The Indian Defense Industry‐Market Opportunities and Entry Strategies Analyses and Forecasts to 2017

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India has one of the fastest-growing global defense markets and is expected to spend approximately US$274.23 billion during the forecast period

The Indian defense industry is one of the fastest-growing global defense markets. India’s defense capital expenditure, which refers to the part of the defense budget that is spent on the acquisition of all types of military hardware and technology, has grown at a CAGR of 16.22% over the review period.

In 2012, India was allocated US$15.36 billion for defense capital expenditure in the budget. Defense expenditure is expected to record a CAGR of 13.35% during the forecast period, to reach an annual expenditure of US$69.41 billion by 2017.

This is primarily due to the country’s aging military hardware and technology, which is in need of replacing, and demands for defense against domestic insurgencies and hostility from neighboring countries. The strong growth in the industry is attracting foreign original equipment manufacturers (OEMs) and leading companies from the domestic private sector to enter the market.

Moreover, terrorism is leading to sharp increases in the defense budget and a shorter sales cycle, which offers an attractive market for defense manufacturers.

The country is especially expected to demand unmanned combat aerial vehicles (UCAVs), advanced electronic warfare systems, combat systems, rocket and missile systems, fighter and trainer aircraft, stealth frigates, and submarines during the forecast period. In addition, its expenditure on IT and communications is expected to increase significantly, with a strong focus on enterprise applications, systems integration, and real-time mobile communications.

The country relies upon imports to procure defense equipment with advanced technology, and, since most of the equipment India is seeking use is advanced technology, there will be a significant prospect for foreign OEMs to enter the Indian defense market.

The Indian homeland security budget reached US$10.1 billion in 2012

Government spending on India’s homeland security market has increased significantly as a result of terrorist attacks, the smuggling of arms and explosives, and domestic insurgency. In 2012, the country’s homeland security budget registered an increase of 13.4% over the previous year, with the Central Reserve Police Force (CRPF) receiving the largest share of the budget.

Due to the nature of the security threats which the country faces, the main opportunities for growth in homeland security are expected in the aviation, mass transportation, and maritime security markets. Following the increase in both domestic and foreign terrorist attacks, spending is expected to increase in surveillance technology, global positioning systems, radars, and biometric systems.

Russia is the largest arms supplier to India

India is one the world’s largest importers of military hardware, with an estimated import spending of over US$12 billion in 2007–2011. The country relies on imports to meet 70% of its defense requirements, with the remaining 30% are met through domestic companies, of which the public sector fulfills 21% and the private sector fulfills 9% of the defense procurement requirements.

During the review period, the Indian defense procurement policy has seen a strategic shift from Russia in favor of the UK, Israel, and the US. There are other countries entering the market however, and Russia is expected to dominate the arms market of India. The improving bilateral ties with US have led to the strengthening presence of American OEMs in the country. During forecast period, the UK, Israel, and the US are expected to further strengthen their market positions, reducing the market share of Russia and other European suppliers such as Germany and France.

Foreign OEMs are participating in joint ventures in order to enter the Indian defense industry

Despite the country’s foreign direct investment (FDI) limit of 26%, the number of foreign companies entering the Indian defense industry through joint ventures has increased.

An outlook of steady growth is driving foreign OEMs to change their strategy in order to adopt a long-term market view. The primary focus of these companies is to establish a presence in the market to enable them to take advantage of opportunities as they arise in future years.

In addition to this, foreign OEMs are setting up export and outsourcing bases that can cater to global markets in the future.

Restricted FDI, lack of transparency and bureaucracy are the key challenges for the industry

Despite expanding opportunities in the Indian defense industry, the government’s comparatively strict regulatory regime poses challenges for foreign investors who are keen to enter the country. With an FDI limit of just 26%, foreign OEMs are unwilling to extend sensitive technologies to their Indian joint venture partners.

The critical area of concern is the offsets in defense, which have been placed at 30%, and in some cases, such as in the development of Medium Multi-Role Combat Aircraft (MMRCA), offsets rise to 50%.

Managing their offset obligations will continue to be the biggest challenge for foreign companies, especially due to the restricted FDI limit. However, the recent changes in offset policy indicate that the regulatory regime may ease during the forecast period, making the Indian defense market more competitive.

With continued pressure on the government from Indian industry bodies and key corporate companies, the FDI limit as part of joint ventures is expected to increase to 49% during the forecast period.

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