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Defence
Defence
Overview
Mahesh Babaria
maheshb@ghallabhansali.com India has a land frontier of 15,200km, a coastline of 7,516.6 km and an
exclusive economic zone of 2.2 million sq km, as well as island territories, vital
Mittal Dharod offshore installations and airspace to defend. The armed forces, therefore,
mittald@ghallabhansali.com have to be kept prepared and well equipped to repel any external threat. India
is also a major participant in international peacekeeping missions with the
UN, sending its troops into conflict zones around the world.
A nation’s military strength is determined by its economic might.
Industry provides the military with the wherewithal to fight the nation’s wars.
Since independence the policy relating to Strategic Defence Production has
been evolving. For too long, India depended on foreign industries for its
military hardware. The desire to achieve self-reliance has always been there.
Constraints of technology and resources prevented the process from
fructifying to the extent desired. The first phase, was characterized by the
State led industrialization. Since the era of liberalization, which began in 1991,
the role of private sector and also that of competition, both domestic and
international is playing a much greater role in the national economy.
Naturally, this also meant changes in policy for Defence production.
Production of defence equipment has been under the purview of
Government right from its inception. The Industrial Policy of the country had
kept defence production in the public sector since First Industrial Policy
outlined in the Industry Policy Resolution of 1948. The Industries
(Development & Regulation) Act, 1951 gave statutory base to the Industrial
Policy. Under this policy, the Defence Industry, which required heavy
investments, strong R&D backing and on which there could be total reliance
because of its criticality, remained under Government Control at all times. The
control over defence industry was exercised under the Industries
(Development & Regulation) Act, 1951, which made licensing compulsory. As
a consequence of the then industrial policy, a large infrastructure for
Defence production consisting of 39 Ordnance Factories, 8 Defence PSUs
and 50 Research & Development laboratories was created in the country.
the Private Sector has been playing significant role in the Defence
industry sector as sub contractors and ancillary industry. The private sector
mainly has been involved in supply of raw materials, semi-finished products,
parts and components to Defence PSUs and Ordnance Factories to a great
extent and also to Base Workshops of Army and Base Repair Depots of Air
Force and the Dockyards of the Navy. Defence PSUs and Ordnance Factories
are outsourcing their requirements from private sector (mainly SMEs) in the
range of 20-25%. Out of this outsourcing, about 25% requirement is met
through small-scale sector.
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DEFENCE INFRASTRUCTURE
Ordnance factories
India’s 39 ordnance factories (OFs) are government units producing
armaments under five categories:
• Ammunition and explosives;
• Weapons;
• Vehicles and equipment;
• Armored vehicles; and
• Ordnance equipment (other military supplies, including general
stores).
They were built to meet the growing needs of India’s armed forces over the
past 60 years.
Defence spending
India is among the world’s top ten countries in terms of defence
expenditure and it is the third-largest importer of defence hardware. Indian
defence procurements include strategic defence capabilities on land, sea and
air.
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3 France 61,571,330,000
4 United Kingdom 56,889,000,000
5 Japan 48,860,000,000
6 Germany 45,930,000,000
7 Italy 40,050,000,000
8 Russian Federation 39,600,000,000
9 India 32,700,000,000
10 Saudi Arabia 31,050,000,000
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Vital Components
The defence budget for 2009-10 has increased by 34.19 per cent over the
previous year’s budget estimate (BE) of Rs. 1,05,600 crores. However, BE of
2008-09 has been scaled upward by 8.52 per cent (Rs. 9,000 crores) to Rs.
1,14,600 crores at the revised estimate (RE) stage. This means, this year’s
allocations has increased by 23.65 per cent over the RE of 2008-09. Of the total
defence budget, revenue expenditure, which caters to the ‘running’ or
‘operating’ expenditure of the three Services and other departments, is pegged
at Rs. 86,879 crores. Capital expenditure, which mostly caters for
modernisation requirements, accounts for Rs. 54,824 crores. Of these two,
revenue expenditure has been increased - in comparison to its last year’s
growth of less than 7 per cent - at a much faster rate of 50.85 per cent (Rs. 29,
286 crores). The growth of capital expenditure has however declined, over the
previous year’s growth, to 14.20 per cent (Rs. 6,817 crores). The sharp rise in
revenue expenditure has taken its share in the defence budget to 61.31 per
cent, from 54.54 per cent a year before. In other words, the share of capital
expenditure has gone down by nearly 7 percentage points in these two years.
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Impact on Modernisation
The Indian Armed Forces are on a modernisation drive. The shopping
list of the Services includes virtually all types of weapons and systems,
including big-guns, fighter aircrafts, armoured vehicles, radars, missiles, naval
vessels, among others. The most pertinent question is whether the latest
budget makes necessary provisions to meet these requirements. Given the fact
that the modernisation programme of the armed forces largely depends on
capital acquisitions, it boils down to how capital budget is allocated.
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Assuming that nearly 80 per cent of the capital budget is meant for
capital acquisitions, the latter consisting of 60 per cent of committed liabilities
and 40 per cent of new schemes, the main sub-divisions of the capital budget
are as below:
• Total Capital Budget: Rs. 54,824 crores
• Capital Acquisition: Rs. 43,859 crores
• Committed Liabilities: Rs.26,316 crores
• New Schemes: Rs.17,544 crores
From the above, it is evident that a substantial amount will be available for
capital procurement. Moreover, over Rs. 17,500 crores (nearly 30 per cent of
the capital budget) will be available for new weapons and systems that the
Armed Forces have planned for induction. While this augurs well from the
modernisation point of view, much depends on how much and how the
resources are spent in the coming fiscal.
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Government Control
Production of defence equipment has always been under the purview
of the government. India has kept defence production in the public sector
since its first industrial policy, outlined in the Industry Policy Resolution of
1948. The Industries (Development & Regulation) Act 1951 gave statutory base
to that policy. As a consequence, a large infrastructure for defence production
was created in India.
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Recent News
• MKU Pvt Ltd., a manufacturer and exporter of armored solutions in
Asia and one of the biggest suppliers to the Indian forces, has bagged
the prestigious contract of armoring the high speed patrol boats from
Goa Shipyard and Garden Reach Shipyard and Builders for Ministry of
Home Affairs, India with an fleet of 186 boats worth US $ 35 m.
• Mahindra Defence Systems (MDS), one of India’s leading providers of
special light military vehicles, inaugurated the Mahindra Special
Military Vehicles (MSMV) facility at Prithla in Faridabad. Spread across
six acres, this modern plant has facilities for specific military
manufacturing applications. Aside from manufacturing, the plant also
has an advanced facility for R&D, product development, design and
prototyping of special vehicles to meet specific customer requirements.
• Larsen & Toubro announced the formation of a JV company with EADS
Defence & Security to develop and manufacture defence electronics
products including radars, avionics, electronic warfare in India to cater
to domestic and overseas markets. The venture, which is awaiting
clearances from the Government, would target to clock Rs 2,000-2,500
cr revenue in 5-7 years. The JV would be based at Talegaon in Pune,
where the engineering major has an existing facility, and will invest Rs
100 crore to start with which would go up as per the requirements.
Conclusion
India is forging a reputation as a manufacturing hub for world
corporations wanting to exploit the sector’s proven skills in product design,
reconfiguration and customisation with creativity and assured quality. With
its defence sector now more accessible for foreign investment, India is poised
to become a key outsourcing hub for global defence majors.
The Indian government is fully committed to the development of a
vibrant and proactive defence industry. Its objective is to ensure that the
resources, capabilities and infrastructure, including intellectual capital,
available both in the public and private sector are treated as national assets
and harnessed to the fullest extent.
For a foreign company, the benefits are twofold. On the one hand,
equity investment in an Indian defence company will appreciate rapidly,
while on the other, the Indian company can act as a manufacturing base to
supply high-quality components in a cost-effective manner. A strong and
healthy partnership between the public and private sector will be critical in
delivering the defence capability the country needs and in sustaining a
powerful domestic industrial base for the future.
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Company Prospects
L&T
NELCO
BEML
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Information Source:
Wikipedia
IDSA
CII Defence
Business Outlook
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