Deloitte Indian Defence

Confederation of Indian Industry
Since 1895
Prospects for Global Defence

Export Industry in
Indian Defence Market
CII Indian Defence Industry Mission

EUROSATORY 2010
2 | CII Indian Defence Industry Mission EUROSATORY 2010
Contents
1. Foreword from CII 4
2. Preface from Deloitte 5
3. Executive summary 6
4 Indian defence requirements 14
5 Domestic capacity 37
6 Financial implications 46
7 Benefits in Indian defence industry

and barriers thereto 50
8 Strategic Alliances 56
9 Conclusion 64
10 A brief about CII 67
11 A brief about Deloitte 68
12 Annexure 69
13 Abbreviations 73
14 Acknowledgement 76
15 Contacts 77
Prospects for Global Defence Export Industry in Indian Defence Market | 3

1. Foreword from CII
The opening up of the Indian economy during the early the introduction of “Buy & Make (Indian)” category in
nineties heralded an era of unprecedented industrial Defence Procurement Procedures in November 2009 as
growth in India. The growth rates seen match those a very positive step. It would encourage the participation
of the fastest growing economies. A confident and of the Indian private industry in defence acquisitions.
resurgent Indian Industry is making forays into almost all
the sectors of manufacturing. Lately, the huge oppor- CII has been playing an active role in the areas of
tunities for growth within the domestic and global steering defence policy formulation, market develop-
defence and aerospace industries have attracted the ment, trade promotion and formulation of international
attention of Indian industry. joint ventures and technology transfers. It is with
this objective that CII in partnership with Deloitte is
India is one of the largest global military spenders. In publishing this report to bring to the notice of global
the Union Budget 2010-11, expenditure is of about USD and domestic defence industry of the opportunities for
32.03 billion has been earmarked for national defence, them for the defence requirements in India.
which has been increased from USD 29.62 billion revised
estimates for the last year. The total defence budget has I hope that this report will enable the domestic and the
increased by 8.13 % and out of which budget for capital global defence companies to understand the emerging
acquisition of USD 13.04 billion has been increased by business opportunities in the areas of defence and to
25.46 % from last year. Outright purchase and upgra- understand the defence ecosystem in India. Further, this
dation and maintenance of the existing equipment for will help foreign OEMs and defence major companies
modernisation will continue to provide immense oppor- to understand the Indian capabilities for making invest-
tunities to the industry in the coming future as well. ments in India in this sector.
The Indian defence industry has evolved and has been

developing capabilities in land, naval and air systems. Gurpal Singh
After the introduction of defence Offset Policy, India Deputy Director General
is gradually becoming a key outsourcing hub for the & Head- Defence & Aerospace
global defence industry. The continuous revisions of Confederation of Indian Industry
the Defence Equipment Procurement Procedures in the
recent past suggest the intent of the Indian Government Amit Kumar Singh
to streamline the procedures and make the system more Director (Defence and Aerospace/Security/Space)
transparent. Confederation of Indian Industry (CII) views Confederation of Indian Industry

2. Preface from Deloitte
The global Defence industry is truly at an inflection point armed forces are expected to increase their purchases
and we see it continuing to move rapidly east — toward of new equipment and technology for the next 20 to
China, India, and the Middle East. These countries are 25 years. Liberalization of India’s defense procurement
expected to be large markets for A&D industry products policy offers a unique opportunity for Indian companies
and services, as well as participants in the supply chain. to provide services for the armed forces. Currently,
about 70 percent of procurement in value terms is from
In India, the aerospace and defence sector is growing foreign sources-with Indian companies supplying only
at an unprecedented rate and emerging as a key around 30% indigenous items (including 25 percent
participant in the Asia Pacific region. United States and of components and subassemblies) to state-owned
European aerospace companies are now recognizing companies. In the near term, foreign companies will
India as a critical market as well as a potential manu- likely continue to have an edge in the supply of defence
facturing partner. India is becoming one of the largest armaments and transfer of technology.
military spenders in the world and catching worldwide
attention, with the third-largest defense procurement In India, foreign acquisitions are expected to be more
budget in Asia. In 2010-11, USD 32.03 billion has been affordable at this time. Industry consolidation in India
earmarked for national defense. Of this, USD13.04 may be on the upswing for larger companies that have
billion is to be spent on acquisitions for new weapons desire to enter manufacturing businesses. This would
systems equipment and services. It is estimated that give them a presence abroad to interact and do business
Indian defence procurement will rise to an estimated with OEMs and suppliers directly, while simultaneously
USD 42 billion by 2015 (including USD 19.20 billion harnessing the advantages that India as a manufacturing
for capital acquisitions) which could make it one of the destination provides. 1
most attractive defense markets in the world. In other
words, India is likely to spend nearly USD 100 billion on The key drivers of Indian aerospace and defence
military procurement during the current five year plan industry are high domestic demand, offset policy, cost
(2007-12) and USD 120 billion in the next plan period advantages, talent base and leveraging IT competitive-
(2012-17), the latter coinciding with the last phase of ness. There are challenges too, such as infrastructure,
India’s ambitious military modernisation plan. There customs clearances, complex tax laws, certifications,
are greater opportunities for Indian defence industry to quality assurance, setting up measures like supply chain
work with partnership or in collaboration with overseas management, security, taxes and various legislations etc.
companies, thus enabling them to have broader market
access. Kumar Kandaswami
Senior Director, Deloitte India 1 D
eloitte compilation:
In light of the Mumbai attacks as well as the overall Compass 2010 Global
Aerospace & Defense
need to modernize its defensive capabilities, India’s Nidhi Goyal sector outlook

3. Executive summary
3.1 Background
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 In addition, the report seeks to highlight both potential
aircrafts, Scorpène class submarines, advanced Russian opportunities for global defence exporters as well as
T-90 main battle tanks and state-of-the art information potential risks to these opportunities, such as risks of
and communication systems. More than USD 42 billion the Indian Government being unable to commit to the
in total defence expenditure is targeted by 2015, of identified plans (fiscal capacity assessment), potential
which approximately USD 19.20 billion would be regulatory barriers to foreign firms and indigenous
expected to be spent on capital equipment for the production advantages.
Defence Armed Forces.
3.2.1 Key findings: acquisition plans by each domain
The parallel challenge for India in meeting its policy India’s budgeted acquisition plans are expected to
objectives will be expanding its indigenous production see an overall expansion of capital expenditure from
capabilities at the same time as meeting its ambitious approximately USD 19.20 billion by 2015 (Table 1).
acquisition agenda. Historically, India has imported more
than 70 per cent of its defence assets, most notably The Defence Service’s capital expenditure budget
from Russia, on which it continues to have a strong is expected to achieve a compound annual growth
reliance. Over the past decade the Ministry of Defence rate (CAGR) of 10 per cent from 2011 to 2015.
has implemented a series of reforms to its procurement This represents a marginal slow down in budgeted
policy framework with the aim of reversing this historical expenditure from the past decade (CAGR of budgeted
spending pattern, including through the introduction of expenditure of 13.8 per cent from 2003-2010).
offsets requirements for designated equipment.
Taking account of inflation, however, tempers the
The sheer volume of planned expenditure is expected estimate of the overall opportunity; when accounting
to create new opportunities for foreign firms, as total for India’s inflation rate, the real growth in Defence
spending will grow in absolute terms. Moreover, India’s Service capital expenditure is expected to be marginal
domestic defence sector, which will benefit from over the next two years before increasing to a real
increasing requirements to ‘buy local’ as well as taxation growth rate of about 5.3 per cent from 2012 to 2015.
arrangements that advantage domestic firms, will also
likely require specialist inputs into both platform and Navy and Coast Guard acquisitions
systems development that can be met by foreign firms. The Indian Government has publicly recognised that
India’s expanding maritime responsibilities and interests
3.2 Objectives necessitate enhancement in naval and coast guard force
The primary objective of this study is to provide the levels. By 2022, the Indian Navy has plans to have a
Global Defence Industry with information on India’s 160-plus ships Navy, including three aircraft carriers, 60
defence requirements across four key domains: major combatants (including submarines), and close to
• Maritime (Navy and Coast Guard) 400 aircrafts of different types. The Indian Coast Guard
• Land is all set to double its force levels and manpower in the
• Aerospace next few years and triple it in the next decade in order
• Electronics to protect the country’s maritime zones and assets.
Table 1 : Projected expenditure by each Service Division (USD million)
2010-11 2011-12 2012-13 2013-14 2014-15 Total 2011-2015

Capital Expenditure (USD million) 13110 14421 15863 17450 19195 80039
Army (53 %) 6948 7643 8407 9249 10173 42421
Navy (16 %) 2098 2307 2538 2792 3072 12806
Air Force (31 %) 4064 4471 4918 5410 5950 24812
Source: Indian Thirteenth Finance Commision Report, Dec 2009; Union Budget(s) & Economic Survey 2003-2011; and Deloitte Analysis of allocations by Service Division.

While the smallest of the three Indian Defence Force credibility as a source for delivering quality ships in
Services, the Indian Navy is already a rapidly expanding time.
maritime force with 36 ships and six Scorpène
submarines currently on order. Two aircraft carriers are … It would, however, not be in our interest to re-invent
also currently in varied stages of construction alongside the wheel; therefore strategies to incorporate the results
eight Boeing P8-I Maritime Multi-Mission Aircrafts and of such research in indigenous shipbuilding need to
16 Mig-29Ks which are under production in Russia. be evolved. The JV route, with a larger share of FDI
offers an avenue to meet this objective. [Emphasis
In addition to the construction already underway, the added] If we are able to produce ships which offer
Navy has further plans to acquire: greater operational efficiencies i.e. lower running costs
• Submarines, including both four nuclear and twenty and longer service life, as well as lower acquisition
four diesel-powered vessels costs than their peers, we would be able to attract
• A range of additional warships, including additional international customers.”
frigates, destroyers, corvettes, offshore patrol vessels,
and other survey vessels The Ministry of Defence (Navy) Indigenisation Plan
• Navalised helicopters and aircrafts (2008) lists forecast requirements of the Navy for marine
• Marine equipments and weapon systems engineering equipment, weapon systems and submarine
equipment and systems from 2008-2022. Examples
India’s Ministry of Defence recently issued a tender for of equipment contained within this plan include gas
16 advanced multirole helicopters and this request is turbines, diesel engines, pressure cylinders, hydraulic
likely to later expand by a further 44 aircrafts within manipulators, and motors.
the next few years. The Navy also requires unspecified
numbers of unmanned aerial vehicles (UAVs), air defence Naval acquisitions have been earmarked for the greatest
missiles, twin engine helicopter fighters, AEW aircraft, degree of indigenisation across each of the four
heavyweight torpedoes for submarines and additional domains. India already produces more than half of its
warships. Upon completion of the six Scorpène class acquisitions in this space, and it has had the best track
submarines currently in production, India expects to record among the services for delivering projects to
float a tender on six more diesel submarines. It also budget and timelines. India has developed strong rela-
plans to indigenously build between three and five tionships with French firms, which have been transfer-
additional nuclear-powered Arihant class submarines. ring technology to local firms through a range of recent 2 M
ana’s Defence yearbook
contracts. 2010-11
A key potential opportunity also exists to support the
modernisation of Indian shipyards which lack both
capacity and modern technology to undertake advanced
production on such a large scale. As noted by the Indian
Defence Review in 2010:
India’s Ministry of Defence
“In both the naval and commercial sectors, however,
recently issued a tender for 16
a mere increase in infrastructure will not ensure
achievement of desired results. For integrated growth
advanced multirole helicopters
of the industry, there is also a need to create an
R&D base, develop in-house design capability, infuse
and this request is likely to later
new technology, develop skilled workforce, adopt
appropriate fiscal measures and remove administrative
expand by a further 44 aircrafts
hurdles, so that Indian shipbuilding can achieve within the next few years.
2
The Indian Coast Guard is 70% short of its requirements final stages of negotiations for purchase of USD 2.2
and therefore modernizing of the country’s maritime billion worth 10C-17 aircraft and the Army is finalizing
forces was the top priority. The coast guard is reportedly the purchase of 145 ultra light howitzers worth about
eyeing upon maritime ambitious ramping up of its assets USD647 million.
to 217 ships and 74 aircrafts in next five years from the
present strength of 76 ships and 45 aircrafts. The coast In relation to tanks and vehicles, the main planned
guard is hoping to induct these assets during 11th five acquisitions include upgrades and acquisitions of main
year plan period (2007-12), of the new ships, some 70 battle tanks, UAVs and infantry fighting and light strike
would be bigger vessels like AOPVs, interceptor boats and vehicles (to replace ageing BMP-1 and BMP-2 infantry
inshore patrol vessels, six multimission-maritime patrol combat vehicles).
aircraft and twin-engine helicopters.
Army aviation would also be inducting about 300
To augment the force level of the Coast Guard, the helicopters together with the Indian Air Force trials for
government has sanctioned 40 ships, 20 boats and 42 which are in the final stages.
aircrafts, 7 offshore patrol vessels, 20 fast patrol vessels
and 12 Domier aircrafts. The final main area is in upgrades to air defence
systems. India’s main air defence systems include
Land acquisitions the SAM-6 (Kvadrat), SAM-8 OSA-AK and Tungushka
Indian Army acquisition plans include upgrades and systems, all of which are at or near obsolescence.
purchases of artillery, tanks and vehicles, missiles and
other items such as infantry upgrades. The intention is Production on land acquisitions has suffered a serious
to create eight divisional-sized armoured battlegroups, slowdown in 2009 and consequently India is well
comprising artillery, armour and motorised infantry, behind plan in this sector relative to budget.
with state of the art communications equipment and
coordinated air support. Aerospace acquisitions
The major acquisitions of the Air Force over the next
Many acquisitions outlined appear to be part of the USD decade will be:
8 billion artillery modernisation program, FARP, originally • 180 Sukhoi Su-30MKI aircrafts at a value of more
formulated in 1999. The program aims to induct around than USD 9.9 billion
2,184 guns over 20 years, at a minimum rate of 100 • MMRCA at a value of more than USD 9.09 billion
units per annum. In its 11th Defence Plan, spanning (mainly to replace ageing MiG 21s) , for which
2007-2012, the Indian Army has designated around 600 competitive field trials are underway between six
modernisation schemes, amounting to around USD 1.44 international companies
billion. • 120 indigenously produced Tejas fighters, for which
the government recently announced an additional
The FARP is expected to require the purchase of USD 1.71 billion in funding
between 2,700 and 3,600 guns, involving acquisitions
of between USD 4.77 billion and USD 6.48 billion over
the next 15 to 20 years. Key acquisitions planned under
the FARP include:
• Air Mobile Ultra light howitzers
In defence acquisitions, this is
• Towed and wheeled 155mm guns
• Self-propelled tracked and wheeled guns
perhaps the sector where there are
• Mounted gun systems. significant opportunities for firms
Given the urgent requirement for ultra light howitzers
at the Line of Actual Control (LAC) – the effective
with specialised knowledge
border between India and China – the Foreign Military
Sale route for expediting sales has been cleared by the
looking to enter the Indian
Defence Acquisition Council. The IAF is currently in the market.
• Additional Advanced and Intermediate Jet Trainer systems, new generation gyros, new generation logs
aircrafts and new generation echo sounders between 2008
• The Fifth Generation Fighter, the value of which is and 2022. The Coast Guard is seeking coastal surveil-
unknown, but has been estimated to be in the order lance radars and sophisticated long range electro-
of USD 9.9 billion optic solutions for offshore security.
• Upgrades of more than 60 MiG 29 fighters, Jaguars • Army systems – The Indian Army has plans to
and Mirage aircrafts acquire handheld battlefield surveillance radars,
• Airborne Early Warning Aircraft hand held thermal imaging devices for night vision,
• Additional Aerostats stand alone infrared seismic and acoustic sensors,
integrated observation equipment and short range
While the Air Force plans for expansion and replacement secure radio sets in significant quantities. Modern
of the ageing MiG 21s are well underway, a key risk for strategic and tactical command and control systems
the Air Force is that delays and cost overruns in the new are also required. The Chief of the Defence Research
fighter programs (in particular, the MMRCA and Tejas and Development Organisation (DRDO) has recently
programs) will mean that the existing but aged MiGs stated that they are also seeking industry partners
will need to be kept in service for a longer period than to co-develop technology related to gallium nitride
initially planned, with the MiG’s increasingly obsolete semi-conductors and nanotechnologies related to
systems needing to be upgraded and safety features structures, sensors, propulsions and communication.
improved to maintain current squadron numbers. Further, the DRDO has disclosed that they are seeking
to build Indian capabilities in the manufacture of
Aerospace continues to be a sector where India infrared seeker technology and imaging facilitated
struggles to indigenise production. India has historically through working relationships with other countries
sourced much of its aircraft from Russia, but is • Air Force systems – The Air Force is currently going
increasingly seeking to diversify the vendor base, with through a period of modernisation and has recently
United States, European and Israel firms in particular. inducted mid-air refuellers, aerostats, airborne
Shortlisted firms in bid for the MMRCA production warning and control systems and new generation air
include Lockheed Martin and Boeing (United States defence systems. Recently, it has been announced
– the F16 and F/A 18 fighters, respectively), Dassault that the Air Force would also like to upgrade avionics
(France – Rafale), SAAB (Sweden – Gripen), EADS in the Cheetak helicopter and in MiG-29s. A major
(European Consortium – Eurofighter Typhoon), and RAC modernisation of the Su-30MKI aircraft is also
MiG (Russia – MiG-35). planned including the installation of a more powerful
radar and newer avionics. The Air Force would also
Electronics acquisitions be modernizing its airfields with sophisticated radars,
Electronics acquisitions are subsumed under each Service DF and communication and equipment and with
Division (Army, Navy and Air Force) in India’s forward enhanced perimeter security arrangements.
budget plans. Key acquisitions by Service include:
Although India has a strong engineering skills base and
• Navy systems – The Indian Navy is seeking sonars, growing ICT industry, and some significant domestic
navigational radars with Low Probability of Intercept competitors (e.g., Tata), given the legacy distortions in
(LPI) capability, multi-functional radars with capability the markets from controlling private sector participation
to integrate various surveillance/weapon delivery in defence acquisitions, this is perhaps the sector

where there are significant opportunities for firms with modernise its military, overall it was assessed that it was
specialised knowledge looking to enter the Indian market. unlikely that budgeted outlays would come under pressure
in the future due to fiscal capacity constraints.
3.2.2 Challenges and risks
While the market size is large and growing, market entry The chief risk, rather, was the inability of domestic and
is not without challenges and risks for exporters. foreign firms to keep up with the rate of growth. Although
budgets for capital expenditure on Defence Force Services
Regulatory barriers and risks have consistently been increasing, there has also been a
Currently there are a number of regulatory barriers to trend of significant underspending by the Indian Defence
entry, including in the main foreign direct investment Service. Over the period of 2003 to 2010 the defence
restrictions (26%), taxation advantages afforded to DPSUs service has underspent about USD 6.75 billion of its capital
as compared to domestic Indian companies and offset expenditure budget; from 2003-2010:
requirements (ranging from 30% to 50% depending on • the Navy underspent 21 per cent of allocated capital
DPP restrictions).Industrial licensing, protection of intel- expenditure
lectual property rights, capability of Indian joint venture • the Army underspent 31 per cent of allocated capital
partners, customer clearance required for both Import expenditure
and Export, etc. Potential opportunities, such as Fast Track • the Air Force underspent 47 per cent of allocated
Procedures, appear to be applied to acquisitions that capital expenditure
are behind schedule or for where there is only one likely
sole supplier (which tend to be large primes from other Importantly, however, this can be seen as both a risk and
countries), and therefore have limited benefit to foreign an opportunity for foreign firms. The Indian Government
exporters. One of the benefits that have recently been is seeking to expand indigenous production, particularly
accorded is the abolition of controls on foreign remittances within the maritime and land domains; however, domestic
under Foreign Technology Collaboration Agreements under private firms will need to access specialist inputs to meet
Press Note 8/2009. these uplift targets in the context of an acquisitions budget
that is growing in absolute terms. If the Indian Defence
The current timelines for procurement, which are described Forces increase its indigenous procurement from the
by the DPP to be 2-3 years but have been reported to current 30 per cent to the target 70 per cent over the
take more than 4-5 years, also make it difficult for small next five years, the output of Indian firms would need to
to medium enterprises to enter the market. This is largely more than double each year. Total indigenous produc-
due to the often high costs of tendering processes, such as tion over the 2011-2015 period would need to expand
in-country trials and the requirements to demonstrate how from approximately USD 30 billion to more than USD 70
offset and Transfer of Technology obligations will be met. billion in the space of five years. This would translate to an
One of the major impediments is the necessity for No Cost average growth rate of the local industry of 30 per cent a
No Commitment Trials which can take several years and year over the next five years. In any market, this is highly
consequently small players with sophisticated expertise do unlikely to occur.
not have the resilience to survive this mammoth risk.
Competition
It also appears that the tendering process for defence Like many countries, India confers on its domestic firms
equipment in India is not highly transparent. The process regulatory and taxation advantages that improve their
can be extremely long and the basis on which tenders are cost-competitiveness compared to their international
eventually awarded is often not at all clear. There is every counterparts. India is also host to a mature manufacturing
prospect that foreign companies could spend a great deal sector, which means it will often be able to offer more
of time and money working up a bid only to be advised, cost-competitive terms for large platform builds. Foreign
much later, that they were unsuccessful for reasons that firms are best able to compete where they have specialised
are not apparent. knowledge or inputs.
Consistent underspending In some sectors, too, there are very strong incumbent
Given its strong economic growth projections, the modest positions such as the DPSUs - Hindustan Aeronautics
ratio of defence expenditure to GDP and its mandate to Limited (aerospace) and Bharat Electronics Limited (elec-

tronics) that will provide strong competition to exporters will necessarily be a niche player here. Yet in the context
seeking to enter the market. of India’s aspirations in terms of self-reliance, being a
niche player may be no bad thing. By their very nature,
Moreover, global exporters will face fierce competition niche players are not threatening or overbearing and are
from transnational corporations offering state of the art more willing than the big transnational corporations to
technology. work closely with local industry. They also tend to be more
aware of the reciprocal benefits of working overseas and
Competition in markets for defence equipment also may be more willing to incorporate Indian firms into their
does not take place on a level playing field. Government supply chains.
support, particularly with respect to market entry in India,
is important. This does not have to be financial support;
often backing for the bid from the defence force in the
exporting country can be influential in its own right.
3.2.3 Key opportunities for foreign suppliers

If the Indian Defence Forces
The challenges involved in participation in the Indian
defence market should not be under-estimated. Yet the
increase its indigenous
potential rewards for foreign companies are significant. procurement from the current 30
While it is clear that India is seeking a high level of self-
sufficiency in delivering its ambitious defence re-equipment
per cent to the target 70 per cent
and expansion program, it is also evident that there will
be a high level of reliance on overseas interests to supply
over the next five years, the output
the necessary technology in a number of areas. The export
countries which already dominate the global market can
of Indian firms would need to
supply complete platforms or systems. Other Countries more than double each year.

4 Indian defence requirements
4.1 Basis for requirements
4.1.1 Overview of the Indian economy The recently released economic survey for financial year
Per capita income of India has reached USD 1016 billion 2009-10 reveals that some of the key macroeconomic
in the year 2008 (more than doubled in the last 7 years). fundamentals of the economy have revived over the
The last fiscal and the first half of the current fiscal saw past few months. Aided by the fiscal stimulus package
India dealing with the impact of the global slowdown and a liberal monetary policy , the country’s GDP growth
that resulted in the GDP growth rate slowing down rate for FY 2009-10 is expected to be 7.2 %.In addition,
from an average of 9 % achieved in the last 5 years industrial production has seen record levels (touching
to 6.7 %.The slowdown also resulted in plummeting 11.7% in November 2009),exports (USD 81.14 billion as
exports, a booming fiscal deficit and an alarming fall on September 2009) have regained the lost momentum,
in the industrial production. Capital flows shrinked and domestic private consumption have increased from
the stock market tumbled into an abyss landing a blow last year level and the capital markets have remained
to the “decoupling” hypothesis. Despite these negative strong and robust. The policymakers deserve for the well
impacts, when compared to the rest of the world,India calibrated and synchronized policies that have helped 3 D
eloitte’s Budget 2010:
Snapshots for the
stood out as one of the better performers and continues restore the lost optimism in the future prospects of the Aerospace and Defence
to remain a primary focus for many businesses. economy3. Sector
Figure 1: GDP shared, GDP growth rate and Industrial production
Share of GDP GDP Growth rate of India Industrial production 2009-10
Agriculture Industry
12 Growth in Real GDP
17% 21% 14%
10 9.5% 9.7% 11.6%
9.2% 12%
IIP Growth (%)
8 7.5% 6.7% 7.2% 10% 8.4% 8.2% 8.5% 8.6%

8% 7.0% 2.6%
GDP (%)
6 6%
4 4%
2%
2
0%
0 -04 4-05 5-06 6-07 7-08 8-09 9-10
03 0 0 0 0 0 0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 20 20 20 20 20 20 20
Services
62% Source: Economic Survey IIP (Y-o-Y)
Source: The Economic Survey 2009-10 GDP Linear
• India is highly consumer driven with consumption forecasted to contribute 63% to GDP growth.
• India would emerge as the second largest economy in the world by the year 2050.
• By 2025 India’s economy is projected to be about 60% of the size of the US economy.
Figure 2: Export and Import

Principal export 2007/08 (USD billion fiscal year Apr-May) Principal import 2007/08 (USD billion fiscal year Apr-May)
Engineering Petroleum
Others,
Goods, 36.6 Products and
40.8
Others, 65 Petroleum , 79.6
Agriculture
Petroleum Chemicals,
and Applied
Products, 18.6
Products, 18.1
24.9
Capital
Gold &
Goods, 37.3
Gems and Textile and Silver, 17.8
Electronic
Jewellery, 19.7 Clothing, 19.0
Goods, 20.3 Source: Economist Intelligence Unit

Sector Performance: Recovery is evident! The classification based on population density is as
Manufacturing sector has grown at 8.9% in FY 2009-10, follows
higher than that of services (8.7%) and industry (8.2%) • Tier 1 — Population > 4 million
• Tier 2 — Population > 1 million
• Tier 3 — Population > 500 thousand
Figure 3: Growth Rate of various sectors
• Tier 4 — Population < 500 thousand
10
8.7 8.9
8.2
8 Most multi-nationals operate in eight tier 1 cities as they
accounted for 40% of disposable income. Delhi and
6 Mumbai has experienced rapid growth in their suburbs
4 and the mushrooming of satellite towns.
2 Tier 1 and Tier 2 cities together account for 44% of

urban population and 53% of urban disposable income.
0
The man power (labour ) available in India can be
-2 -0.2 estimated through the graph below. Labour being the
Services Manufacturing Industry Agriculture most important resource in manufacturing sector can
contribute great deal to the productivity and GDP of the
Growth rate country.
Source: Economic Survey of India, 2009-10
The industrialisation in India has turned towards small
towns and they have become the key to increased
Several other sectors have made a strong recovery - productivity and enhanced standards of living.
Auto, BFSI, cement & steel, rubber, plastic, textile, wood
products and chemical industries. The purchasing power of Indian middle class is expected
to attract global producers to find attractiveness in Indian
Population and Indian cities: Population is estimated at markets.
1,129 million and growing at 1.38%.
Figure 5: Tier distribution of cities
Figure 4: Population (million) Vs age group (2001)

Mumbai,
Kolkata,
Chennai, Delhi,
Bangalore, Pune
(55+) Hyderbad, Ahemdabad
101.7
(0-4) 106.5 (45-54) Surat, Kanpur, Nagpur, Lucknow,
Jaipur, Kochi, Madurai, Meerut,
85.7 Kozhikode, Nasik, Agra, Rajkot
(35-44)
122
(5-14) Trichy, Amritsar, Faridabad, Goa, Aligarh,
(25-34) Moradabad, Pondicherry, Bhavnagar, Jodhpur
239
156.6
(15-24)
Rohtak, Rourela, Anand, Hassan, Villupuram, Gurgaon,
199 Shillong, Faizabad, Palghat, Shimla, Kolar
Tier 1 — 8 Major Cities Tier 3 — 33 Cities

Tier 2 — 26 Mainstream Cities Tier 4 — 5094 Small Towns
Source: NCAER

Table 2: Urban population and urban disposable income demographics 2001
Classification Urban population Urban population tier wise Urban disposable Urban disposable income as a % of
tier wise (million) as a % of total population income (USD Billion) total disposable income (USD Billion)
Tier 1 83.73 8.14% 75.85 16.23%
Tier 2 43.31 4.21% 26.6 5.69%
Tier 3 25.99 2.53% 16.75 3.58%
Tier 4 135.7 13.19% 75.23 16.09%
4.1.1.1 Impact of defense on Indian Economy Table 3 below provides a summary of the Government
In the Union Budget 2010-11, expenditure of about USD of India budget for defence, Home Affairs, Space, Civil
32.03 billion has been earmarked for national defence Aviation etc.
which has been increased from USD 29.62 billion revised
estimates for the last year. This will account for about Table 3: Government of India Budget — 2010–11
2.43% of GDP. The budgeted allocation keeps growing (1 USD=INR 46) (figures in USD billion)
by 7-8% every year. The targeted defense expenditure
till 2015 is 100 billion dollars. India is expected to be one Ministries/ Revenue Capital Total
of the largest buyers of defense equipment and services Departments
in the world. The total defence budget has increased
Defence 18.99 13.04 32.03
by 8.13 % and out of which capital acquisition of USD
Home Affairs 6.09 1.55 7.64
13.04 billion has been increased by 25.46 % from the last
year (see figure 6). The total defence budget accounts Space 0.67 0.59 1.26
for about 13.29 % of the total Central Government Civil Aviation 0.32 0.31 0.63
expenditure. If the scope of national defence is enlarged Department of Science 0.51 0.01 0.52
to national security, it would include expenses for civil and Technology
defence, security aspects of the Department of space, Scientific and Industrial 0.65 0.01 0.66
expenditure of the Ministry of Home Affairs, research and Research
development, which roughly account for about 20 % of
total Government budget.4 (see table 3)
4.1.1.2 Growth in the Manufacturing Market
Figure 6: Expenditure on Defence by GOI The growth in defence production is a growth in manu-
facturing sector.
Growth of Defence Public Sector Undertakings

(DPSUs): The DPSUs in India have historically dominated
11.5 13.04 Indian aerospace, shipbuilding, communications and elec-
tronics.. They have grown tremendously through protec-
tion, monopoly and have developed and have passed off
outdated technologies to the services. On a positive note
they have also succeeded in building fine warships and
17.5 18.99 aircrafts albeit at substantial cost and time overruns.
Growth of IT/Engineering Companies: Indian

software companies are active in the field of avionics and
2009 -10 2010 -11 are aggressively trying to increase their share of the engi-
4 D
eloitte’s Budget 2010: neering services outsourced (ESO) market. All big players
Snapshots for the Revenue Capital
have already set up a separate aerospace vertical. There
Aerospace and Defence
Sector. (figures in USD Billion dollars) are a few standalone ESO companies as well.

Growth of Other Private Players: There are many India has been engaged in an ongoing dispute with Pakistan
SMEs who entered post liberalization . Key drivers for along the Line of Control (LoC) in Kashmir for decades. In
their growth are subcontracting for DPSUs, liberaliza- addition to direct confrontations, this encompasses threats
tion and the offset policy. For example, big houses like from a range of non-state groups, which India has frequently
Tata, L&T, M&M and other domestic private players like blamed for terrorist activities.6
Dynamatic Aerospace have been aggressively building
capabilities in different spheres.5 Reports of the growing strategic relationship between
China and Pakistan (for example, the Chinese proposal to
Growth of Auto Component Manufacturers: Indian establish foreign military bases in Pakistan) are also a cause
automotive companies have been the recent entrants for concern. These issues are further complicated by the
in this sector primarily due to synergy of operations and ongoing relationship between Pakistan and the United
business processes.The primary drivers for entering this States, primarily due to the ongoing United States military
sector is risk diversification, process similarities, slowdown presence in Afghanistan.7
in auto sector, higher margins and offset opportunities.
Also the automotive industry was in the forefront in Further development of this strategy remains focussed on
adoption of best practices particularly in manufacturing avoiding a nuclear response, but maintaining the ability
and supply chain processes. Therefore the penchant of to engage in rapid retaliatory responses to any attacks.
several automotive players for A&D sector is a logical This would include the ability to respond on dual fronts to
choice than other industries. Pakistani and Chinese incursions. The resulting doctrine is
focussed on eight integrated battlegroups of division size,
4.1.2 Defense acquisitions : Strategic imperatives and which would combine mobile ground forces with air power,
economic context and be connected via advanced networking and communi-
cation systems.
4.1.2.1 Indian defence strategic directions and
priorities 4.1.2.2 Rapidly expanding economic power
India’s overall military strategy is shaped by a range of India has seen its economy expand almost exponentially
ongoing and emerging issues in the region. This includes over the past two decades (Figure 7). During this time, India
conventional threats and border disputes with China has been increasingly moving towards a more open-market
and Pakistan, growing concerns about terrorism from economy, reducing historic controls on foreign trade and
non-state and state-sponsored groups, and the ongoing investment and privatising a range of government-owned
Maoist Naxalian insurgency. companies. This has catalysed India to be one of the fastest
Figure 7: Indian GDP – 1980-2014 (%, INR)
120,000 12%
GDP (INR, real terms)
GDP (INR, nominal terms)
100,000 10%
GDP % change (real terms)
GDP (INR, D 2000)
% change in GDP
80,000 8% 5 D
eloitte A&D Presentation
for Belgium Economic
Mission March 26,2010
60,000 6%
6 M
ired in Red Tape’ in
40,000 4% SP’s Land Forces Defence
Magazine, contributed
by Brig Gurmeet Kanwal
20,000 2% (Retd), Feb Mar 2010, Vol
7, Number 1, pp.1-6 &
13-14
0 0%
7 K
atoch, Lieutenant General
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
(Rtd) (2010) Restructure

Capabilities’ in SP’s Land
Source: IMF (2009) World Economic Outlook Database (Last Release – October) Forces, January, pp.32-33

growing emerging markets, with its GDP growing by seven procedures have been focused on increasing the number
per cent each year on average since 1995. India’s ‘economic of vendors from which India sources its capabilities. In
miracle’ has been underpinned by a significant expansion in particular, India is looking to other countries for acquisi-
its advanced manufacturing, engineering and ICT industries. tions as so far traditionally India has been relying on
Russian equipments.
Moreover, India’s economic growth forecast to not only
continue but accelerate. The IMF projected in October 2009 4.1.3 Defense expenditure: Historical trends, future
that India’s real GDP growth rate would exceed 7.5 per cent plans & fiscal capacity
on average from 2010 to 2014 (Figure 7). The increased 4.1.3.1 Acquisition governance and planning
focus on privatisation of government controlled firms and Responsible agencies
engagement with the private sector has also impacted The Indian Ministry of Defence is responsible for all defence-
on India’s defence sector. The government is seeking to related activities in India, spanning the Army, Navy and Air
establish a new class of domestic private enterprise, the Force. The principal task of the Defence Ministry is to frame
Raksha Udyog Ratnas (RURs), which would enjoy the same policy directions of the Government on all defence and
tax treatments as incumbent publicly owned firms (the security related matters for communication to the Services
Defence Public Sector Undertakings). It has also agreed to Headquarters and other relevant organisations. The Ministry
provide greater detail to the private sector about future of Defence is comprised of four Departments:
defence acquisition plans; historically, the private sector has • Department of Defence – responsible for the defence
only been provided one-year forward estimates. budget, establishment matters, defence policy, matters
relating to Parliament, defence co-operation with foreign
4.1.2.3 Defence spending and acquisitions countries and co-ordination of all defence related
It is in the above military and economic contexts that India activities
has moved over the past decade to implement a transforma- • Department of Defence Production – responsible for
tional capability upgrade across all defence service divisions. matters pertaining to defence production and indigenisa-
In implementing the modernisation plans, the Ministry of tion of imports
Defence is seeking to: • Department of Research and Development –
• Correct legacy underspending – Following the responsible for advising the Government on scientific
Bofors acquisition scandal in 1986, India’s expenditure aspects of military equipment and logistics. The Defence
on defence was reduced, which contributed to a decade Research and Development Organisation (DRDO), which
of underspending that became apparent in 1999 during works in a range of areas of indigenous military tech-
the Kargil conflict. The Kargil conflict highlighted a range nology development
of deficiencies in the capabilities of the Indian Armed • Department of Ex-Servicemen Welfare – deals
Forces. Even today it is still estimated that around 50 per with resettlement, welfare and pensions matters of
cent of the Indian Armed Forces’ existing equipment is Ex-Servicemen.
obsolete.8 Accordingly, modernisation is a key priority for
future defence acquisitions. The MoD also has a Finance Division which is fully integrated
• Establish self-reliance – The Indian Government with the Ministry & performs an advisory role. The Defence
also has aspirations to significantly enhance indig- Acquisition Council (DAC) was established in 2001 and is
enous production capabilities (particularly in relation charged with the approval of capital acquisitions. The DAC
to advanced technologies). This would represent a is the responsible authority for determining the category of
shift from historical patterns of defence procurement, proposed acquisitions under the DPP, and is assisted in this
which have typically involved foreign supply of critical role by:
components, with some licensed indigenous production. • Service Headquarters (SHQ)
Supporting this objective, and in keeping with broader • Service Capital Acquisition Plan Higher Committee
moves to open up the Indian economy, the Ministry of (SCAPCHC).
Defence has implemented a series of changes to the
8 O
pportunities in the
governance and planning processes for defence acquisi- Planning framework and procedures Indian Defence Sector,
tions to improve the transparency of long term defence Planning for capital acquisitions is undertaken on a short, Report prepared by the
Confederation of Indian
acquisition plans to the private sector. medium and long-term basis, by way of the following
Industry in partnership with
• Improve value for money – Revisions to procurement documents: KPMG

• Annual Acquisition Plan (AAP) • Implementing policies and procedures to increase the
• 5-year Services Capital Acquisition Plan (SCAP) quality, reliability and transparency of procurement
• 15-year Long Term Integrated Perspective Plan (LTIPP). processes
• Enhancing the delegation of financial powers to the
The planning process is under the overall guidance of the Services.
DAC. The DAC is responsible for approving the LTIPP and Under one of the key amendments to the DPP-2008, the
SCAP. The AAP is a subset of the SCAP, and is subject to the LTIPP will be made publicly available for the first time in June
approval of the Defence Procurement Board (DPB). 2010, reflecting India’s strong desire to increase engagement
with the private sector. This amendment is designed to assist
The Defence Procurement Procedures 2008 (DPP-2008) is a the private sector in more effectively undertaking planning
policy document providing formalised guidelines for capital (including R&D and collaboration) for tender proposals.
acquisitions. In November 2009, the DPP-2008 (Amendment
2009) was released, comprising the following key reforms: 4.1.3.2 Defence Expenditure: key definitions and
• Supporting the development of indigenous Defence areas of focus
9 A t an exchange rate of 46 industry through the introduction of new category for The 2010 budget for defence spending in India is INR
INR to 1 USD
10 One crore is a Hindi meas-
acquisition — ‘Buy and Make (Indian)’ 175,772 crore or USD 38.21 billion, which will account for
urement equivalent to 10 about 2.53% of GDP. 9, 10
million. • Encouraging competition by broadening the vendor
11 Expenditure Budget 2010-
2011, Vol 1, p 12.
base, including through increased domestic private sector Defence force expenditure is split into ‘Revenue’ and
12 Ibid. involvement and continued foreign firm equipment, ‘Capital’ expenditure. Table 4 below gives general terms and
hardware and services provision their definitions.
Table 4: Expenditure definitions

Expenditure type Definition
General budget terms
Budget The budget for the defence force is prepared prior to each financial year and estimates the capital and revenue
expenditure that will occur in that year.
Revised Estimates The Revised Estimates Budget is calculated at the end of the year and captures the actual revenue and capital expend-
Budget iture spent during the financial year.
Plan Expenditure Plan Expenditure is expenditure requirements identified and discussed by respective ministers or departments and
discussed with the Ministry of Finance. Indian Government Plan Expenditure includes health and education. It
comprises 34% of the total Central Government budget.11
Non-Plan Non-Plan Expenditure is all expenditure that was not identified in the plan expenditure; in spite of its name, most of
Expenditure the budget prepared by the Planning Commission is categorised as non-Plan (66% of total budget).12 This expenditure
includes salaries for government employees, loans to private enterprises, States, Union Territories, local governments
and foreign government, tax collection and social services.
*The Indian Defence Force’s Expenditure budget is predominantly Non-Plan expenditure.
Defence-specific categories of spending
Capital Expenditure The Capital Expenditure Budget is primarily used by the Defence Force to construct infrastructure, and procure land,
armaments, and other equipment required by the defence services.
Revenue The Revenue Expenditure Budget is used for the everyday operating expenses of the Defence Force. Salary and wages
Expenditure for the Defence Force Personnel accounts for about half of this budget.
Defence - Services Defence Services expenditure is comprised of direct defence spending, including: capital outlay on machinery,
Expenditure construction and land (capital expenditure), other works expenditure (revenue); pay and allowances for the armed
force personnel (revenue); stores purchases (revenue) and transportation and miscellaneous expenditure (revenue).
Defence - Civil Defence Civil expenditure is spending that is considered to be auxiliary to the defence services. It includes: secretarial
Expenditure and general services; the coast guard; canteen stores department; housing; public works; investment in public enter-
prises; and defence pensions.

4.1.3.3 Historical defence spending
Total budgeted defence Trends in defence acquisition spending

Total budgeted defence spending (including Services
spending (including and Civil, Revenue and Capital expenditures) in India in
the period from 2003 to 2010 has been increasing by
Services and Civil, a nominal Compound Average Growth Rate (CAGR) of
about 11.7 per cent per year.14 While this is a high rate
Revenue and Capital of growth, it does signal that defence spending has been
falling as a percentage of GDP, which has achieved a
13 Union Budget(s) &
Economic Survey 2003-
expenditures) in India nominal CAGR of about 13.8 per cent for the same period
(8 per cent in real terms). 15
2011. Available at: www.
indiabudget.nic.in,
accessed on 23th March
in the period from Not all areas of defence budgeted expenditure, however,
2010.
14 Union Budget(s) & 2003 to 2010 has been have been falling as a proportion of GDP. Budgeted
capital expenditure across both Defence Services and Civil
Economic Survey 2003-
2011. Available at: www.
indiabudget.nic.in,
increasing by a nominal Expenditure categories has been keeping in line with GDP
with a CAGR of about 13.8 per cent, compared to a CAGR
accessed on 23th March
2010.
15 Ibid
Compound Average of 9.1 per cent for revenue expenditure.16
16 Ibid
17 There was no change in Growth Rate (CAGR) Figure 9: Defence Expenditure as % of GDP –
Budgeted Expenditure
2005 between the budgets
for revenue and capital
expenditure. Considering
of about 11.7 per cent 2.5%
Defence Revenue / GDP
per year.
Defence Capital / GDP
the prior and following
Total Defence / GDP
year differences, it seems 2.0%
unlikely that all expendi-
ture occurred as planned 1.5%
during this one period. This
aberration in the data could For the purposes of this analysis, the primary focus is on
1.0%
have several causes, such capital expenditure in Defence Services. In 2009-2010,
as a change in accounting 0.5%
Defence Services capital expenditure will account for
methods.
18 In nominal currency approximately one third of India’s total spending on
0.0%
amounts. defence (Figure 8). 13 2003 2005 2007 2009 2011
Figure 8 : Expenditure breakdown Source: Union Budget(s) & Economic Survey 2003-2011. Available
at: www.indiabudget.nic.in, accessed on 23th March 2010. Deloitte
Analysis
Service Civil Total
Expenditure Expenditure Expenditure Reflecting the high proportion of the overall capital
(USD, billions) (USD, billions) (USD, billions) expenditure budget, capital expenditure on Defence
Services has also increased by a CAGR of 13.8 per
$13.30 (33.8%)
Capital Expenditure cent (in line with overall capital expenditure trends).
$13.04b (34.13%) $0.26b (0.68%) Total Capital
Budget (USD, billions) Budgeted capital expenditure on Defence Services has
Expenditure
increased from USD 5 billion in 2003 to a budget of USD
$24.91 (66.2%)
14 billion in 2011.
Revenue Expenditure Total Revenue
$18.99b (49.70%) $5.92b (15.49%)
Budget (USD, billions) Expenditure
Consistent underspending
Although budgets for capital expenditure on Defence
$38.21 billion Services have consistently been increasing, there has
$32.03 (83.83%) $6.18 (16.17)%
Total Expenditure (100%) Total also been a trend of significant underspending by the
Total Services Total Civil
(USD, billions) Defence Indian Defence Service. Figure 10 shows the historical
Expenditure Expenditure
Expenditure difference between the budget and the revised

estimates budget. It highlights the defence service Over the period of 2003 to 2010 the defence service
consistently underspends their monies allocated to has underspent about Rs 31,135 crore or USD 6.75
capital expenditure. 17 billion18 of its capital expenditure budget. This is about
equivalent to 57 per cent of the 2011 budget for capital
expenditure.
Figure 10: Unspent funds – Total Defence Budget (in both % and USD terms)
Unspent funds as % of Budgeted Expenditure Unspent funds in USD

Underspending relative
40% 3,000 to budget
30%
% Overspend % Underspend
2,000
20%
1,000
USD Billions
10%
0
0%
-10% -1,000
-20% -2,000
-30% -3,000
Overspending relative
to budget
-40%
-4,000
2003 2004 2005 2006 2007 2008 2009 2010
2003 2004 2005 2006 2007 2008 2009 2010
Defence Revenue
Defence Capital
Total Defence
Source: Union Budget(s) & Economic Survey 2003-2011. Available at: www.indiabudget.nic.in, accessed on 23th March 2010. Deloitte Analysis

Trends in acquisitions by each Defence Force division
The Indian Defence Force includes the Army, Navy and Air Force. Budgeted capital expenditure for the three services,
shown in Figure 11, has remained relatively constant as a proportion of GDP since 2003. Each Service undertakes
their own systems procurement which falls under ‘other equipment’ within the defence budgets.
The spike in budgeted expenditure for the Air Force in 2005 is due to doubling in expenditure on ‘aircraft and aero-
engines’, and an increase in expenditure on ‘other equipment’, which related to systems acquisitions, of about 50
per cent from 2004. The 2005 financial year was the ‘abnormal’ year where all spending targets were met within the
defence force.
Figure 11 : Expenditure by Service division (in both % and USD ($) terms)
Expenditure by Division as % GDP Expenditure by Service Division
0.45%
$14.0
0.40%
0.35% $12.0
0.30%
$10.0
0.25%
USD Billions
0.20% $8.0
0.15%
$6.0
0.10%
0.05% $4.0
0.00%
2003 2004 2005 2006 2007 2008 2009 2010 2011 $2.0
Army
Navy $0.0
Airforce 2003 2004 2005 2006 2007 2008 2009 2010 2011
Table 5 identifies some of the areas within the defence service that have been receiving large proportions of the
service’s capital expenditure allocation or have been growing at a rate greater than that of the capital expenditure
budget which has a CAGR of 13.8 per cent.
Table 5: Expenditure by Service division (in both % and USD terms)
Proportion of total capital expenditure (2003-2011) CAGR (2003-2011)

Air Force -aircraft and aero-engine 26.7% 13.8%
Army –systems 18.3% 7.4%
Air Force –systems 10.6% 21.5%
Navy –naval fleet 14.1% 13.8%
Research and Development 6.4% 21.6%

Underspending by Service Division
Excluding the 2005 year, however, all divisions of the defence service were consistent in their underspending of
budgeted capital expenditure. The consistent underspending by all three divisions may indicate that procurement
issues regularly arise within the whole defence service as opposed to within just one division (Figure 12). The Air
Force has been the most consistent area of underspend relative to budget, although recent indigenous production
delays have also resulted in a significant underspend by the Army as well.
Figure 12: Unspent funds – Service Division Capital Budgets (in both % and USD terms)
Unspent Funds as % of Budgeted Expentiture USD underspent by Service

40.00% 1,400
35.00% 1,200
30.00% Underspending relative
1,000 to budget
25.00%
20.00% 800
USD Millions
15.00% 600
10.00%
400
5.00%
200
0.00%
-5.00% 0
-10.00% -200
2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010
Army
Navy
Airforce
Trends in indigenous versus imported acquisitions

In 2005, the Indian Standing Committee on Defence reviewed the defence force procurement policy and proce-
dures.19 This report identified that although India had been independent for 55 years, cutting edge military tech-
19 Procurement Policy and nologies had not been locally developed and the procurement of capital equipment remained reliant on imports.
Procedure. Standing
Committee on Defence Production of defence equipment was a purely government function up until 2001, when the sector was opened to
(2005-06) Sixth Report. private industry.

Box 1: Overview of India’s indigenous defence production
Achieving self-reliance in defence production has been a goal of Indian support from the Government in terms of research and development
policy-makers since the attainment of independence in 1947. At that assistance (particularly through the work of the Defence Research
time, India’s productive capabilities were limited to small –run arms, and Development Organisation), investments in productive capacity,
ammunition, mines and explosives, all of which were undertaken by tax breaks and prioritisation for tenders. However, the performance
16 ordnance factories. Developing indigenous defence capabilities of the DRDO has been subject to a range of criticism, and as such,
was seen as a key means of maintaining foreign policy independence. the production activities of the DPSUs in relation to complex systems
The Industrial Policy Resolution of 1948 decreed that the public sector have typically been by way of licensed production based on foreign-
would be the main source of production in a range of areas, including developed technology.
defence. Policy revisions in 1956 explicitly excluded the private sector
from taking part in the munitions, aircraft and shipbuilding industries. Industrial policy meant that the private sector was limited to producing
elementary and intermediate products, components and spare parts
In the following decades, a number of new public sector ordnance until 2001, when the defence sector was opened to private sector,
factories were built, so that by the mid 1980s there were 35 factories with complete private ownership of defence production and up
manufacturing tanks, armoured vehicles and trucks in addition to the to 26 foreign direct investment permissible. These policy changes
previous products. Currently, there are 40 state-run ordinance factories were intended to open the way for the private sector to become
which focus primarily on land-based systems and operate under the more involved in the production of advanced weapons systems and
guidance of the Ordnance Factories Board. equipment.
In addition to the ordnance factories, there are eight Defence Public In addition to major industrial companies such as Tata Advanced
Sector Undertakings (DPSUs) controlled directly by the Ministry of Systems and Mahindra, there are also a large number of small and
Defence. The DPSUs produce combat aircraft, helicopters, warships, medium-sized businesses that assist the DPSUs and private companies
missiles, defence electronics, heavy earth moving equipments and with the provision of components.
specialist alloys. The DPSUs have been the recipients of significant
Source: (2010) ‘Chapter Ten: Reforming India’s Defence Industries’ in The Military Balance, February, pp.473-478
The private defence industry in India is still relatively fighters, frigates and tanks to the electronic systems that
young with the Ministry of Defence, noting that the support them and even many of the munitions carried
private defence sector is still ‘embryonic’ and that it will by these vehicles.20
take time to ‘come of age’. Further, the private defence
industry will have a number of barriers to overcome Complex weapons systems are differentiated from other
before it reaches maturity, including: defence weapon systems by the technical difficulties
• Prohibitive industry entry costs that occur at the conception, development and produc-
• Barriers to the export of defence intellectual property tion stages, in addition to uncertain outcomes which
from foreign countries increase the risk to the buyer and seller of a complex
• Integration difficulties when combining complex weapon system. Adding to the complexity of creating
weapon systems. these systems, complex weapon systems often require
• Understanding of the Defence Domain requirements the integration of many systems, each of which may be
produced by a different supplier.21
20 Singer, P. W. (2003)
These barriers to the growth of the defence industry are
Corporate Warriors: The
Rise of the Privatized predominantly for the sectors that produce equipment Under these constraints, entry into many parts of the
Military Industry, Cornell that may be considered to fall under the title of defence industry requires significant investment into
University Press, Ithaca and
‘complex weapon systems’. Although relatively simple R&D before, during and after a complex weapon system
London.
21 Procurement Policy and systems such as mines and rifles account for the bulk of has entered production. And in addition to long term
Procedure. Standing fatalities in current conflicts, complex weapon systems commitments to R&D, organisations wishing to enter
Committee on Defence
account for a majority of a defence force’s capital into the defence industry face significant infrastructure
(2005-06) Sixth Report.
22 ibid expenditure. Complex weapon systems range from and production facility costs.

The issues surrounding complex weapons systems are that technology and information used by or for the
compounded by the fact that the effectiveness of a military cannot be shared with any non-US individual
weapon system is relative to other like or adversarial unless proper authorisation has been provided. The USA
systems. For this reason, governments which fund therefore restricts knowledge that is used in the produc-
the invention and development of these systems have tion of their complex weapons systems. Most countries
an interest in restraining the transfer of cutting edge implement similar denial regimes to protect their tech-
weapon systems to other countries and therefore create nological competitive advantage in weapon systems.22
export barriers or denial regimes for some systems. India will necessarily need to develop the capability of
their defence industry prior to making serious advances
One example of an exporting barrier is the USA’s in proportion of capital equipment that is manufactured
International Traffic in Arms Regulations (ITARS). ITARS locally.
is a set of regulations that controls defence-related
equipment and services which are on the United States Up until 2005, India still procured most of its defence
Munitions List. In practice, ITARS regulations dictate force equipment from international suppliers (Table 6).
Table 6: Imported vs indigenous production
Year Navy Army Air Force Total

Imports Indig. Imports Indig. Imports Indig. Imports Indig.
2000-01 36% 64% 46% 54% 81% 19% 54% 46%
2001-02 49% 51% 34% 66% 74% 26% 52% 48%
2002-03 50% 50% 65% 35% 70% 30% 62% 8%
2003-04 58% 42% 52% 48% 76% 24% 62% 38%
2004-05 58% 42% 42% 58% 62% 38% 54% 46%
2006-07 5% 95% 22% 78% 11% 89% 5% 95%
2007-08 23% 77% 42% 58% 42% 58% 23% 77%
2008-09 46% 54% 34% 66% 27% 73% 46% 54%
Average 41% 59% 42% 58% 55% 45% 45% 52%
Source: Procurement Policy and Procedure. Standing Committee on Defence (2005-06) Sixth Report and Standing Committee on Defence (2009-10) Sixth Report.
Even in recent times India has struggled to lift indigenous production above 50 per cent of the total cost of the
acquisition. It has had the greatest success in naval and land acquisitions, where large platform builds have required
less advanced technological know-how and India’s mature manufacturing and engineering sector is able to strongly
compete.
While the private defence industry may be growing in India, the high barriers to entry will probably mean that
the Indian Defence force will still need to procure much of its desired equipment from outside of the countries.
This is likely to be particularly true for items that require high levels of technological sophistication. For example,
naval production is currently focused on heavy engineering rather that the complex electronic systems design and
integration.

4.2 Defence requirements
4.2.1 Future defence spending

Table 7 presents Indian Government forecasts for future defence service expenditure.
Table 7: Forecast expenditure on defence services
Year 2011 2012 2013 2014 2015

Capital Expenditure (USD million) 13110 14421 15863 17450 19195
Army (53 %) 6948 7643 8407 9249 10173
Navy (16 %) 2098 2307 2538 2792 3071
Air Force (34 %) 4064 4471 4918 5410 5950
Source: Indian Thirteenth Finance Commission Report, Dec 2009; Union Budget(s) & Economic Survey 2003-2011; and Deloitte Analysis of
allocations by Service Division.
The above Table shows that the Defence Service’s In very recent times India has struggled to lift the
capital expenditure budget is expected to grow in indigenous share of its budgeted acquisitions; in 2010,
nominal terms, with capital expenditure achieving a 10 capital defence procurement that originates in India fell
per cent CAGR. This represents a marginal slow down to about 30 per cent.23 If the Indian Defence Service
in budgeted expenditure from the past decade (CAGR wished for their indigenous industry to supply 70 per
of budgeted expenditure of 13.8 per cent from 2003-
2010). However, considering the degree of underspend
and in turn the level of activity that is yet to occur for
which budgets have already been allocated, this may
be a more realistic growth rate of the Indian defence
budget.
Moreover, it is important to consider the real growth

rate of expenditure when evaluating forward projec-
tions. When accounting for India’s inflation rate in
the near future, which is expected to peak this year
around 9.0 per cent in 2010, before falling to 7.3 per
cent in 2011 and subsequently stabilising in the long
run at around 4.7 per cent by 2015, the real growth
in Defence Service capital expenditure growth will be
marginal over the next two years before increasing to
about 5.3 per cent from 2012 to 2015. This may mean
that competition for new opportunities is higher than
the nominal figures suggest.
The future balance of indigenous vs imported

procurement: defence policy objectives
India has established a notional target for 70 per cent of
new acquisitions in the future to be sourced from indig-
enous production; the Navy has a slightly higher target
of 85 per cent but this is likely to be offset by lower
levels of indigenisation in other domains. This would
represent an effective reversal of historic trends.

cent of the armed forces capital goods by 2015, then the local industry would need to more than double in size in
five years. This is highly unlikely to occur, due to the combination of the aspirational growth rates for total spend and
the proportion of defence equipment that is manufactured within India today. Table 8 highlights the growth rate
required for the indigenous defence industry to provide 70 per cent of the capital goods to the defence service by
2015. As shown in the table, indigenous production would need to expand by an average of 30 per cent a year over
the next five years.
Table 8 : Forecast Growth of Imported vs indigenous production, if targets are met
Year 2011 2012 2013 2014 2015

Capital Expenditure (USD million) 13,110 14,421 15,863 17,450 19,195
Indigenous growth rate 39.33% 33.16% 29.13% 26.30% 24.19%
Imported growth rate -2.57% -4.19% -6.30% -9.13% -13.16%
Source: Indian Thirteenth Finance Commission Report, Dec 2009; Deloitte analysis – nominal projections.
It would be very difficult for the Indian indigenous defence industry to achieve the growth rate above without signifi-
cant government intervention.
4.2.2 Fiscal capacity considerations

Indian GDP has achieved a very high growth rate in the past ten years. This contrasts with India’s developed nation
counterparts, which are expected to achieve much slower GDP and revenue receipts growth, combined with harder
spending choices driven predominantly by ageing populations.
As a consequence, although the Indian Government has budgeted substantial increase in nominal capital expenditure
(and more modest growth in real terms to 2015), overall expenditure is expected to remain a modest proportion of
GDP (and steady component of government budgets). Defence Expenditure, including revenue expenditure and capital
expenditure within this, is forecast to decline as a proportion of GDP over the next five years to 2015 (Table 9). 24
Table 9: Forecast Expenditure on Defence Services
Year 2011 2012 2013 2014 2015

Forecast GDP Nominal Growth Rate 12.50% 13.00% 13.50% 13.50% 13.50%
Forecast GDP Nominal (INR billion) 76,898 86,895 98,625 111,940 127,052
Forecast GDP Nominal (USD billion) 1660.5 1876.5 2130.3 2417.4 2744.1
Total Def Expenditure as % of GDP 2.12% 2.03% 1.94% 1.85% 1.76%
Def Rev Expenditure as % of GDP 1.20% 1.14% 1.07% 1.01% 0.95%
Def Cap Expenditure as % of GDP 0.92% 0.89% 0.87% 0.84% 0.81%
Source: Economics Intelligence Unit, Country Monitor — India. Indian Thirteenth Finance Commission Report, Dec 2009.
In general, the strong economic growth projected by India would be expected to build confidence in India’s capacity
to commit to its budgeted outlays for defence. However, with the majority of Defence Expenditure categorised
as Non-Plan expenditure, there is a potential risk that expected growth in Plan Expenditure could put pressure on
proposed acquisitions. This pressure could be exacerbated in the event of a ‘double dip’ recession, which could be
more protracted given the current debt positions of governments following the Global Financial Crisis (GFC).
23 Military Balance (2010),
‘Chapter Ten: Reforming
India’s defence industries’, In addition, India’s public debt as a proportion of GDP is currently high by world standards (Figure 13). India ranks
110(1), pp 437-478 31st in terms of the proportion of debt to GDP, and exceeds the world average of 53 per cent. Critically, it also
24 Indian Thirteenth Finance
outpaces its emerging market peers: Brazil’s public debt as a percentage of GDP is 47%, China’s public debt as a
CommissionReport, Dec
2009. percentage of GDP is 18% and Russia’s is only 7%. To the extent that a ‘double dip’ recession were to occur, India’s

Figure 13: Public Debt to GDP – Key country comparisons (2009 estimates)
200%
180%
160%
140%
120%
Debt% of GDP
100%
80%
60%
60% 53%
47%
40%
18%
20%
7%
0%
Japan
Singapore
Italy
Greece
Iceland
Israel
France
Germany
Canada
United Kingdom
Ireland
Norway
India
World
Spain
Brazil
Thailand
Sweden
United States
South Africa 36
New Zealand
Saudi Arabia
Australia
China
Russia
Source: CIA World Factbook, 2009 estimates, accessed online at: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html?countryName=India&count
ryCode=in&regionCode=sas&rank=31#in
debt position would be expected to potentially weaken

its ability to commit to its proposed acquisition plans.
Offsetting its high debt position, however, is the more

balanced nature of its growth. In contrast to China,
which relies heavily on exports for its economic growth,
India enjoys a strong domestic demand component.
As a result India weathered the GFC well, posting the
second highest real growth rate globally. In 2009-10, its
deficit was reported to be 6.8% of GDP.
This suggests that although India’s fiscal position is not

‘bullet proof’ there are overall low risks to its capacity to
commit to future spending.
Even in the event that Plan Expenditure grows in the

near future, it is generally considered that, given the
security environment in and around India with boarder
disputes with Pakistan and China, the government
would continue to expand Defence Service capital
expenditure in line with their desire to modernise the
defence force. It is likely that pressure would first be
focused on reigning in the defence force’s revenue
expenditure growth.25

4.2.3 Future acquisition plans to protect the country’s maritime zones and assets.
4.2.3.1 Navy Acquisitions While the smallest of the three Indian Defence Force
The Indian Government has publicly recognised that Services, the Indian Navy is already a rapidly expanding
India’s expanding maritime responsibilities and interests maritime force with 36 ships and six Scorpène subma-
necessitate enhancement in naval and coast guard force rines currently on order. Two aircraft carriers are also
levels. By 2022, the Indian Navy has plans to have a currently in varied stages of construction alongside eight
160-plus ship Navy, including three aircraft carriers, 60 Boeing P8-I Maritime Multi-Mission Aircraft and 16 25 Arvind Kadyan, India’s
major combatants (including submarines), and close to Mig-29Ks which are under production in Russia. Defence Budget (2010-
400 aircraft of different types. The Indian Coast Guard 2011): Wakeup call for
defence managers. Institute
is all set to double its force levels and manpower in the In addition to the construction already underway, the for Defence Studies &
next few years and triple it in the next decade in order Navy has further plans to acquire: Analysis.
Table 10 : Indian defence acquisition plans in the Navy domain
Category Indicative Items (Quantity) Timing USD Source

Tenders released USD 3.42b each
Diesel Submarines (6) 4, 25, 26
2010-2011 2010-2015 (USD 20.7billion)
Submarines
>USD 1.8 b (USD 5.4
ATVs (nuclear subs) (3-5) From 2010-2015 9, 25, 26
b- USD 9 billion +)
Indigenous Aircraft Carriers (2) 2010-2017 USD 450 million 17, 21, 23, 25, 26
ASW Corvettes (8) 2010-2020 > USD 1.8 billion 10, 11, 18, 19,26
Off-shore Patrol Vessels (4) Over 15 years 22, 26
Sail Training Ship (1) Over 15 years 25, 26
Survey vessels (6) Over 15 years 25, 26, 27
Warships
Destroyers (4) Over 15 years USD 3.33 billion 25, 26, 28, 29
Frigates (7) Over 15 years USD 8 billion 24, 25, 26
Mid-Life Upgrades of the Kirch Class Corvettes (5) 2010-2022 25
Landing Platform Dock (2) 25
Mid-Life Upgrades of the Brahmaputra Frigates (3) 2010-2022 25
Fighters for IAC2 2015+ 12, 25, 26, 30
MiG-29K (29) 2010-2015 USD 2.25 billion 12, 20, 25, 26, 30
Alternatives for six Naval Tejas 2010-2015 USD 1.17 billion 12, 13, 30, 31
Navalised Long Range Maritime Patrol Aircraft - Boeing P8-I (20) 2010-2022 USD 2.07 billion 1, 2. 25, 26, 30
aircraft 2007 (project has been
Long Range Maritime Patrol Aircraft – IL-38 (5) 14, 15, 25, 26, 30
delayed)
Medium-range Maritime Reconnaissance Aircraft (6) 2010-2022 USD1 billion 16, 25, 26, 30
Short-range Maritime Reconnaissance Aircraft (11) 2010-2022 25, 26, 30
Advanced Light Helicopters (47) 2010-2022 25, 26, 30
Helicopters Maritime Helicopters (16) 2010-2022 US$1 billion 5, 25, 26
Training aircraft – 17 Advanced Jet Trainers(17) 25, 26
Weapons – Missiles 2010-2022 6
Weapons – other 2010-2022 6
Equipment Marine engineering equipment 2010-2022 6
Marine engineering equipment – propulsion systems 2010-2022 6
SSK/EKM Submarine Equipment 2010-2022 6

4.2.3.2 Land Acquisitions Many acquisitions outlined appear to be part of the
Indian Army acquisition plans include upgrades and USD 8 billion artillery modernisation program, the FARP,
purchases of artillery, tanks and vehicles, missiles and originally formulated in 1999. The program aims to induct
other items such as infantry upgrades. The intention is around 2,184 guns over 20 years, at a minimum rate of
to create eight divisional-sized armoured battlegroups, 100 units per annum. In its 11th Defence Plan, spanning
comprising artillery, armour and motorised infantry, with 2007-2012, the Indian Army has designed around 600
state of the art communications equipment and coordi- modernisation schemes, amounting to around USD 1.44
nated air support. billion.
The Indian army has further plans for acquisition.

Table 11: Indian defence acquisition plans in the land domain

Main battle tanks (1500) 2010-2015 1, 2, 8
DRDO production plans are for
Infantry fighting vehicles 1, 2, 12
2020-2025
Tanks and Ongoing, with DRDO production
Light strike vehicles and Bullet proof vehicles 1, 2, 10
Vehicles planned for 2020-2025
Mine protected vehicles (600) Ongoing 1, 7, 9, 10, 11
Unarmed/unmanned aerial vehicles (200) DRDO trials are ongoing 1, 3, 13
Unmanned combat air vehicles DRDO trials are ongoing 1, 4, 13
USD 4.77 billion to
Field Artillery Rationalisation Plan Up to 2020 5
USD 6.57 billion
155mm self-propelled guns (400) Up to 2020 1, 2
155 mm medium guns 2010-2020 5
Air Mobile Ultra light howitzers (ULH) (140) 2007-ongoing USD 1.35 billion 1, 2, 5
Towed and wheeled guns 2007-2012 5
Self-propelled tracked guns - 155mm/52 calibre Cost of USD 792
2007-2012 2, 5
Artillery guns million
Self-propelled wheeled 155mm/52 calibre guns
with armour protection (mounted on a six- 2007-2012 USD 0.99 billion 2, 5
wheeled vehicle )
Towed 155 mm Gun-howitzers (400) USD 0.9 billion 3, 5
Mounted gun system (200) 2010 USD 1.89 billion 5
155mm precision guided munitions (50,000) 1, 2
155mm ammunition – all types (150,000 rounds) 1, 2
Tracked medium range surface to air missile
1, 2
systems (100)
Replacement of air defence systems 1, 4
Missiles ZU-23-2 anti-aircraft upgrade (468) 2010 USD 522 million 2
40 mm Anti- aircraft Gun (115) 2010 USD 270 million 2
Hand-held anti-tank guided missiles (5000) USD 393.3 million 1
ICV-mounted anti -tank guided missiles (1000) 2009-2012 1
Other Bullet proof jackets (59,000) Ongoing 1, 15, 16

4.2.3.3 Aerospace acquisitions
Aerospace continues to be a sector where India struggles to indigenize production. However due to urgent require-
ment of new technology, high demand from the Indian Airforce and limited indigeneous capacity. the Airforce has
planned for major acquisitions.
Table 12: Indian defence acquisition plans in the aerospace domain

MiG-29 Upgrade (63) 2013 USD 0.99 billion 1,2,3,4
Mirage 2000 Upgrade (51) USD 2.187 billion 5,6
Su-30 MKI 80 (40+40) 2008 onwards USD 1.593 billion 7,8
Original agreement
Su-30 MKI (140) 2015 7, 9,10
USD 8.46 billion
Fighter Aircraft Medium Multi Role Combat Aircraft (MMRCA) (126 with
USD 9.09 billion 11,12
an option for 64-74 more)
USD 434.7
LCA (Tejas) (120) 2013-2014 million+ USD 1.71 13,14
billion
Estimates of up to
Fifth Generation Fighter Aircraft (FGFA) ( number) 2017 15, 16, 24
USD 9.9 billion
Medium lift Helicopters (80) 2013 USD 1.17 billion 17
Combat and Heavy Lift helicopters (22 +15) USD 1.98 billion 17, 33
VVIP helicopters (12) 2013 USD 810 million 17, 25
Helicopters
Dhruv helicopters (245) Deliveries ongoing 7, 17
Cheetal Helicopters (10) Deliveries Ongoing 17
Observation Helicopter (187) 2017 17, 34
Multi-Role Tanker Transport (6) 18, 22, 23
Upgrade underway, to
AN-32 Upgrade (105) USD 397.8 million 32
be completed by 2013
Transport and C 130J Hercules aircraft (6) 2012 USD 869.4 million 7, 19
Other Aircraft Strategic Transports/Advanced Airlifters Not specified USD 2.52 billion 20
Hawk Mk 132 Advanced Jet Trainer (66) Final delivery due 2011 USD 1.9 billion 7
Basic trainer aircraft (181) USD 5.8 billion 21
Embraer Jets (3) 2011 USD 232 million 7
Short Range Surface to Air Missile System (SRSAM) 2011 26, 29
Missile Systems
Medium Range Surface to Air Missile Systems (MRSAM) Induction due in 2012 USD 2.44 billion 26, 27
UAVs Israeli Harop ‘killer’ UAVs (10) 2011 USD 110 million 30, 31
Other Airfields for infrastructure upgrade (30) 28

4.2.3.4 Electronics Acquisitions
Electronics acquisitions are subsumed under each service division ( Army, Navy and AirForce ) in India’s forward
budget plans. Key acquisition plans are given below.
Table 13 : Indian defence acquisition plans in the electronics domain

Short/medium range battlefield surveillance radars 2010-2020 USD 0.99 billion 1, 8, 20, 21
Weapon locating radars (40-50) Ongoing USD 198 million 1, 2, 22, 23
Hand-held thermal imaging devices (up to 5,000) 2010-2020 USD 144 million 1, 9, 24
Integrated observation equipment (1,200) 2010-2020 USD 0.99 billion 1, 10
Standalone infrared, seismic and acoustic sensors 2010 1, 3, 27
Infantry upgrades under the Future Infantry Soldier as a System
2010-2020 USD 0.99 billion 3, 25, 26
(F-INSAS) project
Land
Networked communications and modern strategic and tactical level
2010 3,16, 29
command and control systems
Technology related to gallium nitride semi-conductors 4, 12
Nanotechnologies related to structures, sensors, propulsions and
4
communication
Detection Devices, NBC systems, remotely operated robots and
4
micro-UAVs based on DRDO technologies
Various general electronics including rectifiers (70) and rotary
2008-2022 5
converters (35).
Radars (130) 2008-2022 5, 29
Sonar 2010-2014 33, 35
Navy
Gyros (100) 2008-2022 5
Logs (100) 2008-2022 5
Echo sounders (40) 2008-2022 5, 28
Integration of various surveillance/weapon delivery systems (25). 2008-2022 5
Upgrade of Cheetah/Cheetak helicopters 13, 30
Upgrade MIG-27s 13, 14, 31
Upgrade of avionics in Sukhois 2010-2015 13,15
Aerospace Surface-to-air Guided Weapon System (SAGW) 2010-2020 17
Medium Range Surface to Air Missile Systems (MRSAM) 2010-2020 USD 2.16 billion 17
Short Range Surface to Air Missile System (SRSAM) 2010-2020 18
Air Defence Ground Environment System (ADGES) modernisation Ongoing USD 1.6 billion 32

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rjul2003/30072003/r3007200336.html, last accessed 6 April 2010

4.2.4 Conclusion on Defence Requirements growth in expenditure is high, each of India’s Services have
India has the tenth largest defence budget in the world. shown a consistent inability to keep up with the massive rate
Countries that spend more on defence than India include of growth in outlays, with an average of 57 per cent under-
developed countries which currently have much lower spend in budgeted capital expenditure since 2003.
GDP growth including America, France, United Kingdom,
Japan, Germany and Italy. India therefore presents an overall Moreover, while India has a stated goal to transition to a
significant opportunity for defence equipment exporting higher proportion of indigenous production (with a notional
companies from around the world. In addition to the rapidly target of 70 per cent identified), the private defence industry
expanding defence budget, India’s defence force is currently in India is relatively immature, compared to the size of
undergoing a modernisation program across the three the defence force’s budget and comparable industries
services of the Army, Navy and Air Force. worldwide. This has been an effect of the government’s
refusal to allow an industry to develop prior to 2001 and
The Indian Government has budgeted for a substantial the state of the Indian economy prior to the 1990’s which
increase in nominal Defence Services capital expenditure. constrained public funding in technologically sophisticated
Total expenditure is expected to grow at a CAGR of 10 weapons and systems development. The future growth of
per cent from 2011 to 2015, with capital expenditure on the defence industry will continue to face barriers to growth
Defence Services expanding from USD 15.3 billion in 2001 because of the high infrastructure and investment costs that
to USD 19.20 billion by 2015. necessarily accompany state of the art development and
manufacturing of defence equipment. The Indian defence
By and large the analysis indicates that there are low risks industry also faces export bans by countries limiting the
to the Indian Government being able to commit the money transfer of knowledge and technology to foreign countries.
it has budgeted. Expenditure as a proportion of GDP is
expected to remain low, and although Defence Expenditure As a consequence, reliance on imports is still expected to
is classified as Non Plan expenditure it is likely that other continue, particularly where the equipment has a high level
aspects of the budget would come under greater pressure of technology sophistication. It would be expected that
before the capital expenditure budget due to the Central even if indigenous procurements are able to be increased as
Government’s focus on modernising the armed forces. a percentage of the defence budget, the absolute amount
spent on imports of equipment will still grow as the growth
The major risk lies not in fiscal capacity but the challenge of in capital expenditure holds up imports, creating potentially
meeting such a high rate of growth. Although the projected significant opportunities for Foreign defence exporters.

5 Domestic capacity
Figure 14: Indian Navy procurements through 5.1 Indian manufacturing capabilities
imports versus indigenous production (2000-2005)
Navy capabilities
70%
60% Domestic capacity
50% Indigenous production has historically accounted for
40% roughly half the Indian Navy’s procurements. Figure 14
30% shows the share of imports and indigenous production
20% for Indian Army capital acquisitions from 2000 to 2005.26
10%
In 2006, a position for a Directorate of Indigenisation
0%
was created with the charter to pursue indigenisation
2000-01 2001-02 2002-03 2003-04 2004-05
and import substitution for naval requirements. In 2008
Imported Indigenous the Indian Navy committed to a 15 year program to
Source: Standing Committee on Defence (2005-06) ‘Procurement achieve 85 per cent indigenisation of hardware.27
Policy and Procedure’
Table 14 : Major Navy production currently occurring in India
Production Agency Production

Mazagon Dockyards Ltd, Mumbai Three Kolkota (P-15A) destroyers; two Shivalik (P-17) stealth
frigates; six Scorpène submarines
26 Ministry of Defence (2006)
Standing Committee on
Garden Reach Shipbuilders & Engineers Ltd, Kolkata Landing ship tanks – large; fast attack craft; four P-28
Defence — Procurement Corvettes
Policy and Procedure’
Goa Shipyard Ltd, Mormugao Patrol vessels; fast attack craft
27 Vishakhapatnam (2008),
‘Navy orders 30 ships from Cochin Shipyard Ltd, Cochin Two air-defence ships (P-71)
Indian dockyards’, accessed
online: http://newsx.com/ Ship Building Centre, Vishakapatnam Three Arihant nuclear-powered submarines
story/5657 , last accessed
22.March.2010 Source: The Military Balance (2010), ‘Chapter Ten: Reforming India’s defence industries’, 110(1), pp 437-478
Examples of India’s current capabilities in in developing its own indigenously-produced submarine, the INS Arihant, at the Ship
Submarine production subs. Building Centre in Vishakapatnam. It is
India is currently in the process of constructing expected that the vessel will undergo at least
six Scorpène-class boats that are being indig- The Advanced Technology Vessel (ATV) two years of extensive sea trials before it can
enously built at the Mazagon Dock in Mumbai, submarine, work on which began in the 1970s, be commissioned into the Indian Navy.
under the supervision of French technicians. is a complex project that has faced multiple
The process has faced challenges of time and difficulties. Private sector Indian firm Larsen The Arihant is the first of three ATVs currently
cost overruns. India expects to tender for the and Toubro began work from 1985. Although being built, with plans for an eventual fleet
procurement of six more diesel submarines in Larsen and Toubro were able to manufacture of 5-6 nuclear-propelled submarines that will
the near future. the hulls and develop or acquire necessary perform a strategic nuclear role. The vessels
systems for the secret project (code name are likely to carry 12 Sagarika submarine
In addition to its fleet of diesel-electric subma- S2), it faced a number of challenges relating launched ballistic missiles (SLBM) with a range
rines, India is also in the process of developing to systems integration and reactor design. of around 700km. The construction project
an indigenously built nuclear-submarine capa- Ultimately, India was forced to purchase the is being conducted jointly by the DRDO, the
bility. India briefly used a nuclear submarine reactor designs from Russia around 1998. Department of Atomic Energy (DAE), private
on lease from the Russians from 1988 to 1991 contractor Larsen and Toubro, and the Indian
(the Chakra), but has faced many challenges In July 2009, India launched its first ATV Navy at Visakhapatnam.
Source: NTI (2010) ‘India’s current capabilities’, accessed online: http://www.nti.org/db/submarines/india/index.html; India Defence (2007) ‘INS Vikramaditya: Aircraft Carrier Acquisition from
Russia Delayed, Cost Overruns Expected’, accessed online: http://www.india-defence.com/reports/3084; Tech Space, (2009) ‘INS ARIHANT INDIA’s First Nuclear Submarine’, accessed online:
http://techspaceofatul.wordpress.com/2009/08/03/ins-arihant-indias-first-nuclear-submarine/

While the Indian Navy has the highest number of indig-
Figure 15 – Indian Army procurements through
enous principal platforms among the armed services,
imports versus indigenous production (2000-2005)
time and cost overruns persist. In July 2009, the Defence
70%
Ministry acknowledge that the Scorpène production
60%
was running at least two years behind schedule due to
difficulties with the ‘absorption of technologies’. The 50%
construction of six improved Project 17A frigates, which 40%
were ordered in 2009, is also expected to be delayed 30%
due to the lack of sufficient construction capacity and 20%

the modernisation that is required in Indian defence 10%
shipyards.28 As reported in 2010 by the Indian Defence 0%
2000-01 2001-02 2002-03 2003-04 2004-05
Review:
Imported Indigineous
Army Capabilities: Source: Standing Committee on Defence (2005-06) ‘Procurement

Indigenous production has historically accounted for Policy and Procedure’
28 The Military Balance (2010), around half of India’s Army procurements. Figure 16
‘Chapter Ten: Reforming
India’s defence industries’, shows the share of imports to indigenous production for
110(1), pp 437-478 Indian Army capital acquisitions from 2000 to 2005.
Indian shipbuilding is mainly concentrated in respect of technologically advanced credibility as a source for delivering quality
in 27 shipyards. Of these, eight are in the ships, notably LNG carriers are non-existent, ships in time. Advances in ship design and
Public Sector, six yards being under the which is a strategic shortcoming. The Indian in construction technology are derived from
Central Government and two under State shipbuilding industry has been characterized extensive, long-term research in wide ranging
Government with a capacity of 2.54 lakh by low capacity, poor productivity and fields, which involves substantial financial
Dead Weight Tonnage (DWT). In addition, obsolescent infrastructure. support, far more than is available in India.
there are 19 Private Sector yards with an It would, however, not be in our interest to
established capacity of about 27000 DWT, to In both the naval and commercial sectors, re-invent the wheel; therefore strategies to
which are being added the large capacities however, a mere increase in infrastructure incorporate the results of such research in
of three green field projects. The major share will not ensure achievement of desired indigenous shipbuilding need to be evolved.
of the present capacity is held by eight public results. For integrated growth of the industry, The JV route, with a larger share of FDI offers
sector yards, with Cochin Shipyard Limited there is also a need to create an R&D base, an avenue to meet this objective. [Emphasis
and Hindustan Shipyard Limited having develop in-house design capability, infuse added] If we are able to produce ships
capacity and infrastructure to built vessels of new technology, develop skilled workforce, which offer greater operational efficiencies
1.1 lakh DWT and 80,000 DWT respectively. adopt appropriate fiscal measures. i.e. lower running costs and longer service
Barring two notable exceptions, the majority life, as well as lower acquisition costs than
of private sector shipyards are limited in Skilled workforce, adopt appropriate fiscal their peers, we would be able to attract
respect of capacity and size of the vessels measures and remove administrative hurdles, international customers.
they can presently build. India’s capabilities so that Indian shipbuilding can achieve
Source: Indian Defence Review (2010) Indian Shipbuilding Key to Maritime and Economic Security, accessed online at: http://www.indiandefencereview.com/2010/03/indian-
shipbuilding-key-to-maritime-and-economic-security.html March 2010

There does not appear to be any Indian indigenous to come in within the required timelines led to the
capacity in relation to artillery production. This is acquisition of the T-72 tank. Nevertheless, Arjun tanks
supported by the fact that no significant acquisitions are currently being built and the development of this
have occurred for over 20 years. However, there does MBT has lead to the creation of considerable capability
appear to be indigenous capacity to develop tanks and in the Indian defence industry.
other vehicles, and air defence missiles.
The DRDO has commenced conceptual stage develop-
Indigenous firms have been involved in a range of tank ment of Future Main Battle Tank and Future Infantry
and vehicle production activities, including the following Combat Vehicle, expected within the 2020-25
activities by the DRDO: timeframe. 29
• Development of the Arjun MBT by the DRDO (with The private sector has also been involved in the produc-
assistance from German defence firms), which tion of military vehicles, in particular Mahindra Defence
29 Kanwal, G.B. (2010),
entered serial production, but had recurring techno- Systems and Ashok Leyland. Mahindra Defence systems
‘Indian Army modernisa-
logical problems and cost over-runs, with only 124 announced a joint venture with BAE (valued at USD tion needs a major push’,
being ordered as a final consequence 20m) in January for the production of land-based Indian strategic defence
magazine, 5(2), accessed
• In December 2007, a contract was signed for 347 weapons systems including mine-protected vehicles.
online: www.indiastrategic.
T-90 tanks to be assembled under licence by the in/topstories482.htm, last
Heavy Vehicle Factory (HVF), Avadi India has a strong history of missile development, accessed 22 March 2010
30 Kanwal, G.B. (2010),
• 1,700 T-72 M1s have been manufactured under derived from the DRDO’s Integrated Guided Missile
‘Indian Army modernisa-
licence, also by the HVF. Development Program (IGMD), which was operational tion needs a major push’,
from the 1980s to 2009. Projects undertaken as part Indian strategic defence
magazine, 5(2), accessed
While the T-90 and T-72s are Russian designs produced of the IGMD met with varying levels of success, for
online: www.indiastrategic.
under licence, the Arjun MBT is an indigenous design. example: in/topstories482.htm, last
As such, it was a highly ambitious project that origi- • The Akash SAM developed in collaboration with accessed 22 March 2010
and “India shuts down
nated in a requirement in 1972. The requirement Bharat Electronics Limited (BEL). The Akash was
Trishul missile project”,
included indigenous design and production of a gas subject to significant delays but is now operational in Rediff India Abroad,
turbine power plant (later cancelled in favour of a diesel • The Trishul SAM project, which was shut down after Feb 27, 2008, available
at http://www.rediff.com/
engine), composite armour, hydro-pneumatic suspen- unsuccessful trials.30
news/2008/feb/27trishul.
sion and a 120mm rifled gun. The failure of the project htm

In early 2009 the IGMD was closed down, with the 31 “India scraps integrated
DRDO announcing that while most future weapon guided missile programme”
The state owned

in the Hindu Times, January
systems would be developed in collaboration with
9, 2008 available at http://
foreign partners, some items such as longer range www.hindu.com/thehindu/
missiles would be developed indigenously.31 holnus/000200801090301.
HAL is India’s A range of indigenous UAVs are in the design and

htm last accessed 24 March
2010
32 Kanwal, G.B. (2010),
only military development pipeline, including the Gagan, Pawan (a

joint program between the DRDO and Israelis Aerospace
‘Mined in Red Tape’, SP’s
Land Forces Defence
Magazine, 7(1), pp 1 – 6
aircraft producer,
Industries) and Rustom (a medium altitude long & 13 - 14, accessed
endurance UAV).32 online: http://www.
spslandforces.net/ebook.
and is a significant
asp?id=100212145153-
Air Force Capabilities : 66d09a480f7d45a690
Domestic capacity: Hindustan Aeronautics Limited (HAL) df68981bccd702&Nam
player in the
e=sps-land-forces-feb-
The state owned HAL is India’s only military aircraft
mar-2010&Info=SP’s%20
producer, and is a significant player in the defence Land%20Forces%20
industry as a whole. HAL is one of India’s DPSUs. To Fab-Mar%20
defence industry put HAL’s size in perspective, during 2007-08 the

value of production by all Indian defence public-sector
2010&t=1266237474406-
&r=6, last accessed 22
March 2010
as a whole. HAL undertakings totalled nearly 19,200 crore rupees (USD

4.14 billion), which was an increase of more than 20
per cent compared to the previous year; the state run
33 Speech by Defence
Minister Shri AK Antony
at the National Seminar
is one of India’s
on Defence Industry,
HAL manufactures combat aircraft and helicopters, has New Delhi, January 2009.
http://www.defense-
12 divisions, and accounted for around half of total
DPSUs.
aerospace.com/article-
DPSU production by value in 2006-07.33 The company’s view/verbatim/101644/
current order book has a value of more than 60,000 indian-minister-speech-on-
defense-industry.html
crore Rs (USD 13.05 billion). Table 15 below shows that
HAL has also recently experienced rapid growth (28 per
cent) in export earnings.
Table 15: HAL Key Financial Performance Indicators, 2007-08 and 2008-09
Year 2007-08 (Rupees in crore) 2008-09 (Rupees in crore) % Growth 2008-09 (USD million)
Turnover 8,625 10,373 20.27 2255.4
Exports 341 437 28.00 94.5
Profit Before Tax 2,164 2,335 7.88 507.6
Profit After Tax 1,632 1,740 6.62 378
R&D Spending 662 675 1.91 146.7
Source: HAL 2008-09 Annual Report, page 10. Note: One crore = 10 million Rupees, and 1 USD = 46 Rupees.

As Table 15 shows, in 2008-09 HAL had turnover of In terms of product lines, HAL has produced MiG 21s,
USD2.5 billion. HAL is also India’s main beneficiary Jaguars, the Hawk trainer aircraft, the Dhruv advanced
of offset policies.34 Under the current rules, foreign light helicopter (ALH). The company is currently building
companies that receive import orders worth over USD the Sukhoi Su-30 MKI aircraft, and has a one-for-one
64.6 million must draw at least 30 per cent of that order matching program for production of this aircraft with
from domestic suppliers or make a similar sized invest- Russia. Under domestic production requirements
ment within India.35 Since HAL is India’s only military HAL will also likely build most (108 out of 126) of the
aircraft manufacturer, foreign companies often turn to MMRCA aircraft, even though the contract will be
HAL to meet this offset requirement, either through awarded to a foreign supplier. The company will jointly
direct supply or by setting up joint venture arrange- develop the fifth generation fighter aircraft (FGFA) with
ments. These investments directly benefit HAL. Figure the United Aircraft Corporation (UAC) of Russia, and
16 below illustrates HAL’s dominance of the Indian there are plans for a joint venture (also with UAC) to
military aircraft market. The Indian 2008-09 Budget produce a medium multi-role transport aircraft (MTA).
allowed for 11,986.7 crore rupees for Air Force capital Despite the delays in the LCA/Tejas program, in 2008 the
outlays on ‘Air-Craft and Aero Engines.’36 In comparison, India Defence Minister ruled out a foreign partnership to
HAL’s inland sales for the 2008-09 financial year totalled accelerate the program.
9,936.80 crore rupees, over 80 per cent of the total
government capital outlay in that year.37 Electronics Manufacturing Capabilities:
Figure 16 : HAL Domestic Sales and Indian Government IAF Aircraft and Domestic Capacity
Aeroengine Capital Outlays,1997-2008 The strategic electronics market is a rapidly expanding
industry within India. The Department of Information
14000 Technology reported that in 2007-08, the production
of strategic electronics within India was approximately
12000
INS 61 billion, with an annual growth rate of around 35
10000 per cent. India has adopted a two layered approach to
achieving increased techno-economic development in
Crore of Rupees
8000
the Indian defence sector. The first relates to creating a
6000 climate for the indigenous development of technology
in the country and the second deals with the transfer
4000
and adaptation of technology from advanced countries.
2000 Opportunities in the Defence Industry include the major
0
modernisation of existing electronics equipment, indi-
genisation of major assembly and spare parts, innova-
tion and product improvement, ToT from advanced
Year countries (such as United States and Israel) and Research
Indian Government Budgeted Capital Outlays on IAF Aircraft and Aeroengine and Development and Technical support to the field
Capital Outlays
Value of HAL Domestic Sales
Army. 38
Source: Indian Government Budget, various issues; HAL Annual Report 2008-09. Both private companies and public units are rapidly
entering into the defence electronics development and
manufacturing market. Tata Power SED is the leading
domestic player in strategic electronics, recognised
34 Govindsamy, S. (2010) ‘HAL Sets Sites on Global Presence’, Flight International, March. http://www.
flightglobal.com/ articles/2010/03/01/338726/hal-sets-sights-on-global-presence.html for its vast engineering capabilities. It is fast emerging
35 http://www.financialexpress.com/news/boeinghal-ink-4.5m-deal-for-reconnaissance-aircraft/578734/ as a prime contractor to the Ministry of Defence for
36 http://indiabudget.nic.in/ub2008-09/eb/sbe26.pdf
indigenous defence electronics production.39 Another
37 HAL 2008-09 Annual Report, page 3.
38 EETimes India (2010) ‘Defence offers opportunities to Indian Electronics’, accessed online: http:// example of a successful public-private partnership is
www.eetindia.co.in/ART_8800599239_1800003_NT_2bd24a4d.HTM , last accessed 23.March.2010 Samtel Display Systems “SDS-HAL JV”. Under this JV,
39 Das, S. (2010) ‘Defence Electronics Growing Fast’, Electronics for You, May 2009 pp 111, accessed
Samtel is to provide MFDs (Multifunctional Displays) for
online: www.efymag.com, last accessed 22.March.2010
40 http://www.indiaprwire.com/pressrelease/defense/2010020943158.htm, accessed on 01 Jun 2010 the S-30MKI and LCA aircraft being produced by HAL.40

41 FORCE (2010) ‘Soldiers’ Pack The DRDO has a network of more than 50 laboratories • Rajendra and 3D-CAR radars for the Akash surface to
DRDO showcases a range of
in Indian engaged in developing defence technolo- air missile system
vital equipments’, accessed
online: http://www. gies covering various disciplines. The laboratories are • Super Vision Maritime Patrol Radar (SV-2000 MPAR),
forceindia.net/november/ involved in the production of surveillance and recon- designed and developed for the Advanced Light
coverstory9.aspx , last
naissance equipment, communicating and networking Helicopter
accessed 23.March.2010
42 DRDO website, LDRE technologies and detection technologies.41 • Avalanche Victim Detector (AVD), manufactured
Achievments, accessed by private industry and in wide use in the defence
online: http://www.drdo.
The LRDE is India’s foremost radar design and develop- services. 42
org/labs/lrde/achieve.html,
last accessed 6 April 2010 ment establishment. DPSU Bharat Electronics Limited
43 (2010) ‘Chapter Ten: (BEL) is the LRDEs primary production partner, however 5.2 Domestic competition
Reforming India’s Defence
it also works with various private firms. The LRDE has Increasing self-sufficiency in the supply of defence
Industries’ in The Military
Balance, February, been responsible for the development of a range of requirements through the support and development
pp.473-478 radar systems including: of the indigenous defence industry has long been an
44 KPMG (2010) Opportunities
• INDRA-I and INDRA-II vehicle-mounted surveillance radars, objective of the Indian Government. However, due to
in the Indian Defence
Sector, prepared for the and the Battle Field Surveillance Radar - Short Range limitations of indigenous capabilities, India has histori-
Confederation of Indian (BFSR-SR) (a man portable, battery operated surveillance cally relied heavily on foreign supply for its defence
Industry
radar), produced by BEL and used by the army needs, consistently importing over 70 per cent of its
equipment.43
Defence Public Sector Undertakings

BEL is one of the 8 PSU’s under Indigenous defence production is heavily weighted
towards the public sector, which accounts for around 86
Ministry of Defence, Goverment per cent of the indigenous market. The eight Defence
Public Sector Undertakings (DPSUs) are responsible
of India. It has even earned the for over 65 per cent of the total value of public sector
production.44 Table 16 sets out the main products and
Goverment’s Nav Ratna status. services provided by each DPSU.
Table 16 : Defence Public Sector Undertakings
DPSU Product areas

Hindustan Aeronautics Design, development, manufacture, repair and overhaul of aircraft, helicopters, engines and their accessories
Limited (HAL)
Bharat Electronics Limited Design, development and manufacture of sophisticated state-or-the-art electronic equipment components for the
(BEL) use of the defence services, para-military organisations and other government users
Bharat Earth Movers Ltd Multi-product company engaged in the design and manufacture of a wide range of equipment including special-
(BEML) ised heavy vehicles for defence and re-engineering solutions in automotive and aeronautics
Mazagon Dock Limited Submarines, missile boats, destroyers, frigates and corvettes for the Indian Navy
(MDL)
Garden Reach Shipbuilders Builds and repairs warships and auxiliary vessels for the Indian Navy and the Coast Guard
& Engineers Ltd (GRSE)
Bharat Dynamics Limited Missiles, torpedo counter measure system, counter measures dispensing system
(BDL)
Mishra Dhatu Nigam Aeronautics, space, armaments, atomic energy, Navy special products like molybdenum wires and plates, titanium
Limited (MIDHANI) and stainless steel tubes, alloys etc.
Goa Shipyard Ltd (GSL) Builds a variety of medium size, special purpose ships for the defence, Indian Coast Guard (ICG) and civil sectors

Private industry granted to a select number of private sector defence firms, 45 2010) ‘Chapter Ten:
Reforming India’s Defence
The Indian private sector has historically been limited to the giving them similar treatment as the DPSUs in terms of tax
Industries’ in The Military
supply of basic and intermediate products, components and treatment and prioritisation for R&D funding and access to Balance, February,
spare parts due to a range of restrictions on participation ToT contracts. Following the DPP 2006, twelve firms were pp.473-478
46 Ministry of Defence (2008),
in arms production. These restrictions have only relatively considered for RUR status. However, criticism from the
Defence Procurement
recently been relaxed, with 100 per cent private ownership defence industry has led the appointment of RURs to be put Procedure, p.164
of defence sector production being allowed in 2001. on hold, with the status of the policy now uncertain.47 47 Opportunities in the Indian
Defence Sector, prepared
for the Confederation of
Current private sector capabilities continue to be largely Table 17 sets out the potential RURs thought to be under Indian Industry by KPMG
focussed on components and intermediate manufacture, consideration by the Ministry of Defence (identified by (2010)
with key firms including: industry sources).
• Tata Group Companies , which manufacture missile and
rockets launchers, electronics, softeare services providers, Table 17 : Potential RURs identified
composite components and intermediate services for
aerospace and defence applications. Potential RURs Products/services
• Mahindra Defence Systems, which provides light
Ashok Leyland Design, development and manufacture of special vehicles for
vehicles, simulators for weapons and weapons systems,
armed forces.
mines and small arms
• Larsen and Toubro, which provides design, development Bharat Forge Manufacture of various forged and machined components for
and manufacture of missile systems, electronics and the automotive and non-automotive sector.
naval engineering systems Godrej and High tech engineering, including aerospace, construction and
• Punj Lloyd, which provides engineering and construction Boyce custom-built critical equipment.
services HCL IT & software development company offering various services
• Samtel, which is an integrated manufacturer of a wide Technologies such as application development, outsourcing software, systems
range of displays for avionics, machinery and engi- integration and communication.
neering services. Infosys Systems integration, product engineering, custom software devel-
Technologies opment, maintenance, re-engineering, independent testing and
Despite the Government’s objectives and policies supporting validation services, IT infrastructure services and business process
the indigenous industry, inefficiencies in local production outsourcing.
have led to substantial delays in the provision of arms and
Kirloskar Infrastructure projects (water supply, power plants), engineered
equipment, often leading to opportunities for foreign-based
Brothers and industrial pumps.
firms to fill the gaps.
Larsen and Design, development and manufacture of integrated land-based
Toubro and naval missile systems, electronics, control systems and inte-
For example, the 25 year development and testing period
grated naval engineering systems.
for the Tejas light combat aircraft has resulted in the require-
ment for medium multi-role combat aircraft (MMRCA) being Mahindra and Light combat and armoured vehicles, simulators for weapons and
likely to be met with imports from the United States. 45 Mahindra weapon systems, sea mines, small arms and ammunition.
Tata Software services and consulting, the largest provider of infor-
Raksha Udyog Ratnas Consultancy mation technology and business process outsourcing services in
The DPSUs currently enjoy a range of tax exemptions India.
and concessions, receive funding from Government to Tata Motors India's largest company in the automobile and commercial
develop R&D and manufacturing capabilities, and can also vehicle sector.
receive preferential treatment in terms of selection by the Tata Power India’s largest private sector electricity generating company.
Government for receiving technology and undertaking
Wipro IT and systems support in automobile, aerospace, high-tech, and
licensed production with ToT from overseas sources.46
Technologies industrial domains.
In order to support the development of private sector Sources: Sharma, R (2007), ‘12 firms to get Raksha Udyog Ratna status’, The Hindu, June 18
capabilities, the concept of the Raksha Udyog Ratnas 2007, accessed online: http://www.thehindu.com/2007/06/18/stories/2007061801911300.
htm and Siddiqui, H. (2008), ‘Defence min does away with RUR status for pvt military hardware
(RURs), or private sector industry champions, was created
cos’, Financial Express, 3 August 2008, accessed online: http://www.financialexpress.com/news/
as part of the 2006 update to the DPP. RUR status would be defence-min-does-away-with-rur-status-for-pvt-military-hardware-cos/343921/

Ordnance Factories Box 2 : Ordnance Factories in India
With more than 200 years of experience in defence produc-
tion, the Indian Ordnance Factories Organisation is a family Ammunition Factory Khadki (AFK) Ordnance Factory Bhusawal (OFBH)
of 40 Ordnance Factories functioning under the aegis of
Cordite Factory Aruvankadu (CFA) Ordnance Factory Bolangir (OFBOL)
a single corporate headquarters, the Ordnance Factories
Engine Factory Avadi (EFA) Ordnance Factory Kanpur (OFC)
Board, in Kolkata (Box 6.1). The Ordnance Factories Board is
engaged in production, testing, logistics, research, devel- Field Gun Factory Kanpur (FGK) Ordnance Factory Chandrapur (OFCH)
opment and marketing of comprehensive product range Gun Carriage Factory (GCF) Ordnance Factory Dumdum (OFDC)
in the areas of land, sea and air systems. The Ordnance Grey Iron Foundry (GIF) Ordnance Factory Dehu Road (OFDR)
Factories Board is the largest and oldest departmentally Gun and Shell Factory (GSF) Ordnance Factory Dehradun (OFDUN)
run production organisation in the country and is engaged
Heavy Alloy Penetrator Project (HAPP) Ordnance Factory Itarsi (OFI)
primarily in the production of state of art battlefield equip-
ments. The ordnance factories were established with a High Explosive Factory (HEF) Ordnance Factory Khamaria (OFK)
mandate to ensure self reliance in manufacturing of defence Heavy Vehicle Factory (HVF) Ordnance Factory Katni (OFKAT)
hardware. The organisation functions under the depart- Machine Tool Prototype Factory (MPF) Ordnance Factory Muradnagar (OFM)
ment of Defence Production and Supplies and is a dedicated Metal and Steel Factory (MSF) Ordnance Factory Project Nalanda (OFN)
facility for manufacture of weapons, ammunitions, vehicles
Ordnance Clothing Factory Avadi Ordnance Factory Project Medak (OFPM)
(Armoured and transport), clothing, general stores and
(OCFAV)
equipment for defence services. 48
Ordnance Cable Factory Chandigarh Ordnance Factory Tiruchirapalli (OFT)
(OCFC)
Other private and public sector defence firms
The following table 18 provides a brief overview of private Ordnance Clothing Factory Shahjahanpur Ordnance Factory Varangaon (OFV)
sector firms involved in defence procurements in India and (OCFS)
non-DPSU public sector firms. It should be noted that the Ordnance Equipment Factory Kanpur Opto Electronics Factory (OLF)
list is by no means comprehensive, particularly given the (OEFC)
increasing involvement of small and medium enterprises in Ordnance Equipment Factory Hazratpur Ordnance Parachute Factory (OPF)
the defence sector. (OEFHZ)
Ordnance Factory Ambernath (OFA) Rifle Factory Ishapore (RFI)
Ordnance Factory Ambajhari (OFAJ) Small Arms Factory (SAF)
Ordnance Factory Bhandara (OFBA) Vehicle Factory Jabalpur (VFJ)
Source: Indian Ordnance Factories, accessed online at: http://ofbindia.gov.in
48 Manas Defence Yearbook

2010-2011, pg 139

Table 18: Private sector defence firms & key operating domains
Firm Navy Land Aerospace Electronics Firm Navy Land Aerospace Electronics
ABG Shipyards √ Macmet Technologies √
Advance Tech Control Pvt √ Limited
limited Magnum Aviation √
Allen Reinforced Plastics √ Mahindra Group* √ √ √
Alpha Phazotron radar √ Max Aerospace and √ √
Equipment & Systems Aviation Limited
Alpha-ITL Electro Optics √ MEL Systems & Services √
Private Limited
Anjani Technoplast √ Memory Electronics √
Ashok Leyland* √ Nova Integrated Systems √ √ √ √
Astra Microwave Products √ Limited
Limited Pipavav Shipyard √
Aurora Integrated Systems √ √ Punj Lloyd Limited √ √
Pvt Ltd Radiant Cables √
Automotive Coaches & √ Ramoss India √
Components RMX Bridport Defence √
B.F. Utilities Limited √ Systems Pvt
Bharat Forge* √ √ Rolta √
Bharati Shipyard √ Samtel Display Systems √
Data Patterns (India) √ SEC Industries Private √
Dynamic Technologies √ √ √ SIGMA Microsystems √
Limited Southern Group Industries √
EON Infotech √ Speck Systems √
Godrej and Boyce* √ √ Shri Bajrang Alloys Limited √
HBL Nife Power Systems √ Steel Authority of India √ √ √
HCL Technologies* √ Limited
Heavy Engineering √ √ √ Svipja Technologies √
Corporation Tata Group* √ √
Hindustan Opticals √ TIL Tractors India Limited √
Indtech Construction √ TSL Defence Technologies √ √
Infosys Technologies* √ Pvt
Infotech Enterprises √ Vectra Technologies √
Limited VEM Technologies √ √
IST Limited √ √ VXL Technologies √
Jupiter Strategic √ Walchandnagar Industries √ √ √
Technologies Limited
KEW Industries Limited √ Wartsila India √
Kirloskar Brothers* √ Wipro Technologies* √ √ √
KPIT Cummins √ √ Zen Technologies √
Infosystems
Larsen & Toubro* √ √ √ Note: *Previously under consideration for RUR status

6 Financial implications
The 2009 amendment to the 2008-DPP allows the

DAC to prescribe offset percentages above 30 per
cent, or alternatively waive offset obligations entirely
at its discretion. There is also a provision allowing
vendors to select their own offset partner, and (in
rate cases), change offset partners in order to meet
the requirements.50 However, once the contract (main
and Offset) are signed, no revision of cost, whether
upwards or downwards is permitted.
Under the 2008-DPP, offset obligations can be met in

the following manner:
• Direct purchase of, or executing export orders
for, defence products and components manufac-
tured by, or services provided by, Indian defence
industry, i.e. Defence Public Sector Undertakings
(DPSUs), Ordnance Factory Board (OFB), and any
private defence industry manufacturing these
products or components under an industrial licence
granted for such manufacture. For the purpose of
defence offsets, “services” will mean maintenance,
overhaul, upgradation, life extension, engineering,
design, testing, defence related software or quality
A defence industry will always look for reducing assurance services.
costs,taxes during a defence deal. In order to get • Direct foreign investment in Indian defence
the maximum profit in the shortest possible time, industries for industrial infrastructure for services,
Government policies must ensure speedy transaction co-development, joint ventures and co-production
and lesser costs and taxes. of defence products.
• Direct foreign investment in Indian organisa-
6.1 Costs: Offsets tions engaged in defence R&D as certified by the
Offset contracts typically refer to requirements Defence Offset Facilitation Agency (DOFA).
imposed by the Government on vendors to source a
specific level of components from indigenous firms. TOT is not recognised as a method of meeting offset
Offsets impose a cost on the vendor in question and requirements.51 The 2008-DPP contains a list of
are therefore generally responded to an increase in the defence products (and covered defence industries)
margin for the price of the contract. that are able to be used to meet offset obligations.
Offset requirements apply to all acquisitions catego- Capital Acquisition and Offset: 52
rised as Buy (Global), Buy and Make or Buy and Make Figure 17 gives the flow chart on required offset under
(Indian), where the estimated cost of the acquisi- various categories of acquisitions.
49 Ministry of Defence (2008), tion is Rs. 300 crore or more (approximately USD 75
Defence Procurement million). Contracts of lesser value are not subject to Offsets can be undertaken under any of the above
Procedure, Appendix D,
offset requirements. In addition, defence acquisitions mentioned categories. Of late, there has been a
p.43
50 Defence Procurement approved for the FTP are completely exempt from debate on the issue of Indian defence industry’s
Procedure- 2008 offset obligations. 49 capability to absorb a huge amount of offsets. This
(Amendment-2009)
is even more pertinent considering that the armed
51 Verma S. (2009) Offset
Contracts under Defence Offset obligations have historically been set at 30 forces’ modernisation has been stepped up in recent
Procurement Regulations in per cent of the contract value for the Buy (Global) years, with a relatively higher proportion of the
India: Evolution, Challenges
category, and 30 per cent of the foreign exchange defence budget being allocated for capital expendi-
and Prospects, pp20-11
52 Deloitte compilation component in Buy and Make categories. ture. The capital budget for 2007-08, for example

was over USD 10 billion. For the following financial
year (2008- 09), this figure was around USD12 billion.
If one assumes that 70 percent of the capital budget
(i.e. USD 15 billion out of USD 22 billion) is catered
for meeting import requirements, the same should
result in offsets worth USD 4.5 billion or Rs 18,000
crore for these two years alone, with a minimum
threshold of 30 percent of the main contract. It is
pertinent to note that in some cases such as the
proposal to acquire 126 Medium Multi-Role Combat
Aircraft (MMRCA), the offsets have been pegged
higher at 50 percent of the contract value. Against
such a huge potential of offsets, the current value of
defence exports from the country appears too small.
For the year 2007-08 (up to December 2007 or the
first nine months of the financial year), the value of
Indian defence exports stood at Rs 342 crore (USD 85
million).53 On an annualised basis, the value of exports
works out to around Rs 456 crore (USD 114 million).
As against such defence export figure, offsets between
Figure 17: Flow chart of various categories of acquisition
Capital Acquisition and Offset

Requirement
Buy + Make Make

Buy Outright (Purchase (Purchase from foreign vendor followed by (High technology, complex systems to
Equipment) licensed production/ indigenous manufac- be designed, developed and produced
ture in the country) indigenously)
Buy Global Offset requirements to be

Buy Indian No offset
(Indian as well as foreign 30% of the foreign exchange
(Indian Vendors Only) requirements
vendors) component to be fulfilled
No offset requirements
(Minimum 30% indigenous
content in case of integra- Indian Vendor Foreign Vendor Buy + Make (Indian)
tion being done by (Purchase from Indian companies)
Indian vendor)
Indigenous Offset requirement to be

content in product 30% of the estimated
is at least 50% cost of acquisition
Minimum 50% to be
indigenous contents
YES NO
No offset Offset obligations to be fulfilled on the

requirements foreign component i.e. offset to be 30%
of the foreign exchange component

Rs 3,000-4,000 crore (USD 750 million-1 billion) need potential and with limited scope for FDI, it may become an
to be undertaken every year, given the current ratio of arduous task for undertaking the offset obligations by the
capital expenditure allocation in the defence budget.54 vendor companies. This, in a way, is also a major challenge
In other words, the value of defence exports needs for those in the government responsible for implementing
to go up by 8 to 10 times the current level. Thus, the the policy.
gap between existing quantum of exports and what is
required to be undertaken as part of offset obligations 6.2 Relative Advantages
of the vendors is too huge.
Opportunity in India
To be able to undertake such huge amount of exports India has great market advantages because of high
requires investment of a large magnitude in the indig- defence & commercial aircraft demand, strong domestic
enous defence industrial infrastructure. In addition, such manufacturing base, cost advantages, well-educated
large infrastructural investments may take years before the talent pool, abundant low cost skilled workforce, ability
production can be stepped up. Apart from export of defence to leverage IT competitiveness, location advantage for
equipment and services, the two areas for implementing MRO.
offsets are in the form of FDI in Indian defence industry or
defence R&D organisations. The entry of the private sector Further, Indian MRO segment is estimated to reach USD
in the defence industry has been permitted as recently as 1.17 billion by 2010 and USD 2.6 billion by 2020 and
2001 with a maximum cap of 26 percent foreign equity. The Indian offshore engineering is expected to be at 25 per
initial response to such a liberalised policy was muted as no cent of the total offshore engineering spend.
major private company came forward for investment in the
defence industry, until recently. Of late, a few Joint Venture The Government is also giving thrust which is exhibited
(IV) proposals and Memorandums of Understanding (MOUs) through large and growing spend on defence, space,
have been announced involving major Indian companies civil aviation and Research and development (R&D),
such as Tata, L&T and leading arms manufacturing liberalization of defence and civil aviation sectors, push
companies such as Boeing, Lockheed Martin, etc. But the for private participation in manufacturing and R&D,
amount of investments announced in these proposed tie-ups offset policy, sharing of eighty percent of development,
is only a trickle in what is seen as a huge ocean of offsets, costs with private players for the defence R&D.
and the road ahead is rather long. One way to absorb
the huge quantum of offsets is to hike the FDI in defence Besides defence spend, the Government has budgeted
industry from 26 percent to 49 percent, as demanded by for space, homeland security, etc.
a section of the industry. In the absence of defence export
India has great market advantages because of 53 Ministry of Defence,

Government of India
Annual Report, 2007-08,
high defence & commercial aircraft demand, Pan 7.56.

54 As per the present Indian
strong domestic manufacturing base, cost defence offsets policy,

offsets can be under-
taken under three broad
advantages, well-educated talent pool, categories i.e. (a) export

of defence equipment
and services; (b) FDI in
abundant low cost skilled workforce, ability to defence industry; and (c)
FDI in Indian defence R&D
leverage IT competitiveness, location organisations. On a rough

approximation, these three
segments must account for
advantage for MRO. 1/3M of offsets each every

year.

7 Benefits in Indian defence
industry and barriers thereto
7.1 Benefits in Indian defense industry56 for global and the United States spending a proportionately higher
aerospace and defence industry amount, with European and Asian countries spending less
(see Figures 18 and 19).
Global trends in aerospace and defence
56 Compass 2010 Global The global defence markets are likely to stay flat this year, The global industry is truly at an inflection point and it is
Aerospace & Defense
primarily due to the softening of the U.S. defense market, continuing to move rapidly east — toward China, India, and
sector outlook – Deloitte
Report by Deloitte A&D the largest in the world. Cancellations of major weapons the Middle East. These countries are expected to be large
Team led by Tom Captain, programs in the United States, coupled with cost overrun markets for A&D industry products and services, as well as
A&D sector leader, DTT
challenges on major programs around the world, will likely participants in the supply chain.
Global Manufacturing
Industry have an impact on additional spending.
A&D Prospects of India in Asia
Even so, global defence spending will likely stay at approxi- In India, the sector is growing at an unprec¬edented rate
mately 2 percent of global GDP, with Saudi Arabia, Israel, and emerging as a key participant in the Asia Pacific region.
United States and European aerospace companies are now
Figure 18 : Defense spend as percentage of country GDP recognizing India as a critical market as well as a potential
manufacturing partner. India is becoming one of the largest
Saudi Arabia 10.00% military spenders in the world and catching worldwide
7.30% attention, with the third-largest defence procurement
U.S.
4.10% budget in Asia. In 2010 to 2011, USD 32.03 billion has been
3.90% earmarked for national defence. Of this, USD 13.04 billion
India
2.50% is to be spent on acquisitions for new weapons systems
2.40%
World equipment and services. It is estimated that Indian defence
2.00%
1.80% procurement will rise to an estimated USD 45 billion by
Sweden
1.50% 2015, which could make it one of the most attractive
Canada 1.30% defence markets in the world.
1.10%
Mexico 0.80%
In India, the prospects for the defence sector are strong. In
0.50%
light of the Mumbai attacks as well as the overall need to

0% 4% 8% 12% modernize its defensive capabilities, India’s armed forces
are expected to increase their purchases of new equipment
Source: Central Intelligence Agency (CIA)
and technology for the next 20 to 25 years. Liberalization of
India’s defence procurement policy offers a unique opportu-
Figure 19 : Percentage of total global defense spend
nity for Indian companies to provide services for the armed
forces. Currently, about 70 percent of procurement in value
South terms is from foreign sources — with Indian companies
Asia and
America supplying only around 25 percent of components and
Oceania
3% subassemblies to state-owned companies. But the situation
13%
is expected to change with the creation of more public-
private partner¬ships. However, in the near-term, foreign
North
companies will likely continue to have an edge in the supply
America
Western of defence armaments and transfer of technology.
45%
Europe
22% In India, foreign acquisitions are expected to be more
affordable at this time. Industry consolidation in India may
be on the upswing for larger companies that have desire
Central &
to enter manufacturing businesses. This would give them
Europe Africa a presence abroad to interact and do business with OEMs
9% Middle East 1% and suppliers directly, while simultaneously harnessing
7%
the advantages that India as a manufacturing destination
Source: SIPR and DTT Global Manufacturing Industry, A&D sector analysis provides.

Competitiveness in A&D Sector
India is being considered as the next destination of
manufacturing given country’s strength like wider India is being considered as the next
supplier base, low cost manufacturing, persistent focus
on infrastructure development, huge pool of skilled
destination of manufacturing given
workforce and increased penchant for enhancing
competitiveness by the respective firms. There is a lot of
country’s strength like wider supplier
synergy between automotive, discreet manufacturing base, low cost manufacturing, persistent
and A&D industry due to its similar operations and
business processes. These strengths can be leveraged by focus on infrastructure development,
the existing firms entering into A&D space. The nature of
A&D industry is as such technology intensive, innovation
huge pool of skilled workforce and
and automation driven coupled with the complex supply
chain. Considering the massive opportunities that A&D
increased penchant for enhancing
sector has opened up for respective firms, these firms competitiveness by the respective firms.
need a focussed approach in order to achieve economics
of scale and at the same time being efficient and lean in
operations to remain competitive. Hitherto Indian firms role in collaborative product development and ensuring
lacked the global competitiveness in engineering, quality quick launches by leveraging re-use of the existing
and technology aspects in the products. However lately platforms and components. On the quality front, the
there is an increasing thrust on these aspects. We have A&D industry essentially works on 9 Sigma and though
delved into the following areas to get the perspective on several Indian firms have embraced stringent quality
competitiveness in Indian A&D sector. standards, most of these firms have reached to 6 sigma
level only. We have seen remarkable developments in
Supply Chain these two areas in the recent years but we still need
Since around two third cost of the end product reside concerted efforts to take it to the full maturity.
across supply chain, managing complex supply chain
would remain one of the vital aspects of A&D industry. Productivity
Unlike other industries, the nature of supply chain in India has a total labour force of around 450 million.
A&D sector is entrenched with several players adding Though there is a clear advantage of labour cost in
value on component and sub-assemblies at a given India, there would be increased pressure from cost of
point. The firms undertaking opportunities in A&D living and inflation perspective. The firms will have to
sector would evolve themselves as integrators or super really emphasize on labour productivity, working envi-
integrators and their role will increasingly become larger ronment, automation and manufacturing best practices
in the A&D value chain. The emerged assemblers and to achieve competitiveness. Government’s ingrained
integrators would treat their upstream suppliers as risk focus on enhancing the skill sets through substantial
sharing partners. The proximity to sources will not be a increase in technical skill courses, industry-university
barrier as the specialized components/sub-assemblies relationships, setting up of R&D base would provide a
can be sourced from other low cost regions with desired major boost to productivity increase.
technology requirements. The supply chain aspects such
as responsiveness, faster deliveries, lean supply chain, Consolidations
flexibility in operations and quality would remain the Hitherto A&D space was owned by vertically integrated
focus areas for the A&D firms. OEMs. But this trend has changed globally in the recent
years as firms want to leverage core competency of the
Technology and quality group and offload the respective value add work to the
Though in the initial years, the technology would be upstream firms. Given this opportunity coupled with
brought in mainly by foreign players, the Indian firms offset policy, several larger and medium size suppliers
need to quickly ramp up the technology base in order are entering into the fray to take a pie of mammoth
to play a more collaborative role with assemblers and A&D industry. Since the nature of A&D industry is
integrators. The firms would be expected to play a vital more specialized than other industries, the industry is

expected to see more consolidations. There would be a companies, but can also include a number of requirements
thrust on JVs and partnerships too in order to achieve such as business registrations, filing tax returns and payment
technology and capacities quickly. Given the current of applicable custom duties.
constraints of 26% FDI, the foreign firms would hold
control of product know-how. However in the long An overview of regulatory and taxation on defence industry
run it is not a cause of worry. The local firms would be is given in the Annexure 1.
keen on joint ventures and partnerships with foreign
firms. At the same time, the foreign acquisitions are also 7.2.3 Domestic competition
expected to be formed by local firms. This would give Increasing self-sufficiency in the supply of defence require-
them a presence abroad to interact and do business ments through the support and development of the indig-
with OEMs and suppliers directly, while simultaneously enous defence industry has long been an objective of the
harnessing the advantages that India as a manufacturing Indian Government. However, due to limitations of indig-
destination provides. enous capabilities, India has historically relied heavily on
foreign supply for its defence needs, consistently importing
7.2 Barriers and risks over 70 per cent of its equipment. This topic has been
7.2.1 Restrictions on foreign investment discussed in detail in section 6 above.
India has historically applied tight restrictions on the
allowable amount of foreign investment in the defence 7.2.4 Supply Chain Issues
industry, due to concerns that foreign involvement would Though India has a widespread supply chain network,
hinder the development of the indigenous private and large supply base and favourable investment environment
public sector firms. in place, there is a massive potential to bring structured
improvements in supply chain of A&D industry. The supply
In 2001, the Government opened the defence sector for chain has become a cornerstone of a firm’s success irre-
private Indian companies with 100% Indian shareholding spective of the scale and complexity of the firm. It has also
and allowed limit of 26% for foreign Direct investment. gained wider momentum in the recent years and firms are
However, this is still seen as prohibitively restrictive by at different stages of adopting the best practices from the
potential investors. The 2009 Annual Economic Survey, same/other industry in the relevant functions. Since A&D is
submitted to Indian Parliament by the Chief Economic a new industry particularly in the Indian market, the firms in
Advisor in the Ministry of Finance on behalf of the Indian this sector can adopt the relevant best practices at the early
corporate sector, recommended that the FDI limit should stage of setting up facility. However several firms have still
be increased to 49 per cent.57 There has been debated not reached to a stage of full maturity of production, quality,
discussion on increase of FDI from the present level of 26% delivery, distribution, maintenance processes. It is further
in Ministry of Commerce and in private industry. However, compounded by impediments such as infrastructure bottle-
Ministry of Defence is resilient on increase. necks and delays in compliance measures. Since value add
will be imparted by several players in a staged approach, the
7.2.2 Taxation Issues viability of operations of respective firms should be a priority
There is also a range of indirect taxes that can impact or area to exploit the competitive advantage in the value
disadvantage foreign participation in the Indian defence chain. The government and the respective firms need to put
industry. There is no level playing field for Indian private concerted efforts in tandem to debilitate these impediments
defence industry vis-a-vis DPSUs. For example, customs duty as a step towards competitiveness in the A&D sector.
and/or service taxes may apply to:
• Imported equipment or transfer of intellectual property 7.2.5 DPP restrictions
under licensing arrangements for the purposes of The Defence Procurement Procedure (DPP) sets out the
Transfer of Technology (TOT), which is a common requirements for the participation of foreign firms in the
requirement of procurement contracts. defence acquisitions of the Indian Government. The DPP
• Training services provided to the armed forces for new effectively establishes non-tariff trade barriers to the partici-
equipment and machinery pation of foreign firms in the Indian defence market. The 57 Misquitta, S. (2009)
• Repair and maintenance services key barriers include: ‘Defence contractors Target
Big Jump in India’s Military
Joint ventures (JVs) can be formed to meet offset obliga- • the various categories for capital acquisitions
Spending’ in The Wall
tions. These are subject to the same tax regime as Indian • the offset requirements. Street Journal, July 17

Categories for capital acquisitions
As noted above, the DPP-2008 (Amendment 2009) contained amendments to the existing categories for capital acquisitions.
The revised categories for capital acquisitions are summarised in Table 19.
Table 19: Capital acquisition categories in the DPP
Category Description
Buy (Indian) Tender requests are released to Indian vendors only. Items must have a minimum of 30 per cent
indigenous content if systems are being integrated by an Indian vendor.
Buy (Global) Tender requests are released to both foreign and Indian vendors.
Buy and Items are acquired from a foreign vendor, followed by licensed production and indigenous manu-
Make facture in India.
Buy and Tender requests are released to Indian vendors only, requiring Indian vendors to form a joint
Make venture or establish a production arrangement with a foreign vendor, leading to licensed produc-
(Indian) tion and indigenous manufacture in India. This category requires at least 50 per cent indigenous
content (on a cost basis).
Make Tenders are released to Indian vendors only, for indigenous design, development and production.
Source: DPP-2008 (Amendment 2009)
Under the DPP-2008 Buy and Make category, RFPs were Capability Definition Document and provides a
issued to foreign firms, who were then to enter into agree- recommendation to the DAC
ments with Indian firms for the ToT. The Defence Minister, • The DAC decides the outcome of the project based
A. K. Antony, however, has stated that the previous arrange- on the SCAPCHC’s recommendation.
ments did not lead to sufficient developments in terms of
joint ventures and co-production arrangements in India.58 Following categorisation as Buy and Make (Indian), the
Capability Definition Document is provided to selected
Under the Buy and Make (Indian) category, RFPs are issued Indian firms, who are required to provide a proposal,
to Indian firms (rather than foreign firms), who then including plans for development and production .
play a lead role in negotiating the terms for the ToT and Production arrangements must include details of work share
co-production arrangements with foreign firms. Project and the ToT, demonstrating that the Indian partner will
proposals are required to set out the arrangements for ToT absorb critical technologies.59
and co-production arrangements. Items produced under the
Buy and Make (Indian) category must have at least 50 per Expediting acquisitions
cent indigenous content on a cost basis. Fast Track Procedures (FTP) were introduced into the DPP
in 2001, and further revised in the 2006 amendments. As
The Buy and Make (Indian) category is designed to stated in the DPP the objective of the FTP is to ‘ensure expe-
encourage joint ventures and co-production arrangements ditious procurement for urgent operational requirements
rather than indigenous R&D. foreseen as imminent or for a situation in which a crisis
emerges without prior warning.’ 60
Categorisation of projects as Buy and Make (Indian) requires
the following procedures: FTP applies only to acquisitions under the Buy category,
58 ‘DPP ‘eases’ procedures
for private sector’ in Vayu • Defence Services Headquarters (SHQ) must prepare a and may be used to procure additional items already in
Daily, 2009 Capability Definition Document outlining the acquisi- service, or new equipment. However, FTP is not available for
59 At least 50 per cent of
tion requirements and current capabilities, including equipment requiring field trials, which significantly limits the
critical technologies must
be in category I and II as critical technologies to be absorbed by the Indian scope of its application.
set out in the DPP 2008. Partner (identified in consultation with the DRDO)
• The Services Capital Acquisition Plan Categorization Sales can be also expedited by way of the government-
, Defence Procurement
Procedure, p.191 Higher Committee (SCAPCHC) examines the to-government Foreign Military Sales (FMS) procedures.

FMS offers an alternative path to the Defence Procurement Offset contracts
Procedures, which despite numerous revisions appears to be The offset provisions have been discussed at section 6
onerous and time consuming (despite the existence of the above.
FTP).61
61 ‘Modernizing Artillery
Retrospect and Prospect’ 7.2.6 Identified risks: Bureaucratic delays, lack of trans-
in India Strategic Defence Implications for future acquisitions parency, uncertain contracts
Magazine, contributed by As noted above, the acquisition category is decided on a In addition to the barriers to foreign participation in the
Brig Vinod Anand (Retd),
Senior Fellow at the Centre case by case basis. Therefore, it is not immediately apparent Indian defence industry, there are also a number of risks
for Strategic Studies and which category will apply for the future procurements iden- to involvement, including high costs of sale, time delays,
Simulation, United Service tified in the four domains. bureaucracy and corruption. These issues have contributed
Institution of India, New
Delhi, Feb1-March 15, to a significant level of underspend in the key domains as
2010, Vol 5, Issue 2, However, statements from the Ministry of Defence set out above. Capital acquisitions are subject to a range of
pp.16-18, http://www.indi- following the 2009 amendments have indicated that the approval procedures. The DPP sets out the broad stages and
astrategic.in/topstories483.
htm, accessed March 2010 use of the new Buy and Make (Indian) category is likely timeframes for procurement processes, as shown in Table 20.
62 “DPP ‘eases’ procedures to be prioritised. For example, at the National Seminar on
for private sector” in Vayu Defence Acquisitions in late 2009, Defence Minister A.K. Broad timeframes for capital acquisitions set out in the DPP
Daily, 2009
63 Opportunities in the Indian Antony stated that the existing Buy and Make category indicate that procurements should take between two to three
Defence Sector, prepared had not met expectations of promoting joint ventures or years (including field evaluation trials). 64
for the CII by KPMG (2010) establishing co-production arrangements, a shortcoming
, Defence Procurement that the new Buy and Make (Indian) category was intended Given the length and extent of the procurement process, the
Procedure, pp.41-42 to overcome.62 costs of bidding for procurement contracts can be very high,
Table 20: Procurement process and timeframes63
Stage Timeframe Procedures Authorities involved

Drafting of service 1 month Commencement of procurement process by issuing a request for interest (RFI), • SHQ
requirements including: • HQ IDS
Acceptance of • Services Qualitative Requirements (SQRs) • DPB
Necessity • Acceptance of Necessity (AoN). • Acquisition wing of MoD
Issue of RFPs 4 months Description of key requirements including: • SHQ
• Technical parameters • DAC
• Quantity, acquisition category offset obligations, training requirements
• Commercial aspects
• Evaluation criteria
Technical evalu- 11-17 • Evaluation of offers by Technical Evaluation Committee (TEC) • TEC
ations and field months • Vetting of TEC report • SHQ
trials • Field trials and approval of staff evaluations • DRDO
• DGQA – Director General
of Quality Assurance
• Acquisition wing of MoD
Commercial 4-11 • Involvement of technical oversight committee for procurements over USD • Technical Oversight
negotiations months 75million Committee
• Opening of bids and determination of L1 • CNC
• Negotiations with the Contract Negotiation Committee (CNC) • CFA
• Approval by the Ministry of Defence(MoD), Ministry of Finance (MoF), and • MoD
Cabinet Committee on Security (CCS) • MoF
• Evaluation of commercial offset offers • CCS
Signing of contract 2-3 years
Source: Report on opportunities in the Indian Defence Sector prepared for CII by KPMG 2010

particularly where there is a requirement for field trials to be
held in India, rather than in the country of manufacture.
Unforeseen delays in the tendering process can also increase

costs to bidders. While the DPP sets out timeframes of
around two to three years for procurements, experience has
shown that the process can often take in excess of five years.
For example, while a number of RFPs have been issued for
the acquisition of artillery over the last decade, no significant
new inductions have occurred since the 1986 acquisition of
field howitzers for Swedish firm Bofors. This has been partly
due to a lack of suitable vendors and issues with field trials.65
A number of acquisitions (including the Bofors deal) have

also been subject to allegations of corruption. This has had
the impact of reducing the number of vendors, and locking
the Government in legal disputes. It is important to note
that previous allegations of corruption have often involved
investigations of foreign firms, and are not necessarily related
to indigenous issues.66
Equipment, Test Equipment & Medical Electronics
7.2.7 Quality Assurance Procedures in defence67
The implied needs of Defence are reliability, maintainability, DQA(V): ‘B’ Vehicles, Specialist Vehicles, Tank Transporters,
robustness and ease of operation. The quality assurance Earth Movers (Tracked Dozers).
is required through equipment life cycle. The Directorate
General of Quality Assurance (DGQA) is the governing body DQA(S): Textiles And Clothing, Footwear And Leather Stores,
for the quality assurance. Petroleum Products, Drugs And Pharmaceuticals, Paints And
Chemicals, Specialist Equipment, General Stores, Parachutes
The primary roles of DGQA are:
• quality assurance (QA) of defense stores procured from DQA(M&E): Military Explosives , Nodal Agency For
ordnance factories, PSUs (BEL, BDL, GSL, MDL, GRSE, Metallurgical Related Activities
MIDHANI, HAL, BEML etc.)
• Initiate actions necessary to ensure that the armed forces DQA(CV): Tank T-72 & Its Variants ,Tank T-90, MBT Arjun,
get the entire range of arms, ammunition, equipment & ICV Bmp & Its Variants
stores of the desired quality so as to enhance the combat
efficiency & effectiveness of fighting forces. DQA(R&S): Radars, Missile Systems – ATGM & Sam (Other
Than IGMDP), Unmanned Aerial Vehicles, Simulators,C3i
The main functions of DGQA are quality assurance (QA), Systems
technical services and guidance, defect investigation,
65 ‘A Commentary on the
evaluation of User’s feedbacks, vendor registration and DQA (EE): Bridging Equipment And Water Craft, Fire
Indian Army-Artillery
miscellaneous Fighting Equipments, NBC Systems, All WKSP Equipments upgrades’ (January 2010),
Religare Strategic Advisory
Services, (not publicly
Directorate wise responsibility of quality assurance of DQA (N): Electronic and electronic items, Weapons - both
available)
equipment conventional and guided, Fire Control systems, Radars and 66 ‘A Commentary on the
DQA (A): Weapons, Small Arms, Ammunition ,Instruments Communication, Steel for Ship building, Naval stores Indian Army-Artillery
upgrades’ (January 2010),
–Optical And Opto -Electronics
Religare Strategic Advisory
DQA(WP): Diesel, Gas Turbines, Steam Turbines, Steering Services, (not publicly
DQA (L): Telecommunication Equipment , Armoured Vehicle Gear, Stabilisers, Dg Sets ,AC & Ref Plants, Pumps, available)
67 Colonel Vashisht presenta-
Electronic Systems ,Electronic Warfare Equipment, Batteries Compressors, Galleys & Stp.
tion on Quality Assurance
& Cables, Generator Sets & Charging Sets, Counter led and DGQA

8 Strategic Alliances
8.1 Defence Memorandum Of Understanding (MOUs) in India

Table 21 below gives a tentative list of MOUs in India so far entered by the Indian Government and Indian Public and private
industry.
Table 21: Defence MOUs in India
Date Entities Involved Details

February 200368 Confederation of Indian Industry To cooperate in the joint marketing of military hardware.
(CII) , the Polish Chamber of
National Defence Manufacturers
September 200369 India , Seyechelles Signed MoU on Defence.
April 200570 Antrix,EADS Signed MoA to jointly address the commercial market for communications satellites with
payload power below 4 Kw and a launch mass in the range of 2 to 3 tons.
September 200671 HAL , EADS Signed a MoU that will expand their cooperation into new market segments and exploring
mid-term and long-term strategies on the key segments of aerospace business.
February 200772 HCL,Smith’s Group’s aerospace HCL Technologies partnering with UK’s Smith’s Group’s aerospace Unit, to set up an engi-
Unit,Satyam Technologies, neering services centre and M/s Satyam Technologies forming an alliance with Northrop
Northrop Grumman Grumman. Going by the surge in deals and business opportunities thus created, the
aerospace market is expected to be buoyant in the coming years.
February 200773 M/s Larsen and Toubro (L&T), M/s Larsen and Toubro (L&T), the engineering giant, is foraying into international and
EADS, Boeing aerospace in partnership with Boeing and EADS. The company has drawn up a mega plan
to set up two defence and aerospace component manufacturing units with an investment
of Rs 500 crore. Both Boeing and EADS have agreed to source components from L&T
for their domestic and international use. L&T had signed an MoU to this effect with both
Boeing and EADS during the Aero India Aerospace show at Bangalore in February 2007.
February 200774 BEL , Northrop Grumman Signed a MoU to explore business opportunities on potential co-production opportunities in
Corporation support of the Indian government’s current and future aerospace and defence electronics
requirements as well as Northrop Grumman’s international market requirements.
February 200775 BEL , Elbit Systems Electro Optics Signed an MoU for setting up a joint venture company (JVC) for co-operation in the devel-
ELOP Ltd of Israel opment, production and marketing of thermal imaging cameras and forward looking infra
red (FLIRs) for the Indian and global markets.
February 200776 BEL , Lockheed Martin Signed an MoU to explore business opportunities on potential co-production avenues for
domestic aerospace and defence electronics needs.
December 200777 HAL , Boeing Signed an MoU to source sub-systems for fighter aircraft and helicopters worth USD 1
billion, over a period of 10 years. The MoU is expected to benefit HAL through enhanced
export opportunities, development of new technologies and process; and implementation
of best practices and skills for global competitiveness.
January 200878 Boeing, Indian Institute of Boeing entered into an agreement with the Indian Institute of Science and two leading
Science ,Wipro , HCL Indian information technology companies (MIs, Wipro Technologies and M/s HCL
Technologies). In accordance with the agreement, an Aerospace Network Research
Consortium (ANRC) will be formed. Led by Boeing, the ANRC is India’s first public-private
aerospace research consortium.

February 200879
Tata Power's Strategic Electronics Signed a MoU in the area of optronics. Through this Memorandum of Understanding, Tata
Division (SED) , Thales Power SED and Thales agreed to cooperate in order to offer optronics solutions for Indian
defense market such as the MMRCA programme and further programs on existing or future
airborne platforms. This agreement allowed both Companies to develop transfer of tech-
nologies in order to implement local contents and meet the Offset requirements of Indian
MOD.
February 200880 Tata Group ,Israel Aerospace Signed a memorandum of understanding with the in for developing and manufacturing
Industries (IAI) a wide range of defence products, including missiles, unmanned aerial vehicles, radars,
electronic warfare and security systems.
February 200881 HAL , Airbus Industry of France HAL has become an important outsourcing hub for supply of doors to Airbus Industry of
France. In 2008, it won an order worth USD 150 million for the supply of 2,000 doors for
the single aisle family of aircraft consisting of the A-318, A-319, A-320 and A-321 series.
This is in addition to the earlier orders received by HAL from the European major. The
contract will begin to be executed in 2009 and will stretch over a period of five years.
July 2008 Infotech Limited , Alten Group Signed a formal agreement to create an exclusive partnership specifically for EADS. By
combining the domain expertise, advanced project management capability and customer
know-how of ALTEN in Europe with an efficient, scalable and cost efficient offshore delivery
expertise of INFOTECH in India, the collaboration will allow addressing and achieving some
of the key objectives of EADS in Europe and from India. The tie-up enables high degree of
scalability; world-class quality and quick response time to enable EADS significantly improve
time to market and decrease cost.
December 200882 India , US Signed a memorandum of understanding (MoU) to boost its missile defence system. The
MoU aimed at giving India the state of the art technology that would allow it to intercept
any threat from ballistic missiles.
December 200883 Hindustan Aeronautics Limited Inked a pact to jointly develop and produce a fifth generation fighter aircraft.
and Russia's United Aircraft
Corporation (UAC)
February 200984 Boeing , BEL Signed an MOU for setting up an analysis and experimentation centre in partnership with
BEL in Bangalore. The centre would analyze present equipment and visualize future require-
ments.The centre would do fluid dynamics studies and other research in aircraft design.
February 200985 Infotech Enterprises , Eurocopter Entered into a memorandum of understanding for the attack helicopter programme.
February 200986
Quest Global, Textron, Sikorsky Signed an MoU with the US-based Textron Inc for the development of a global SEZ in
Karnataka. As per the terms and conditions of MoU, Textron and Quest Global will work
together to develop the manufacturing capabilities within the SEZ.
Quest Global has also signed an MoU with Sikorsky to explore the possibility of setting up a
manufacturing base for components.
February 200987 TAML, Saab Tata Advanced Materials Ltd (TAML) a Tata Group Company & Saab have signed a Business
Agreement on February 12 for manufacture of structural composite components. TATA
Industrial Services Limited (TISL) was instrumental in structuring the business relationship
between Saab and TAML.
The agreement is for a period of four years for manufacture of composite components for
one of Saab’s commercial programs.

February 2009 88
BEL, Astra Microwave Products Signed MoU to form a joint venture company.
Ltd
According to the terms of the MoU, the joint venture, in which Bharat Electronics will own
49% equity and Astra Microwave will own 51% equity, will design, develop, prototype,
manufacture, and market RF and microwave products for use in defense, space, and
telecommunications. The JV is proposed to be the platform for the design, development,
and manufacture of BEL’s microwave intensive products.
March 200989 BEL ,BHEL Signed an MoU to explore a 250-MW joint manufacturing facility for solar photo voltaic
cells, modules and silicon wafers.
March 200990 CSM Software Pvt. Ltd., BEML Under the Ministry of Defence, Govt. of India, signed of a strategic MoU . The objective
Limited, of this MoU was to a establish a framework for the execution of the engineering services
orders likely to be received by BEML through CSM’s sales and marketing efforts, under the
defence offset clause, and to ensure total customer satisfaction.
April 200991 BrahMos Aerospace Ltd,ISRO Signed an MOU for launch vehicle integration.
April 2009 92
OFB,IMI Signed a defence deal with Israel for setting up an artillery munitions factory in Bihar state.
June 200993 NAL,HAL entered into an agreement to develop and produce the light transport aircraft Saras. They
have signed a memorandum of understanding to develop the 14-seater aircraft which
can also be used as an ambulance, civil applications and executive requirements. HAL's
contribution to the project is in the areas of designing landing gear, hydraulics and electrical
systems and the manufacture and assembly of wings.
November 200994 India ,Sweden Signed MOU in defence that would promote bilateral co-operation in defence.
November 200995 CFM International (CFM) , GMR Signed a MoU under the terms of this agreement, GHIAL and CFM would work towards
Hyderabad International Airport the development of a new CFM56 Maintenance Training Center at the Rajiv Gandhi Airport
Limited (GHIAL). in Hyderabad.
The new training center is envisioned to mirror CFM facilities currently operating in France,
the United States, and China, and would initially provide advanced courses in line main-
tenance and inspection of CFM56-5B and CFM56-7B engines, which power the majority
of Airbus A320 family aircraft and all Boeing 737s, respectively. The new center’s planned
location is in a special economic zone at the airport dedicated to maintenance, repair and
overhaul (MRO).
January 201096 India and Governments of Russia, Signed an MoU to fight terror. The MoU signed focuses on enhancing cooperation
Brazil and Malaysia between the concerned nations and ensure a smooth flow of information pertaining to
terror and the source of financing terror and money laundering. The MoU would also
enable the government’s Financial Intelligence Unit (FIU), which is responsible for receiving,
processing, analyzing and disseminating information relating to suspect financial transac-
tions to enforcement agencies and foreign FIUs, to share information with these countries
on suspected money laundering activities.
January 201097 DRDO Signed six MOUs with Jyothy Laboratories for woolcare; Vantage Security for explosive
detection kit; Deltapure Water India Ltd. and Ariva Group for RO based Water Purification
System; MGM Associates for High Altitude Pulmonary Oedema (HAPO) Chamber and GSC
Glass Ltd. for electrochromic window.
February 201098 Speck Systems Ltd, Israel Entered into an agreement with Israel Aerospace Industries Ltd (IAI) for manufacturing and
Aerospace Industries Ltd (IAI) service support of the latter’s mini and micro unmanned aerial vehicles product range in
India.

February 2010 99
Shri Lakshmi Defence Solutions Signed an agreement for manufacturing and marketing of hundred 8x8 and 6x6 APC
Ltd (SLDS), "Ukrinmash" (Armoured Personnel Carrier) required by Indian Army for the United Nations (U.N.) Mission.
February 2010100 Shri Lakshmi Defence Solutions Signed an MoU with for supplying and marketing 100 to 300 high tech armoured vehicles
Ltd (SLDS) ,M/s ADCOM in the Middle East and South Africa.
MILITARY INDUSTRIES
February 2010101 Larsen & Toubro Limited (L&T) , Announced teaming up in a L&T led proposal to upgrade Indian Army T72 tanks. Under
Raytheon Company the proposal, Raytheon will provide infrared imaging sights and Electronics that will greatly
improve target accuracy and increase overall system lethality on the battlefield for T72 tank
battalions. Raytheon has provided 20,000 thermal sights in more than 15 countries.
February 2010102 Bharat Electronics , Finmeccanica Signed an outline agreement to explore possible collaboration in the electronic warfare
subsidiary Selex Galileo sector .Potential opportunities in this MOU include fulfilling offset requirements and
contract manufacturing for export markets.
March 2010103 Walchandnagar Industries Signed an MOU to manufacture critical equipment for Scorpene submarines to be used
Limited (WIL), DCNS by the Indian Navy. The submarines are built by state-owned Mazgaon Docks Ltd, and are
expected to join the naval fleet by 2018.
March 2010104 India , Russia Signed a slew of agreements, including some long-pending defence accords and pacts in
that would strengthen their cooperation in the areas of civil nuclear energy and space.
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quest-global-teams-up-with-textron-for-global-sez 101 http://www.defenseworld.net/go/defensenews.jsp?id=4165
87 http://machinist.in/index.php?option=com_content&task=view&id=1931&Itemi 102 http://www.defensenews.com/osd_story.php?sh=VSDI&i=3944907
d=2 103 http://timesofindia.indiatimes.com/city/pune/WIL-signs-MoU-with-French-naval-
88 http://www.valuenotes.com/press/pr_BEL_11FEb09. shipbuilder/articleshow/5744748.cms
asp?ArtCd=141936&Cat=C&Id=1369 104 http://netindian.in/news/2010/03/12/0005733/
89 http://www.moneycontrol.com/news/business/bel-bhel-plan-250-mw-solar- india-russia-sign-civil-nuclear-defence-space-agreements
venture-_391021.html

8.2 Defence Joint Ventures in India
Table 22 gives a list of joint ventures between foreign companies and DPSUs as well as with Indian private defence
industry.
Table 22: Defence Joint Ventures in India

July 2005 105
HAL ,SNECMA of HAL and SNECMA of France signed an agreement to form a JV that would be a centre for excellence for
France the manufacture of key components and assemblies of aero engines. While HAL would bring its manufac-
turing experience in India, SNECMA would transfer technology to the JV, providing HAL additional export
avenues and greater access to civil aerospace industry.
August Lockheed Martin , Lockheed Martin of the US, the world’s largest defence manufacturing company, and Wipro Technologies
2007 106 Wipro Technologies of India, together announced opening of a Network Operations Centre in Gurgaon, near New Delhi.
of India Known as “Ambar Jyoti,” this lab will develop, demonstrate and experiment with emerging network-
enabled capabilities and applications. Lockheed Martin and Wipro will utilise cutting-edge technologies
and real environmental emulation to develop net-enabled capabilities and solutions to employ against
current, real world problems.
February Boeing ,Tata Boeing and Tata utilizes existing Tata manufacturing capability and also develops new supply sources
2008 107 throughout the Indian manufacturing and engineering communities for both commercial and defense
applications. Manufacturing capabilities established within the joint-venture company would in later
phases be leveraged across multiple Boeing programs, including the Medium Multi-Role Combat Aircraft
competition. This involved USD 500 million of defense related aerospace component work.
May Thales, Samtel French defence and aerospace major Thales and the city-based Samtel group announced a joint venture to
2008 108 design, manufacture and sell avionics systems in the Indian market. Samtel and Thales would hold 74:26 in
the venture that was started with a capital of USD 12.5 million with more investments to be pumped in as
the joint development efforts would progress
September , TCS , SAAB IT services provider Tata Consultancy Services (TCS) announced its partnership with Saab, a provider in
2008109 products and services catering to military and civil security, for the establishment of Saab’s Aeronautical
Design and Development Center (ADDC) in India.
The partnership would establish Aeronautical Design and Development Center (ADDC) that would aim
at addressing the global aeronautical market. It would create a single source of design and development
capabilities within India, in addressing domestic and the global defense and civil aeronautical applications.
January L&T,DRDO Larsen & Toubro (L&T) tied up with DRDO to setup a research facility for weapons conceptualization for all
2009110 commercial production undertaken by DRDO.
February Dassault Systèmes, Dassault Systèmes (DS) the world leader for Product Lifecycle Management (PLM) software solutions and
2009111 KPIT Cummins KPIT Cummins Infosystems Ltd a specialist solutions partner to global manufacturing corporations, signed a
Infosystems Ltd go-to-market partnership for joint solution & business development on ENOVIA Platform.
February Tata Group ,Israel Tata Group and Israel Aerospace industry tied up with in a joint venture in called Nova integrated systems
2009112 Aerospace industry with FDI of 50 million USD, which would be making missiles ,pilotless drones , electronic warfare systems
and other defence equipment. Tata owns 74 % while IAI owns 26 %.
March Wipro ,GE Security Wipro forged a JV with GE Security of US during to jointly produce and market physical security solutions
2009113 for Indian defence forces.
April TAAL,TIDCO Bangalore based Taneja Aerospace is planning to float a joint venture with Tamil Nadu owned TIDCO to
2009114 create a new facility at Hosur, manufacture aero parts and would exploit opportunity in the MRO.
May Larsen&Toubro, Announced the formation of a joint venture company for defence electronics in India aim at development,
2009115 Europe's EADS design, manufacturing and related services in the fields of electronic warfare, radars, military avionics and
mobile systems for military requirements.

June 2009 116
HAL , CAE HAL and Canada’s CAE jointly set up a new helicopter training centre.
October SAERTEX , SAERTEX, the world leader in non-crimp glass, carbon and aramide fabrics, planned to set up a 50:50 Joint
2009117 KEMROCK Venture company in India with KEMROCK Industries and Exports Limited, Vadodara, Gujarat; and accord-
ingly, an MOU was entered into by and between SAERTEX and KEMROCK to form the JV.
The joint venture named as SAERTEX-KEMROCK INDIA LIMITED, would set up a new facility for producing
various components for Indian and global aeronautical industry.
November Sikorsky , Tata Sikorsky signed a joint venture with Tata advanced Systems in to produce cabins for the S-92 helicopter
2009118 Advanced Systems and aerospace parts at Hyderabad city.
November Airbus,Airspace Airbus, Airspace Infrastructure Pvt. Ltd and Airlogic Ltd have established a new spare parts and logistics
2009119 Infrastructure Pvt. support joint venture - Spares Support Solutions India, Pvt. Ltd. (SSSI).
Ltd , Airlogic Ltd
The joint venture will maintain an inventory of rotable components used on all types of Airbus commer-
cial aircraft by operators in India for outright sale, exchange and customized pooling arrangements. SSSI
will also offer sale/leaseback of component inventories; the purchase of inventories associated with fleet
phase-outs; and localized, just-in-time, support to both airlines and MROs in India.
The JV is split 26% between Airbus and 37% each for the other partners. Airspace Infrastructure has
expertise in bonded warehousing and compliance with the Indian customs regime while Airlogic specializes
in component trading, distribution, repair management and spares exchange programs.
February Wipro ,CAE Wipro signed an agreement with CAE in to provide simulation-based training for areas like war gaming,
2010120 C4ISR and a range of defence platforms expected to be acquired by India’s defence forces. The two
companies also agreed to help original equipment manufacturers meet offset obligations in India that are
required by defence ministry.
February BEL ,Suriname BEL signed a contract with Suriname Armed forces for delivery of coastal communication system network
2010121 Armed Forces server.
February Agusta westland Agusta westland and Tata Sons Ltd signed to create a Joint Venture with during which would be concen-
2010122 ,Tata Sons Ltd trating on assembly work of AW119 helicopter for the worldwide market, with a production rate of 30 a
year and the first aircraft potentially ready for delivery in 2011.The AW119 would be proposed to Indian
military Reconnaissance and Surveillance Helicopter program.
April 2010123 Rolls Royce , HAL Rolls Royce and HAL forged a 50:50 joint venture to manufacture compressor shroud rings and construc-
tion of a new production facility that would incorporate the latest in modern manufacturing techniques.
April 2010124 Mahindra & Mahindra & Mahindra Ltd and BAE forged a JV to develop strike vehicles for Indian Army. M&M owns 74
Mahindra Ltd , BAE % equity and BAE owns 26% .
105 < www.newindpress.com> 116 h ttp://www.indianaviationnews.net/careers/2007/08/hal-canadas-cae-in-jv-for-

106 <www.wipro.com> pilot-school-in-blore.html
107 http://www.industryweek.com/articles/boeing_tata_industries_announce_india_ 117 http://www.mydigitalfc.com/corporate-releases/
joint_venture_15820.aspx saertex-launches-saertex-kemrock-india-limited-jv-kemrock-industries-and-exports-
108 http://www.thaindian.com/newsportal/sci-tech/thales-samtel-form-joint-venture- 118 http://www.defenseworld.net/go/defensenews.jsp?id=4175
for-avionics_10046498.html 119 http://machinist.in/index.php?option=com_content&task=view&id=2455&Itemi
109 http://www.ciol.com/News/News-Reports/ d=2
TCS,-Saab-to-setup-ADDC-in-India/10908110181/0/ 120 http://www.defenseworld.net/go/show.jsp?id=103&name=DEFEXPO%20
110 http://www.india-defence.com/reports/4181 INDIA%202010
111 http://www.kpitcummins.com/downloads/Dassault-Systemes-and-KPIT-Cummins- 121 http://www.defenseworld.net/go/defensenews.jsp?id=4162
Joint-Press-Release.pdf 122 http://www.agustawestland.com/news/
112 http://indiadefenceonline.com/379/iaitata-group-joint-venture-kick-starts/ agustawestland-and-tata-sons-establish-joint-venture-company
113 http://www.livemint.com/2009/03/10174039/GE-Security-Wipro-Infotech-in.html 123 http://www.dnaindia.com/money/report_hal-and-rolls-royce-announce-manufac-
114 http://stockmarketing.in/news/taneja-aerospace-likely-to-float-jv-with-tidco/5861/ turing-joint-venture-in-india_1365345
115 http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/ 124 http://www.baesystems.com/Newsroom/NewsReleases/
LT-EADS-announce-JV-for-defence-tech/articleshow/4485612.cms autoGen_1091030101550.html

8.3 Defence Offsets in India
So far, offset contracts of about USD 2 billion have been entered into by Defence contractors and expectation is to reach to USD 10 billion by 2011.
Table 23 Tentative list of offset contracts agreed to date.
Contract Contract Offset

Contract Minimum
No. Details of contract Date value in value in amount IN
holder offset %
US$millions IN(Rs.Crore) (Rs.Crore)
A contract worth USD 225 million (Rs. 900 crore) for
supplying radars by ELTA. Offset contracts have been signed
10 Feb
1 ELTA (Israel) with two Indian firms for purchase of components, from 225 900 30% 100
2009
Astra Microwave Hyderabad and Larsen & Toubro (L&T)
securing a contract worth USD 25 million
Contract for fleet Refuelling Tankers for Navy. The estimated
price is USD100 million (Rs. 400 crore) with offset worth USD
Not
2 32.5 million (Rs. 130 crore). The beneficiary companies are - 100 400 30% 130
disclosed
Wartsila India, OFB, BEL, L&T, Almot, Velgear and Johnson
Pumps.
The MIG-29 upgrade contract worth USD 1 billion (Rs. 4,000
crore) has been awarded to a Russian manufacturer. The 10
RAC MiG
3 vendor has agreed to offsets of USD300 million (Rs. 1200 March 1000 4000 30% 1200
(Russia)
crore) and the Base Repair Depots of IAF, HAL, BDL, Alpha 2008
Technologies are beneficiaries.
The medium lift helicopters for the IAF, where the total cost
Rosonboron
of the programme is USD 138 million (Rs. 552 crore) and the 6 Dec
4 export 138 552 30% 165.6
offset value is USD 41.4 million (Rs. 165.6 crore). The benefi- 2008
(Russia)
ciaries of the offset are Tata, L&T, etc.
HAL (likely to
tie up with The Jaguar upgrade valued at USD 82.5 million (Rs. 330.6
5 - 82.5 330.6 30% 81
BAe) (United crore) and the offset value is to be USD 20.25 million
Kingdom)
Boeing has planned for offset in aerospace structures and
aviation electronics products worth at least USD 600 million
from seven firms in India as part of offsets against winning a
USD2.1 billion (Rs. 8,400 crore) contract in Jan09 to supply
Boeing
eight P-8I reconnaissance planes to the Indian Navy. The
6 (United - 2100 8400 30% 2400
offset contracts are being placed with L&T, Bharat Electronics
States)
Ltd, Wipro Ltd, HCL Technologies Ltd, Hindustan Aeronautics
Ltd (HAL), Dynamatic Technologies ltd and Macmet
Technologies Ltd, a unit of Canada’s aerospace simulator
maker CAE Inc.
According to Defenseworld.net in May 2009, senior BEL
executives stated that as part of the offsets for the first fleet
tanker, Fincantieri, in 2008, placed an order worth 14.3M
euros for the supply of Composite Communication System,
Fincantieri 5 June
7 Versatile Communication System, ESM System, Electric 1300 30% 390
(Italy) 2008
Opto Fire Control System and their integration on board the
fleet tanker. BEL will implement this order in 2009. BEL also
expects a follow on order in FY 2009-2010 for the second
fleet tanker.
Contract Contract Offset
Contract Minimum
No. Details of contract Date value in value in amount IN
holder offset %
US$millions IN(Rs.Crore) (Rs.Crore)
the Israel Aerospace Industries (IAI) has agreed to provide
2,000 of the latest version of its Barak surface-to-air missile
for the Indian Navy at an estimated price tag of USUSD1.4
billion. Under the terms of the agreement, a third of the
Israel value of the deal will be spent or invested in India, where
30
Aerospace the IAI will make offsetting purchases from Tata. The
8 April 1400 5600 30% 1866.8
Industries Mumbai-based multinational’s wholly owned subsidiary
2009
(Israel) Tata Advanced Systems (TASL) is forging a direct partnership
relationship with the IAI that is expected to be wide-ranging,
involving missiles, drones, radars, electronic warfare systems
and homeland security systems – all areas of Israeli defense
industry specialization.
The Indian ministry of defence has confirmed that it has
signed a contract with M/s Rafael, Israel for the supply of the
SPYDER (Surface-to-air Python and Derby) low level quick
12
M/s Rafael reaction missile system (LLQRM) for the Indian Air Force.
9 Dec 260 1040 30% 312
(Israel) Reports in the media over the previous three months have
2008
suggested that the USD260 million contract would involve
the supply of 18 SPYDER systems, with deliveries running
through early 2011 to August 2012.
Rosoboronexport has signed a contract to upgrade Indian
Air Force Sukhoi 30 MKI Fighter Jets at a cost of USD 700
Rosoboron
million as per agency report by Interfax. This will be a long
10 export - 700 2800 30% 840
haul version. India is scheduled to acquire 230 Su 30 MKI 4.5
(Russia)
generation fighters considered as one of the most advanced
in the World at present
The Indian Government has signed a Letter of Offer &
Acceptance with the US Government for the procurement of
Lockheed
six C-130J-30 aircraft for the Indian Air Force. The estimated 18
Martin
11 value of the aircraft along with associated ground support March 1000 4000 30% 1200
(United
equipment, ground handling equipment and role equipment 2008
States)
is USD962,454,677.The delivery of these aircraft is likely to be
completed by December 2011
Source: Various websites

9 Conclusion
Substantial benefits are to be derived if foreign industry can one another opens up the possibility of a war on two
become more involved in overseas defence markets, either fronts
through exports or foreign direct investment. Apart from • The demonstration in recent disputes that much of
the obvious benefits of additional revenue and profitability, India’s defence equipment is obsolescent and that
one major advantage concerns the potential for smoothing the Revolution in Military Affairs passed India by,
out the workload. A big problem for local firms is the level suggesting that a major ‘catch-up’ effort is required.
of investment that is required to participate in the Foreign
defence industry when the workload can often reflect a This translates into a major procurement program over
feast or famine cycle. This not only causes considerable the next few years. India is seeking to acquire some of the
disadvantages for the local firms themselves, but also adds most globally advanced platforms and systems for its Navy
to Defence’s costs in seeking to sustain the industry in (SLBM nuclear submarines and aircraft carriers), Army (large
pursuit of self-reliance. numbers of T-90 main battle tanks and other assets to equip
eight divisional sized battlegroups) and Air Force (Su-30
There are also strong potential benefits from involvement advanced fighter aircraft and a follow-up state of the art
in overseas markets in terms of capability. The challenge air superiority fighters in about 2017). India is also seeking
of satisfying a new and demanding customer, perhaps to acquire sophisticated defence electronics and commu-
by refining the particular product or developing new and nications systems, including the intention to equip infantry
more advanced applications, can bring private benefits to soldiers (and the Indian Army can field over 30 infantry
the firm concerned but also broader benefits to the global divisions) with advanced equipment under the Future
defence companies as the spin-offs are brought home. Infantry Soldier as a System project.
Participation in a joint venture in a larger defence market
overseas can also bring benefits in terms of economies of Overall, the acquisitions budget will grow from around USD
scale, movement down the learning curve and also some 17 billion in 2011 to USD 19.20 billion in 2015, an increase
potential ToT and knowhow from related firms operating in of nearly 15 per cent.
the overseas market concerned.
Clearly an expansion such as this offers considerable oppor-
9.1 The opportunity tunities to the international defence industry, including
India is embarking on a very substantial program to Foreign companies. It is important, however, to recognise
expand and upgrade its defence force. There are a the very considerable challenges involved in winning
number of factors underlying this program, including: defence work in India.
• India’s growing economic strength, which allows the
development of a substantial modern defence force 9.2 Some challenges
while keeping defence expenditure below 2.5 per
cent of GDP Competition
• The fact that territorial disputes with two powerful The first challenge facing foreign firms is competition,
neighbouring countries (China and Pakistan) that are particularly from transnational corporations offering state
nuclear-armed and developing closer relations with of the art technology. India’s substantial defence expansion
India is seeking to acquire some of the most globally advanced

platforms and systems for its Navy (SLBM nuclear submarines and
aircraft carriers), Army (large numbers of T-90 main battle tanks and
other assets to equip eight divisional sized battlegroups) and Air Force
(Su-30 advanced fighter aircraft and a follow-up state of the art air
superiority fighters in about 2017).
is in stark contrast with what is occurring among the NATO Tendering process
(and ex-Warsaw Pact) countries where the end of the Cold It appears that the tendering process for defence equipment
War twenty years ago brought about a steep decline in in India is not highly transparent. The process can be
defence expenditure. It also brought about a shake-out extremely long and the basis on which tenders are eventu-
and rationalisation in defence industries in those countries. ally awarded is often not at all clear. There is every prospect
Despite this rationalisation, many defence contractors in that foreign companies could spend a great deal of time
western countries (and presumably in the former Soviet and money working up a bid only to be advised, much
Union as well) are operating well below capacity. later, that they were unsuccessful for reasons that are not
apparent. While companies will want to seek some early
Many of the foreign defence companies generally suffer signals in regard to their perceived qualifications to be
from a lack of scale and may have difficulty in competing selected as a contractor, at the same time they need to
with other non-indigenous players with much higher levels ensure they have strict governance protocols in place to
of production and a more advantageous position on the avoid any suggestion of corruption.
learning curve. Unless they have a unique capability, they
will also have great difficulty competing on price with Indian Buy local, offsets and licensing
companies, with their much cheaper labour rates (even for As shown in the body of the report, India is moving towards
software engineers) and tax advantages. a strong ‘buy local’ policy, aimed at achieving an indigenous
share of total expenditure of 70 per cent. While, India has a
Competition in markets for defence equipment also does policy of self-reliance in defence, this is a phrase capable of
not take place on a level playing field. Government support different interpretations. In India, its meaning seems to be
is particularly important. This does not have to be financial
support; often backing for the bid from the defence force
in the exporting country can be influential in its own right.
If senior officers from the Royal Foreign Navy, for example,
demonstrate enthusiasm for a particular Foreign-made
sensor, this is likely to have some influence on naval officers
in the purchasing country.
It is inevitable that relations between governments are also

important in these areas. A strong relationship between a
foreign country and India would do no harm in fostering
relationships between defence industries in the two
countries. Any marketing strategy for the Foreign defence
industry in India would need to take account of the fact
that relations between the two countries have been subject
to some recent headwinds. For example, the fact that one
country refuses to sell one product to India while another
country has agreed to supply the same product could
provide a relative advantage to that another country’s firm
in the defence industry.

closer to self-sufficiency. This is ambitious and is operational- to India, they will necessarily have to become involved with
ised, in part, by establishing offset requirements for foreign the Indian industry, either as a reciprocal purchaser of Indian
defence purchases of at least 30 per cent and limiting equipment and components under the offsets regime or as
foreign investment in a project to 26 per cent. This suggests a minority investor in a joint venture. This may well contain
first of all that it would be difficult for any foreign firm significant risks in terms of efficient and timely delivery of
without a ‘must have’ capability of piece of equipment to projects. It may involve delays, a reduction in the number of
win a contract in India. If that hurdle can be overcome, any platforms or systems to be acquired or even cancellation of
contract to supply equipment to India will involve working the project.
closely with the local industry. This may involve significant
risks. Because of the buy local policy, there will be pressure on
foreign companies supplying significant items of equipment
The defence sector has traditionally been government and platforms to enter licensing agreements so that local
owned in India and the level of efficiency is questionable. firms can manufacture the product in India under licence.
On the one hand, Indian industry has designed and built Such arrangements can provide valuable revenue and
some highly sophisticated weapons systems. Two that other benefits to the licensor, but they also can involve
immediately come to mind are the Tejas light fighter aircraft the transfer of significant proprietary technology. Foreign
and the Arjun main battle tank. In both these projects, companies entering such arrangements will need to ensure
Indian industry has had the responsibility for designing, they have secure safeguards in terms of their intellectual
producing and integrating highly sophisticated equipment, property protection.
including advanced composites, electronic systems and a
main tank gun. 9.3 India: a potential market for the world?
The challenges involved in participation in the Indian
On the other hand, while some of the goals have been defence market should not be under-estimated. Yet the
achieved for these projects, in general they have not been potential rewards for foreign companies are significant.
successful. The Tejas has evolved from an original require- While it is clear that India is seeking a high level of self-
ment dating from over half a century ago and still is not fit sufficiency in delivering its ambitious defence re-equipment
for front line deployment. The requirement for the Arjun and expansion program, it is also evident that there will
dates from nearly forty years ago and in the course of be a high level of reliance on overseas interests to supply
the project the problems with the Arjun meant that large the necessary technology in a number of areas. The export
numbers of T-72s had to be acquired from Russia. More countries which already dominate the global market can
recently, while around 120 Arjun tanks will be deployed, the supply complete platforms or systems. Other Countries will
Indian Army is acquiring the latest T-90 tanks to equip its necessarily be a niche player here. Yet in the context of
front line armoured brigades in the eight battlegroups. India’s aspirations in terms of self-reliance, being a niche
player may be no bad thing. By their very nature, niche
While these projects were clearly over ambitious, the players are not threatening or overbearing and are more
forward acquisition plan reflects a similar level of ambition. willing than the big transnational corporations to work
Although the private sector has now begun to take its place closely with local industry. They also tend to be more aware
in the defence industry alongside the traditional govern- of the reciprocal benefits of working overseas and may be
ment-owned businesses, their level of competence remains more willing to incorporate Indian firms into their supply
unclear. If foreign firms are to supply defence equipment chains.

10 A brief about CII
CII has been actively partnering with the Ministry of Defence, Production. In continuation, CII has submitted several policy
Armed Forces and DRDO in promoting Industry’s participa- recommendations to the Government of India for promoting
tion in Defence production. CII Defence Division has been contribution and participation of Indian Industry in defence
committed to working in the areas of steering policy production.
formulation, defence market development / trade promotion
and formation of international joint ventures / technology By representing the interests of the Indian Industry both
transfers. public and private sector as well as the end users – The
Armed Forces, CII has been recognised as the voice of Indian
CII had formed the Defence Division in 1993 to catalyse Defence Industry by the Government of India. This would
change in the Defence sector by pursuing the Government bring about competition and help provide quality equipment
to liberalise Defence Production and by initiating the process to the armed forces at the right time and at the right price.
of partnering with the Defence establishments in organising This would in turn increase defence exports of the country.
interactive meetings with the end users, i.e. the Armed
Forces. Realising the importance of harnessing the tech- CII helps the Indian Defence Industry to promote their contri-
nologies developed within the country, CII has also been a bution in Indian Defence procurement by helping them to
pioneer in organising Interactive sessions with the Defence identify the opportunities that exist in Defence. CII organises
Research and Development Organisation to enlarge the role several sector focussed interactive session with the Armed
of Private sector in Defence R&D. A major partnership with Forces to enable the industry to identify their requirements.
the Ministry of Defence has been the organisation of the CII has institutionalised several events with the Armed Forces
Defexpo India (Asia’s largest Land and Naval Systems exhibi- such as AIP (Army Industry Partnership), NIP (Navy Industry
tion) in 1999, 2002, 2004 and 2006. Partnership Meet), DIP (Defence Industry Partnership Meet),
DEFCOM (Defence Communications Seminar), Artillery
CII’s Defence Division strives to forge industry initiatives Technology Seminar, Defence IT Convention to name a few.
to strengthen the Indian Defence Sector. The objective of
this Division is to “Establish a strong partnership between CII Defence Events provide excellent platforms for Industry
Defence Services & Industry and enlarge the role and scope to understand the future requirements of the Armed
of Indian Industry in Defence Production for mutual benefit Forces. These events also provide a platform for industry to
and enhance the National Security”. introduce their capabilities in terms of offering new products
and technologies to the Indian Defence.
CII’s initiatives in the area of policy reforms really got a
boost when, CII had the CEOs meeting with the Ministry International Linkages for Technology Cooperation, Joint
of Defence on the 18th June 1998. The meeting provided Ventures and Export
an opportunity for the Industry to interact with the senior
officials of the Ministry of Defence (MoD) and DRDO. As a CII provides international exposure to Indian Defence
fall out of this meeting 6 Joint task forces, chaired by serving Industry by organising inward and outward industry
officers from the armed forces / Ministry of Defence and missions. It has organised Defence Industry Mission to USA,
co-chaired by CII were formed. This was an epoch making UK, South Africa and Israel. It has also received international
event, which had never previously happened in the history delegation from USA, UK, Russia, South Africa, Poland,
of India. Slovakia etc. The Committee has signed Memorandum of
Understanding with the Defence Manufacturers Association
One of the major recommendations of the Task Forces was of UK (DMA); The United States India Business Council
that private sector should be given an important role in the (USIBC); Polish Chamber of National Defence Manufacturers,
Defence production of the country. Subsequent to this, CII Association of the Defence Industry of the Slovak Republish
had also submitted a ‘Paper’ to the Government of India on (ADISR) and Association of Italian Defence and Aerospace
a suggested mechanism for awarding Licence for Defence (AIDA).

11 A brief about Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, cultural diversity. They enjoy an environment of continuous
a Swiss Verein, and its network of member firms, each of learning, challenging experiences, and enriching career
which is a legally separate and independent entity. Please opportunities. Deloitte’s professionals are dedicated to
see www.deloitte.com/about for a detailed description strengthening corporate responsibility, building public trust,
of the legal structure of Deloitte Touche Tohmatsu and its and making a positive impact in their communities.
member firms
The Deloitte Global Aerospace & Defense (A&D) industry
Deloitte provides audit, tax, consulting and financial group serves all sectors in the A&D industry, including
advisory services to public and private clients spanning commercial and military aircraft, engines and propulsions
multiple industries. With a globally connected network of systems, guided missiles, space vehicles and shipbuilding.
member firms in more than 140 countries, Deloitte brings
world-class capabilities and deep local expertise to help Deloitte has a strong defense practice that draws on best
clients succeed wherever they operate. Deloitte’s more practices, experience, Aerospace and defense, manu-
than 168,000 professionals are committed to becoming the facturing and our other commercial industry practices.
standard of excellence. We focus on the top issues facing the industry, including
Supply Chain Strategy, Customer Support and Sustainment
Deloitte’s professionals are unified by a collaborative culture (CS&S), Program Management, Mid-market ERP Solutions,
that fosters integrity, outstanding value to markets and Corporate Finance, Talent Management, and Tax Strategies.
clients, commitment to each other, and strength from

12 Annexure
Quick overview of taxation and regulatory for a Defence related requests for BO need Government’s
foreign company in Defence industry inter-ministerial consultation. BO can carry on full-fledged
India has a well-developed tax structure with clearly business activities (except not permitted activities viz.
demarcated authority between the Central and State manufacturing). However, since a branch office is an
Governments and local bodies. The Central Government extension of its head office, under the tax treaties, a
levies taxes on income, customs duties, central excise and branch would be considered as a Permanent establish-
service tax, etc. Then there are also levies on taxes such as ment (PE) of the foreign company. Therefore, the business
surcharge and education cess which is the collection by the income accruing in India would be taxable at the rate
Government to meet specific objective. of tax applicable to the foreign companies (i.e. effective
tax rate is 42.23%125 on net profits) which is higher than
Value Added Tax (VAT), stamp duty, State Excise, land the rate of tax applicable to companies incorporated in
revenue and tax on professions are levied by the State India (effective tax rate is 33.22%126 on net profits). In
Governments. Local bodies are empowered to levy tax computing the income of the branch, there are certain
on properties, octroi and for utilities like water supply, restrictions on allocation of head office expenditure.
drainage etc. Indian taxation system has undergone
tremendous reforms during the last 10-15 years. The Project Office (PO)
tax rates have been rationalized and tax laws have been Although PO does not need prior approval of RBI,
simplified resulting in better compliance, ease of tax however, being a defence sector, approval from RBI
payment and better enforcement. The process of rationali- may be required. Defence related requests for PO need
zation of tax administration is continuing in India with the government’s inter-ministerial consultation. A PO can be
Government intending to implement New Direct Tax Code established to execute a specific project. A project office
(DTC) and new Goods and Services Tax (GST) w.e.f. April would not be considered a legal entity separate from its
1, 2011. parent company. Therefore, income of a project office
would also be taxable at the rate applicable to the foreign
Requlatory and Income tax overview companies (effective tax rate is 42.23% on net profits). The
Foreign Company computation of the profit of the project office does involve
A foreign company is a company, which is not a domestic complexities such as the base on which the tax is leviable.
company. A domestic company means an Indian company
or other company, which declares and pays dividends in Further, LO/BO/PO needs registration with registrar of
India. Generally, a company registered outside India, is companies, income tax department etc. It is also required
regarded as a foreign company. to fulfil annual compliances with RBI and ROC.
A foreign enterprise may carry on its business operations in Business Operations without Physical Presence in India
Indian in any of the following manner: A foreign enterprise may operate in India without any
• Through a Liaison office in India actual physical presence in India. For instance, a foreign 125 For foreign companies-
• Through a branch set up in India company may supply goods, plant & machinery to Indian surcharge @ 2.5% (where
income exceeds Rs. 10
• Through a Project office in India parties from its home country. A foreign company is
million) and education
• Without any physical presence in India taxable in India on the income received or income accrued/ cess @2% and secondary
arising in India. Where the supply is affected in a manner and higher education cess
@1%). Draft DTC has
Liaison Office (LO) that no income therefrom is received or accrues in India,
proposed tax rate at 25%
Prior approval of Reserve Bank of India (RBI) is required then tax liability may not arise in India. for foreign companies and
for establishing LO. Defence related requests for LO need additional tax of 15% as
‘Branch profits tax’.
Government’s inter-ministerial consultation. LO is not The above would be a case where sale of plant &
permitted to carry on commercial activities in India. Its role machinery is affected outside India; the title in goods is 126 For domestic companies-
is usually restricted to collection and dissemination of infor- transferred in favour of the Indian buyer outside India; surcharge @ 7.5% (where
income exceeds Rs. 10
mation on behalf of the foreign entity. Therefore, generally and the payment for such supply is received outside India.
million) and education
a liaison office is not liable to tax in India. In such a case, income from such transaction may not cess @2% and secondary
be taxable in India. However, where a foreign entity has and higher education cess
@1%). Draft DTC has
Branch Office (BO) a ‘business connection’ in India, tax is payable on the
proposed tax rate at 25%
Prior approval of RBI is required for establishing BO. income arising from operations in India. for domestic companies

The normal business income is computed by reducing from the right to use, industrial commercial or scientific equip-
the gross business receipts, expenses incurred in earning ments. Under the ITA, royalty is taxable @ 10% on gross
such income subject to certain restrictions prescribed under payment, plus surcharge and education cess (aggregate
the Income-tax Act, 1961 (ITA). to 10.56%) or a lower withholding tax rate under the
applicable tax treaty.
Joint venture Company (JV)
The Investment in defence production was liberalized FTS is defined to mean consideration for provision of any
in May 2001,vide Press Note No. 4 of 2001, subject to technical, managerial or consultancy services including
licensing for production. The guidelines for licensing were supply of technical personnel. Like royalty, FTS is also
issued in Press Note No. 2 of 2002. The Indian domestic taxable @ 10% on gross basis in certain cases or a lower
private sector was allowed 100 % participation in defence withholding tax rate under the applicable tax treaty.
production, whereas 26% is for foreign direct investment
(with FIPB approval) in an Indian joint venture company Interest Income
(JV). The management of the JV should be in Indian hands Interest Income earned in India is taxable in India at the
with majority representation on the Board as well as the normal tax rate applicable to foreign entities, viz, 20%
Chief Executive of the company being resident Indians. (effective rate 21.12%). Under Tax Treaties, generally, the
interest income is taxed at the reduced rate of 10% or
The FIPB issued press note 2 of 2009 series on the guide- 15%.
lines for calculation of total foreign investment whereby
it has provided inter-alia that JV should be owned and Capital Gains
controlled by resident citizens and Indian companies which Gain arising from transfer of a capital asset is liable to
are owned and controlled by resident Indian citizens. The capital gains tax in India. Most of the tax treaties signed by
words ‘ownership’ and ‘control’ have also been defined in India provide for taxation of capital gains as per domestic
the said press note. tax laws of the respective countries. Accordingly, capital
gains from sale of capital assets/immovable properties
Where a foreign company makes foreign direct invest- situated in India are generally taxable in India.
ment in a JV in India, the JV is considered as a ‘domestic
company’. The income of JV is taxable at the rate appli- Dividend Distribution Tax (DDT)
cable for domestic companies. The effective rate of tax is In addition to the normal income tax, a Domestic
33.22%. Company is liable to pay DDT @ 15% on amount distrib-
uted as dividends. Thus, the effective rate of tax is 16.61%.
Remittances On the other hand, receipt of dividend is fully exempt from
LO/BO/PO can remit surplus funds to foreign company tax in the hands of the recipient shareholders. Foreign
subject to approvals from RBI and tax department Whereas companies are not required to pay DDT.
cash remittance by the JV to the foreign JV partner
company can be made through dividend pay-outs, interest Withholding tax
payments, royalty/fee for technical services, exit through An Indian resident is obliged to withhold tax while
transfer of shares, buy-back, capital reduction, capital making payment to a foreign party. The withholding tax
restructuring. rates vary depending upon the nature of payments like
Royalties, FTS, interest, etc. Generally, under the Tax Treaty
Automatic approval for remittances under foreign tech- mechanism, withholding tax rates are lower as compared
nology agreements has been recently liberalized. to the tax rates under the domestic tax laws of India.
Supply of Technical Know-How/Services Under the domestic tax laws of India, a mechanism has
Income from supply of technical know-how or technical been provided whereby if the entire income of a non-resi-
services to Indian parties is taxable in India either as dent is not believed to be taxable in India, the payer or the
‘Royalty’ or as ‘Fee for technical services (FTS)’ as defined payee of the income can obtain a lower rate withholding
under the ITA. order from the tax authorities.
The definition of royalty covers payment for the use of or A new provision has been inserted recently w.e.f. April 1,

2010, whereby any person whose receipts are subject to
withholding tax under the ITA, should furnish PAN to the • Companies manufacturing eligible goods in North
person responsible for such withholding tax. On failure to Eastern States (up to 31st March 2017) eligible for
furnish PAN, higher of the following to be deducted as tax 100% tax holiday for 10 years and in Himachal Pradesh
at source: and Uttaranchal (up to March 2012) eligible for 100%
• Rate of tax specified in ITA; tax holiday available for 5 years and 30% thereafter.
• Rates in force as specified under the Finance Act or Draft DTC does not allow area-based exemptions. Tax
under relevant tax treaties; holiday available to an undertaking manufacturing
• Rate of tax at 20% eligible goods in specified areas to be discontinued
without affecting tax payers currently enjoying such
Minimum Alternate Tax incentives, which will be grandfathered.
Where income tax payable by corporate taxpayers is less • Exemption available on royalty/fees for technical
than 18% of the book profits, 18% of the book profits is services received by a notified foreign company under
regarded as their tax liability. Book profits mean profits as an agreement with the Government to provide services
per profit and loss account prepared in accordance with in or outside India in projects connected with the
the Indian Companies Act, subject to certain specified security of India.
adjustments. • Expenditure on Scientific Research is allowed at:
– 100% deduction for any revenue expenditure on
Thus, effective rate of minimum Alternate Tax (MAT) for scientific research
Domestic companies is 19.93% of the book profits. For – 100% deduction for capital expenditure (other than
Foreign companies, the effective rate of MAT is 19.00% of land) on scientific research
the book profits. – 200% weighted deduction for in-house scientific
research available to companies engaged in manu-
Further, taxpayers are allowed credit in respect of MAT facturing/ production of any goods (except goods
paid on or after 1 April 2006 to the extent of difference such as liquor, tobacco, cosmetics etc.)
between MAT paid and tax payable on total income – 125% of deduction on payments for research activi-
computed as per other provisions of the ITA. MAT credit ties to an approved Indian company in scientific
can be set off against the tax payable in the year in which R&D
taxpayer is liable to pay tax under normal provisions of the
ITA. It can be carried forward for 10 years from the AY it Transfer Pricing
becomes allowable. Draft DTC has proposed MAT at 2% • The Indian transfer pricing regulations require inter-
of the ‘gross assets’ of the company and eliminatingcarry national transactions with associated enterprises to
forward of MAT credit. be at arm’s length price and further supported with
prescribed documentation. There are strict penalties for
Corporate tax Incentives relevant to this industry non-compliance.
• Developers and co-developers of Special Economic • As a measure of simplification, Central Board of
Zone (SEZ) entitled to 100% tax holiday. Direct Taxes (CBDT) empowered to formulate safe
• Units set up in SEZ eligible for 100% tax holiday on harbour rules. Detailed Safe harbour rules are still to be
profits on exports for 5 years and 50% tax holiday for prescribed.
the next 10 years. • In the draft DTC, there is a proposal to introduce
• Export Oriented Units (EOUs)/Electronic Hardware advance pricing agreements with regard to the
Technology Parks (EHTPs)/Software Technology Parks International transactions between associated
(STPs) eligible for deduction of 90% of export profits for enterprises.
10 years (up to March 31 2011).
Under the DTC, taxable profits of the business of Advance Ruling
developing SEZ shall be the gross income from the • Taxpayers can approach the Authority for Advance
business carried on during the financial year as Ruling to determine income-tax aspects of any
reduced by capital and revenue expenditure proposed or current transactions with the non-resident.
No tax holiday available to units in SEZ/ EOU/ EHTP/ • India has entered into comprehensive treaties for
STP under the Code avoidance of double taxation with over 70 countries

and limited agreements with 18 countries. Tax implica- technical know-how, licensing of intellectual property
tions under the domestic laws could be mitigated by rights(‘IPRs’) in relation to equipments, drawings etc./
resorting to a tax treaty. engineering services.
• Service tax to be paid by Indian joint venture as
Alternative Dispute Resolution Mechanism (ADRM) recipient of taxable service by virtue of reverse charge
With a view to encourage the growth of foreign invest- mechanism
ment in India, a dispute resolution mechanism has been • Set off of such service tax paid could be availed against
recently introduced to facilitate expeditious resolution of output excise duty.
disputes on a fast track basis. Salient features of ADRM • Service tax rate is 10.3% (inclusive of cess).
are: • Services transactions between associated enterprises
• Foreign companies and cases involving transfer pricing would be subjected to service tax on book entry basis
disputes eligible for ADRM. instead of receipt / payment basis.
• DRP directions binding on the Assessing officer.
• ADRM mandatory for eligible taxpayers. Research and development (R&D) Cess
• Research and Development (R&D) Cess @ 5% is appli-
Indirect Tax Overview cable on import of technology into India by an indus-
Customs Laws trial concern. R&D Cess can be adjusted against service
Effective rate of customs duty payable by importer on tax liability, in certain cases.
import of goods would be 26.85% based on peak rate
of customs duty. Customs duty exemption is available on Entry Tax/ Octroi
imports for aerospace and defense purposes subject to the • The States, Local authorities and Municipal corpora-
fulfillment of specified conditions. tions also levy other local taxes such as entry tax, octroi,
etc. on entry of goods in the designated areas for the
Central Excise Laws purpose of consumption, use or sale.
• Effective excise duty rate on manufacturing activity is
10.3% (inclusive of cess). Special Economic Zone (‘SEZ’) Incentives
• Presently, excise duty exemption benefit is restricted to • Indirect tax incentives available to SEZ units for their
notified institutions only such as DPSUs and OFBs. authorized operations. No service tax leviable on
services provided to SEZ wholly consumed within the
Value Added Tax (‘VAT’)/ CST Laws SEZ.
• Inter-State sale of goods is subject to levy of CST, intra- • The exemption to the taxable services provided to
State sale of goods is subject to levy of VAT. SEZ consumed partially or wholly outside the SEZ, is
• CST rate is 2% against submission of prescribed provided by way of refund.
statutory form by the purchaser. Otherwise, VAT rate
of the originating State would apply. The rate of VAT In light of above-mentioned structure of indirect taxes
typically ranges between 4% to 14.5%. in India, it could be stated that Joint ventures formed
• No general/specific exemptions/concessions available for offset purpose incur a number of indirect tax obliga-
on sale of goods made to defence Each State VAT tions. However, appropriate review of the transactions
legislation should be examined. could result in tax-optimization, in view of certain benefits
available, including under the Foreign Trade Policy.
Foreign Trade Policy 2009 - 14
• Export of manufactured goods is subject to SCOMET
guidelines,etc.
Service Tax (including Cenvat Credit) Laws
• Specified services are subject to service tax and liability
to pay the same is on service provider. For few services
including services received from outside India, liability
to pay service tax shifts to the service recipient located
in India.
• Service tax applicable on input services like payment for

13 Abbreviations
Abbreviations
Abbreviations Expansion Abbreviations Expansion

AAP Annual Acquisition Plan FGFA Fifth Generation Fighter Aircraft
ADGES Air Defence Ground Environment System FIPB Foreign Investment Promotion Board
ALH Advanced Light Helicopter FSU Former Soviet Union
AOPVs Arctic Offshore Patrol Vessels FTP Fast Track Procedure
ASW Anti-submarine warfare GDP Gross Domestic Product
ATV Advanced Technology Vessel GFC Global Financial Crisis
AVD Avalanche Victim Detector GRSE Garden Reach Shipbuilders & Engineers Ltd
BDL Bharat Dynamics Limited GSL Goa Shipyard Ltd
BEL Bharat Electronics Limited HAL Hindustan Aeronautics Limited
BEML Bharat Earth Movers Ltd HVF Heavy Vehicle Factory
BFSR-SR Battle Field Surveillance Radar - Short Range IAC Indigenous Aircraft Carrier
CAGR Compound Average Growth Rate IAF Indian Airforce
CCS Cabinet Committee on Security ICG Indian Coast Guard
CNC Commercial Negotiation Committee ICT Information and Communication Technologies
DAC Defence Acquisition Council ICV Infantry Carrier Vehicle
DGAQA Directorate General of Aeronautical Quality IMF International Monetary Fund
Assurance INS Indian Navy Service
DGQA Directorate General of Quality Assurance ISRO Indian Space Research Organisation
DPB Defence Procurement Board ITARS International Traffic in Arms Regulations
DPP Defence Procurement Procedure, 2008 JV Joint venture
DPSU Defence Public Sector Undertaking L&T Larsen and Toubro
DQA(A) Directorate of Quality Assurance (Armaments) LCA Light Combat Aircraft
DQA(CV) Directorate of Quality Assurance ( Combat Vehicles) LPI Low Probability of Intercept
DQA(EE) Directorate of Quality Assurance(Engineering LRDE Electronics & Radar Development Establishment
Equipment) LTIPP Long Term Integrated Perspective Plan
DQA(L) Directorate of Quality Assurance (Electronics) M&M Mahindra & Mahindra
DQA(M&E) Directorate of Quality Assurance (Metals and MBT Main Battle Tank
Explosives)
MDL Mazagon Dock Limited
DQA(N) Directorate of Quality Assurance(Naval)
MHA Ministry of Home Affairs
DQA(R&S) Directorate of Quality Assurance(Radars and
MIDHANI Mishra Dhatu Nigam Limited
Simulators)
MiG Mikoyan and Gurevich
DQA(S) Directorate of Quality Assurance (Stores)
MMRCA Medium Multi-Role Combat Aircraft
DQA(V) Directorate of Quality Assurance (Vehicles)
MOD Ministry of Defence
DQA(WP) Directorate of Quality Assurance(Warship Project)
MRO Maintenance Repair and Overhaul
DRDO Defence Research and Development Organisation
MRSAM Medium Range Surface to Air Missile Systems
DWT Dead Weight Tonnage
MTA Multi-Role Transport Aircraft
EADS European Aeronautic Defence and Space Company
NATO North Atlantic Treaty Organisation
ESO Engineering Services Outsourced
OEM Original Equipment Manufacturers
FARP Field Artillery Rationalisation Plan
OFB Ordnance Factory Board
FDI Foreign Direct Investment

Summary of tables
Abbreviations Expansion
PSU Public Sector Unit
Table Data description Page No
QA Quality Assurance No.
R&D Research and Development 1 Projected expenditure by each Service Division 8
RFI Request for Information 2 Urban population and Urban disposable
16
RFP Request for Proposals income demographics 2001
RMA Revolution in Military Affairs 3 Government of India Budget 2010-11 16
RUR Raksha Udyog Ratnas 4 Expenditure definitions 19
SAM Surface-to-Air Missile 5 Expenditure by Service division 22
SCAP Services Capital Acquisition Plan 6 Imported vs indigenous production 25
SCAPCHC Service Capital Acquisition Plan Higher Committee 7 Forecast Expenditure on Defence Services 26
SED Strategic Electronics Division 8 Forecast Growth of Imported vs indigenous
27
SHQ Service Headquarters production, if targets are met
SLBM Submarine launched ballistic missiles 9 Forecast Expenditure on Defence Services 27
SME Small and medium enterprises 10 Indian defence acquisition plans in the Navy
29
SQR Services Qualitative Requirements domain
SRSAM Short Range Surface to Air Missile System 11 Indian defence acquisition plans in the land
30
domain
TAS Tata Advanced Systems
12 Indian defence acquisition plans in the
TEC Technical Evaluation Committee 31
Aerospace domain
ToT Transfer of Technology
13 Indian defence acquisition plans in the
UAC United Aircraft Corporation 32
Electronics domain
UAV Unmanned Aerial Vehicle
14 Major Navy production currently occurring in
ULH Ultra light howitzers 37
India
USD United States Dollars 15 HAL Key Financial Performance Indicators,
40
VVIP Very Very Important Person 2007-08 and 2008-09
SQR Services Qualitative Requirements 16 Defence Public Sector Undertakings 42
SRSAM Short Range Surface to Air Missile System 17 Potential RURs identified 43
TAS Tata Advanced Systems 18 Private sector defence firms and key operating
45
TEC Technical Evaluation Committee domains
TEC Technical Evaluation Committee 19 Capital acquisition categories in the DPP 53
ToT Transfer of Technology 20 Procurement process and timeframe 54
UAC United Aircraft Corporation 21 Defence MOUs in India 56
UAV Unmanned Aerial Vehicle 22 Defence Joint Ventures in India 60
ULH Ultra light howitzers 23 Tentative list of Offsets contract in India
62
USD United States Dollars agreed to date
VVIP Very Very Important Person

Summary of figures
Figure No Data description Page No

1 GDP Shared, GDP Growth rate and Industrial production 14
2 Export and import 14
3 Growth Rate of various sectors 15
4 Population Vs Age group (2001) 15
5 Tier distribution of cities 15
6 Expenditure on Defence by GOI 16
7 Indian GDP (1980-2014) 17
8 Expenditure Breakdown 20
9 Defence Expenditure as % of GDP – Budgeted
20
Expenditure
10 Unspent funds – Total Defence Budget 21
11 Expenditure by Service division 22
12 Unspent funds – Service Division Capital Budgets 23
13 Public Debt to GDP – Key country comparisons 28
14 Indian Navy Procurements through imports versus indig-
37
enous production (2000-2005)
15 Indian Army procurements through imports versus
38
indigenous production (2000-2005)
16 HAL Domestic Sales and Indian Government IAF Aircraft
41
and Aero-engine Capital Outlays,1997-2008
17 Flowchart of various categories of acquisition 47
18 Defence spend as percentage of country GDP 50
19 Percentage of total global defence spend 50
Box 1: Overview of Indian’s indigeous defence production

Box 2: Ordnance Factories in India

14 Acknowledgement
In order to provide a comprehensive industry view in the study, we have interacted with various participants in this
sector, independent defence consultants, ex-officials from the Ministry of Defence and other relevant governmental
organisations like Defence Research Development Organisation (DRDO), Institute for Defence Studies and Analysis
(IDSA), Centres for Airpowers Studies (CAPS) and United Service Institution of India (USI). We would like to thank the
various industry participants, whose invaluable contributions have made this study possible.
We would like to thank the team at CII especially Gurpal Singh, Deputy Director General and Head (Defence and
Aerospace), Amit Kumar Singh, Director, Defence and Aerospace/Security/Space), for assisting us during the course of
this study.
Deloitte would like to thankfully acknowledge the valuable inputs received from the following participants
Sujeet Samaddar Brig. Vinod Anand (Retd)

Vice President (Operations) Senior Associate - USI
Nova Integrated Systems Limited
Air Vice Marshal Kapil Kak (Retd)
Brig Anand Mehra (Retd.) Deputy Director - CAPS
Advisor (Marketing)
Bharat Electronics Limited Surbhi Sareen
Assistant Librarian – CAPS
Laxman Kumar Behera
Associate Fellow – IDSA Wing Commander Sandeep Sapra (Retd)
Aerospace and Defence Consultant

15 Contacts
Deloitte aerospace and defence contact e-mail id

indiaknowledge@deloitte.com
Bangalore Delhi NCR Mumbai

Deloitte Centre, 7th Floor, Building 10 Tower B, 12, Dr. Annie Besant Road,
Anchorage II, 100/2, DLF Cyber City Complex, DLF Opp. Shiv Sagar Estate, Worli,
Richmond Road, City Phase II, Mumbai 400 018, India
Bangalore 560025, India Gurgaon 122002, India Phone : +91 (022) 6667 9000
Phone: +91 (080) 6627 6000 Phone: +91 (0124) 679-2000
Chennai Hyderabad
Ol No. 37th, New No: 52, 1-8-384 & 385, 3rd Floor,
7th Floor, ASV N Ramana Gora Grand, S.P. Road,
Towers, Venkatnarayana Road, Begumpet,
T Nagar, Hyderabad 500 003, India
Chennai 600 017, India Phone : +91 (040) 40312600
Phone: +91 (044) 66885000
CII aerospace and defence contact e-mail id
Gurpal Singh Amit Kumar Singh

Deputy Director General & Head Director (Defence and Aerospace/Security/Space)
(Defence & Aerospace) Confederation of Indian Industry
Confederation of Indian Industry The Mantosh Sondhi Centre
The Mantosh Sondhi Centre 23, Institutional Area,
23, Institutional Area, Lodi Road, New Delhi 110 003
Lodi Road, New Delhi 110 003 Tel: 91-11-24629994-7
Tel: 91-11-24629994-7 Email: amit.singh@cii.in
Email: gurpal.singh@cii.in

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for
a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms.
This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private
Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not
an exhaustive treatment of such subject(s) and accordingly is not intended to constitute professional
advice or services. The information is not intended to be relied upon as the sole basis for any decision
which may affect you or your business. Before making any decision or taking any action that might affect
your personal finances or business, you should consult a qualified professional advisor.
None of DTTIPL, Deloitte Touche Tohmatsu, its member firms, or its and their affiliates shall be responsible
for any loss whatsoever sustained by any person who relies on this material.
Member of
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Confederation of Indian Industry

Prospects for Global Defence

CII Indian Defence Industry Mission

1. Foreword from CII 4

2. Preface from Deloitte 5

4 Indian defence requirements 14

7 Benefits in Indian defence industry

10 A brief about CII 67

11 A brief about Deloitte 68

Prospects for Global Defence Export Industry in Indian Defence Market | 3

The Indian defence industry has evolved and has been

4 | CII Indian Defence Industry Mission EUROSATORY 2010

Prospects for Global Defence Export Industry in Indian Defence Market | 5

Following the Kargil conflict in 1999, India was

In this context, India has embarked on a major defence

The scale of the planned investments reflects both its

Its acquisition plans include a substantial procurement

6 | CII Indian Defence Industry Mission EUROSATORY 2010

Table 1 : Projected expenditure by each Service Division (USD million)

2010-11 2011-12 2012-13 2013-14 2014-15 Total 2011-2015

8 | CII Indian Defence Industry Mission EUROSATORY 2010

Prospects for Global Defence Export Industry in Indian Defence Market | 11

12 | CII Indian Defence Industry Mission EUROSATORY 2010

3.2.3 Key opportunities for foreign suppliers

Prospects for Global Defence Export Industry in Indian Defence Market | 13

4.1 Basis for requirements

Figure 1: GDP shared, GDP growth rate and Industrial production

Share of GDP GDP Growth rate of India Industrial production 2009-10

8 7.5% 6.7% 7.2% 10% 8.4% 8.2% 8.5% 8.6%

Figure 2: Export and Import

14 | CII Indian Defence Industry Mission EUROSATORY 2010

2 Tier 1 and Tier 2 cities together account for 44% of

Figure 4: Population (million) Vs age group (2001)

Tier 1 — 8 Major Cities Tier 3 — 33 Cities

Prospects for Global Defence Export Industry in Indian Defence Market | 15

Growth of Defence Public Sector Undertakings

Growth of IT/Engineering Companies: Indian

16 | CII Indian Defence Industry Mission EUROSATORY 2010

Figure 7: Indian GDP – 1980-2014 (%, INR)

(Rtd) (2010) Restructure

Prospects for Global Defence Export Industry in Indian Defence Market | 17

18 | CII Indian Defence Industry Mission EUROSATORY 2010

Table 4: Expenditure definitions

Prospects for Global Defence Export Industry in Indian Defence Market | 19

Total budgeted defence Trends in defence acquisition spending

20 | CII Indian Defence Industry Mission EUROSATORY 2010

Unspent funds as % of Budgeted Expenditure Unspent funds in USD

Prospects for Global Defence Export Industry in Indian Defence Market | 21

Expenditure by Division as % GDP Expenditure by Service Division

Table 5: Expenditure by Service division (in both % and USD terms)

Proportion of total capital expenditure (2003-2011) CAGR (2003-2011)

22 | CII Indian Defence Industry Mission EUROSATORY 2010

Unspent Funds as % of Budgeted Expentiture USD underspent by Service

Trends in indigenous versus imported acquisitions

Prospects for Global Defence Export Industry in Indian Defence Market | 23

24 | CII Indian Defence Industry Mission EUROSATORY 2010

Table 6: Imported vs indigenous production

Year Navy Army Air Force Total

Prospects for Global Defence Export Industry in Indian Defence Market | 25

4.2.1 Future defence spending

Table 7: Forecast expenditure on defence services

Year 2011 2012 2013 2014 2015

48 Manas Defence Yearbook

India has great market advantages because of 53 Ministry of Defence,