Sunday, July 4, 2010

>Prospects for Global Defence Export Industry in Indian Defence Market (DELOITTE)

Over the past decade, the Indian Ministry of Defence has put into motion plans for an unprecedented modernisation program of its defence capabilities.

Following the Kargil conflict in 1999, India was confronted with the recognition that much of its
Soviet-era equipment was outdated and obsolescent compared with its regional rivals. India faces the theoretical prospect of a war on two fronts, one with a major power rival (China) and the other with a powerfully-armed middle power that poses potential threats to its homeland security (Pakistan). Both China and Pakistan have significantly expanded their military capabilities in the past decade.

In this context, India has embarked on a major defence acquisition program, aimed at increasing the size, capability and self-reliance of its Defence Armed Forces.

The scale of the planned investments reflects both its need to make up for lost time as well as its expanding economic power. India has seen its economic capacity to fund its capability modernisation expand almost exponentially over the past two decades. During this time India has been increasingly moving towards a more open-market economy, reducing historic controls
on foreign trade and investment and privatising a range of government-owned companies across a range of sectors, from airports to electricity generation to telecommunication firms. This has catalysed India to be one of the fastest growing emerging markets, with its GDP growing by seven per cent each year on an average since 1995. India’s ‘economic miracle’ has been
underpinned by a significant expansion in its advanced manufacturing, engineering and
ICT industries and is forecast to continue. The IMF in 2009 projected India’s GDP would grow in real terms by more than 7.5 per cent on an average from 2010 to 2014. India’s economy
is projected to be 60 per cent of the size of the United States economy by 2025 and second only to China by 2050.

Its acquisition plans include a substantial procurement program for the Army, Navy and Air Force. Realising that the Revolution in Military Affairs (RMA) effectively passed India by in the 1990s, the government is seeking to develop a flexible, mobile and networked defence
force with substantial power projection capabilities.

Many of the assets India is acquiring are at the leading edge of technology, including 180 Sukhoi Su-30MKI aircrafts, Scorpène class submarines, advanced Russian T-90 main battle tanks and state-of-the art information and communication systems. More than USD 42 billion in total defence expenditure is targeted by 2015, of which approximately USD 19.20 billion would be
expected to be spent on capital equipment for the Defence Armed Forces.

Key findings: acquisition plans by each domain
India’s budgeted acquisition plans are expected to see an overall expansion of capital expenditure from approximately USD 19.20 billion by 2015 (Table 1). The Defence Service’s capital expenditure budget is expected to achieve a compound annual growth rate (CAGR) of 10 per cent from 2011 to 2015.

This represents a marginal slow down in budgeted expenditure from the past decade (CAGR of budgeted expenditure of 13.8 per cent from 2003-2010).

Taking account of inflation, however, tempers the estimate of the overall opportunity; when accounting for India’s inflation rate, the real growth in Defence Service capital expenditure is expected to be marginal over the next two years before increasing to a real growth rate of about 5.3 per cent from 2012 to 2015.

Navy and Coast Guard acquisitions
The Indian Government has publicly recognised that India’s expanding maritime responsibilities and interests necessitate enhancement in naval and coast guard force levels. By 2022, the Indian Navy has plans to have a 160-plus ships Navy, including three aircraft carriers, 60 major combatants (including submarines), and close to 400 aircrafts of different types. The Indian Coast Guard is all set to double its force levels and manpower in the next few years and triple it in the next decade in order to protect the country’s maritime zones and assets.

To read the full report: INDIAN DEFENCE MARKET