Defence
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Defence as PDF for free.
More details
- Words: 4,055
- Pages: 12
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Mahesh Babaria [email protected]
Mittal Dharod [email protected]
www.ghallabhansali.com
Overview India has a land frontier of 15,200km, a coastline of 7,516.6 km and an exclusive economic zone of 2.2 million sq km, as well as island territories, vital offshore installations and airspace to defend. The armed forces, therefore, have to be kept prepared and well equipped to repel any external threat. India is also a major participant in international peacekeeping missions with the UN, sending its troops into conflict zones around the world. A nation’s military strength is determined by its economic might. Industry provides the military with the wherewithal to fight the nation’s wars. Since independence the policy relating to Strategic Defence Production has been evolving. For too long, India depended on foreign industries for its military hardware. The desire to achieve self-reliance has always been there. Constraints of technology and resources prevented the process from fructifying to the extent desired. The first phase, was characterized by the State led industrialization. Since the era of liberalization, which began in 1991, the role of private sector and also that of competition, both domestic and international is playing a much greater role in the national economy. Naturally, this also meant changes in policy for Defence production. Production of defence equipment has been under the purview of Government right from its inception. The Industrial Policy of the country had kept defence production in the public sector since First Industrial Policy outlined in the Industry Policy Resolution of 1948. The Industries (Development & Regulation) Act, 1951 gave statutory base to the Industrial Policy. Under this policy, the Defence Industry, which required heavy investments, strong R&D backing and on which there could be total reliance because of its criticality, remained under Government Control at all times. The control over defence industry was exercised under the Industries (Development & Regulation) Act, 1951, which made licensing compulsory. As a consequence of the then industrial policy, a large infrastructure for Defence production consisting of 39 Ordnance Factories, 8 Defence PSUs and 50 Research & Development laboratories was created in the country. the Private Sector has been playing significant role in the Defence industry sector as sub contractors and ancillary industry. The private sector mainly has been involved in supply of raw materials, semi-finished products, parts and components to Defence PSUs and Ordnance Factories to a great extent and also to Base Workshops of Army and Base Repair Depots of Air Force and the Dockyards of the Navy. Defence PSUs and Ordnance Factories are outsourcing their requirements from private sector (mainly SMEs) in the range of 20-25%. Out of this outsourcing, about 25% requirement is met through small-scale sector.
Page 1
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Several hi-tech equipments have also been successfully produced by the private sector. In the quest for self-reliance in the crucial sector of defence, the Government has been continuing its efforts to indigenize defence equipment wherever technologically feasible and economically viable. It has been a part of indigenization efforts to locate and develop broad-based indigenous supply source – both in the public sector and in the civil trade for many complicated and intricate equipments. The economic liberalization in 1991 resulted in the high degree of deregulation and allowed the private industry to progress more rapidly. With the initial difficulties encountered by the Indian Industry today one has witnessed positive impact of this liberalization. There has been tremendous growth in the private sector and today many Indian companies are global players. After considering the capital intensive nature of defence industry sector as also the need to infuse foreign technology and additional capital including FDI, Govt. decided in May, 2001 to open Defence industry for private sector participation up to 100% with FDI permissible up to 26% - both subject to licensing. Now with this policy change all defence related items have been removed from Reserved Category and transferred to the licensed category, as a result of which private sector can manufacture all types of defence equipment after getting a licence. Consequent to the Government’s announcement about the policy change, Department of Industrial Policy & Promotion (DIPP) in consultation with Ministry of Defence, issued detailed guidelines regarding the modalities for consideration of applications for grant of Industrial Licence. After the announcement of policy changes, there has been a paradigm shift in the role of private sector in the field of indigenisation, i.e., from the role of supplier of raw materials, components, sub-systems, they have now become partners in the manufacture of complete advanced equipment/system. The basic objective of allowing private sector participation is to harness available expertise in the private sector towards the total defence efforts and search for self-reliance. In-built advantages of the private sector are its reservoir of management, scientific and technological skills coupled with its ability to raise resources. The involvement of private sector with its worldclass expertise and high technology would not only augment India’s indigenous defence production capability but also lead to creation of employment and infrastructure in the country, giving a strong impetus to the economy. It must be acknowledged that the policy change of May 2001 for allowing private industry to produce any defence item under licence was a logical outcome of liberalization initiated in India in 1991. The private sector industry in India is now just beginning to become significant partner in production and development of Defence items. www.ghallabhansali.com
Page 2
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd DEFENCE INFRASTRUCTURE Ordnance factories India’s 39 ordnance factories (OFs) are government units producing armaments under five categories: • Ammunition and explosives; • Weapons; • Vehicles and equipment; • Armored vehicles; and • Ordnance equipment (other military supplies, including general stores). They were built to meet the growing needs of India’s armed forces over the past 60 years. Defence public sector undertakings The eight defence public sector undertakings (PSUs) are public-sector corporations managed by the Indian government. They are: • Bharat Dynamics Ltd; • Bharat Earth Movers Ltd; • Bharat Electronics Ltd; • Hindustan Aeronautics Ltd; • Garden Reach Shipbuilders and Engineers Ltd; • Goa Shipyard Ltd; • Mazagon Dock Ltd; and • Mishra Dhatu Nigam Ltd. The defence PSUs produce a range of defence equipment. They also provide overhaul and maintenance facilities. Defence research and development India also has a defence research and development (R&D)capability: the Defence Research and Development Organisation (DRDO). The DRDO draws on the work of the 50 R&D laboratories/establishments. Defence spending India is among the world’s top ten countries in terms of defence expenditure and it is the third-largest importer of defence hardware. Indian defence procurements include strategic defence capabilities on land, sea and air.
www.ghallabhansali.com
Page 3
May, 12 2009
DEFENCE SECTOR Ghalla Bhansali Stock Brokers Pvt Ltd World’s top ten countries in terms of defence expenditure Rank
Country
Military expenditures (USD)
1
United States
651,163,000,000
2
People's Republic of China
70,242,645,000
3
France
61,571,330,000
4
United Kingdom
56,889,000,000
5
Japan
48,860,000,000
6
Germany
45,930,000,000
7
Italy
40,050,000,000
8
Russian Federation
39,600,000,000
9
India
32,700,000,000
10
Saudi Arabia
31,050,000,000
List of countries by size of armed forces Rank by number of active troops
Country
Active troops (thousands)
Tanks
NS
S
Air
Nu
1.
People's Republic of China
2,250
7,580
8
55
1,700
200
2.
United States of America
1,452
7,821
71
14
2,604
9,200
3.
India
1,325
5,000
0
16
706
45-100
4.
Russian Federation
1,245
22,800
40
20
1,600
16,800
5.
Democratic People's Republic of Korea
1,106
3,500
78
400
0
6.
Republic of Korea
687
2,300
0
11
388
0
7.
Pakistan
650
2,451
0
8
530
55-90
8.
Turkey
617
4,205
14
900+
0
9.
Iran
545
1,800
3
180
0
10.
Vietnam
484
1,829
2
459
0
*NS – Nuclear Powered Submarine S - Submarine
www.ghallabhansali.com
Air – Fighter Aircraft Nu – Nuclear Weapons Page 4
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd India’s Defence Budget 2009-10 In its interim budget for 2009-10 the Union Government has allocated Rs. 1,41,703 crores for the country’ Defence Services that include three Armed Forces (i.e., the Army, the Navy and the Air Force), and other Departments, primarily Defence Research and Development Organisation (DRDO) and Defence Ordnance Factories. This is apart from Rs. 24,960 crores which have been earmarked to defray civil expenditures of Ministry of Defence (MoD) and its affiliated organisations, including, the Coast Guard, and for defence pension (Rs. 21,790 crores). In other words, the total resource available for the MoD and its various establishments is Rs. 1,66,663 crores. By convention, only budgetary provisions for the Defence Services constitute India’s defence budget. Though the allocations made in the interim budget are not binding for the next government to follow, it is unlikely that the new government will make any major changes in the allocation, given the mandatory increases in certain components of the defence budget, the worsening security situation in the country’s neighbourhood and the gap in the country’s defence preparedness. This commentary examines the various components of the defence budget, analyses the impact of the budget on the modernisation requirements of the Armed Forces, and the problem of under-utilisation of resources under the capital head. Vital Components The defence budget for 2009-10 has increased by 34.19 per cent over the previous year’s budget estimate (BE) of Rs. 1,05,600 crores. However, BE of 2008-09 has been scaled upward by 8.52 per cent (Rs. 9,000 crores) to Rs. 1,14,600 crores at the revised estimate (RE) stage. This means, this year’s allocations has increased by 23.65 per cent over the RE of 2008-09. Of the total defence budget, revenue expenditure, which caters to the ‘running’ or ‘operating’ expenditure of the three Services and other departments, is pegged at Rs. 86,879 crores. Capital expenditure, which mostly caters for modernisation requirements, accounts for Rs. 54,824 crores. Of these two, revenue expenditure has been increased - in comparison to its last year’s growth of less than 7 per cent - at a much faster rate of 50.85 per cent (Rs. 29, 286 crores). The growth of capital expenditure has however declined, over the previous year’s growth, to 14.20 per cent (Rs. 6,817 crores). The sharp rise in revenue expenditure has taken its share in the defence budget to 61.31 per cent, from 54.54 per cent a year before. In other words, the share of capital expenditure has gone down by nearly 7 percentage points in these two years.
www.ghallabhansali.com
Page 5
May, 12 2009
DEFENCE SECTOR Ghalla Bhansali Stock Brokers Pvt Ltd Key Statistics of Defence Budgets, 2008-09 and 2009-10 2008-09
2009-10
Defence Budget (Rs. in crores)
1,05,600
1,41,703
Growth of Defence Budget (%)
10.00
34.19
57,593
86,879
54.54
61.31
6.50
50.85
48,007
54,824
45.46
38.69
14.51
14.20
Revenue Expenditure (Rs in crores) Share of Revenue Expenditure in Defence Budget (%) Growth of Revenue Expenditure (%) Capital Expenditure (Rs. in crores) Share of Capital Expenditure in Defence Budget (%) Growth of Capital Expenditure (%)
The faster growth of revenue expenditure is primarily due to the hefty increase in pay and allowances flowing from the implementation of Sixth Central Pay Commission (CPC). To put the figure in perspective, total budgeted pay and allowances debited from the Services’ budgets has more than doubled from 21,891.67 crores in 2008-09 to Rs. 44,500.69 crores in 200910.
Impact on Modernisation The Indian Armed Forces are on a modernisation drive. The shopping list of the Services includes virtually all types of weapons and systems, including big-guns, fighter aircrafts, armoured vehicles, radars, missiles, naval vessels, among others. The most pertinent question is whether the latest budget makes necessary provisions to meet these requirements. Given the fact that the modernisation programme of the armed forces largely depends on capital acquisitions, it boils down to how capital budget is allocated. www.ghallabhansali.com
Page 6
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Assuming that nearly 80 per cent of the capital budget is meant for capital acquisitions, the latter consisting of 60 per cent of committed liabilities and 40 per cent of new schemes, the main sub-divisions of the capital budget are as below: • Total Capital Budget: Rs. 54,824 crores • Capital Acquisition: Rs. 43,859 crores • Committed Liabilities: Rs.26,316 crores • New Schemes: Rs.17,544 crores From the above, it is evident that a substantial amount will be available for capital procurement. Moreover, over Rs. 17,500 crores (nearly 30 per cent of the capital budget) will be available for new weapons and systems that the Armed Forces have planned for induction. While this augurs well from the modernisation point of view, much depends on how much and how the resources are spent in the coming fiscal. Higher Allocation and Under-utilisation of Resources The growth of over 34 per cent in India’s defence budget is one of the highest in the country’s history of defence spending (the last time the defence budget was increased by over 30 per cent was in 1987-88 when allocation was increased by 43.4 per cent to Rs. 12,512 cores). In the recent past, the defence budget, despite registering modest growth rates, has been subjected to criticism in view of its declining shares in total central government expenditure and gross domestic product. In fact, the defence budget had decreased to below two per cent of GDP in the last fiscal year. The new budget, defying all criticism, has made a substantial increase in allocations. From the perspective of resources allocation, the defence budget for 2009-10 represents 14.87 per cent of total central government expenditure, and 2.35 per cent of gross domestic product (GDP). The corresponding figures for 2008-09 are 14.06 per cent and 1.95 per cent respectively.
www.ghallabhansali.com
Page 7
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd However, accompanying the growth in defence budget is the problem of utilisation of resources under the capital head. As the latest budget reveals, the budgeted capital expenditure for 2008-09 has decreased by Rs. 7,007 crores (15 per cent) from Rs. 48, 007 crores to Rs. 41,000 crores at the RE stage. Its implication is also seen in the wide variation in the growth of the capital budget. If the defence establishments had fully spent the entire 2008-09 capital budget, the 2009-10 capital expenditure would have seen only 14.2 per cent growth instead of 33.72 per cent rise (Rs. 13,824 crores) that has been registered over the previous year’s RE.
Government Control Production of defence equipment has always been under the purview of the government. India has kept defence production in the public sector since its first industrial policy, outlined in the Industry Policy Resolution of 1948. The Industries (Development & Regulation) Act 1951 gave statutory base to that policy. As a consequence, a large infrastructure for defence production was created in India. Limited Private Sector Involvement The private sector has played a significant role in the defence industry as subcontractors and ancillary industry, although until recently its participation was largely restricted to the supply of raw materials, semi-finished products, parts and components to: • defence PSUs; • OFs; • the base workshops of the army; • the base repair depots of the airforce; and • the dockyards of the navy.
www.ghallabhansali.com
Page 8
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Opening Up The Defence Sector In its quest for self-reliance in the crucial sector of defence, the Indian government has been continuing its efforts to indigenise the production of defence equipment wherever technologically feasible and economically viable. It originally planned to source 70% of its defence requirements from indigenous suppliers by 2010. In May 2001, the Indian government decided to open the defence industry for private sector participation up to 100%om of equity, with foreign direct investment (FDI) permissible up to 26%. Both were subject to licensing restrictions. Following the policy change, all defencerelated items have been removed from government’s reserved category and transferred to the licensed category. As a result, the private sector can now manufacture all types of defence equipment after obtaining a government licence. India Offset Policy Attract Global Attention The overwhelming presence of the foreign stamp on the final product is not changing—not just yet. However, the ‘Made In India’ stamp on what goes into the final product is set to see a manifold increase. The trigger for this change is the fleshing out, in August, of a clause introduced in the Defence Procurement Policy 2002: the ‘offset clause’. Under this clause, all companies that get a defence contract of above Rs 300 crore from the Indian government will have to bring back 30% of the contract value into the country, either by way of purchases or as investments in the sector. China, which is tipped to see the biggest increase in defence spending in the next 10 years, has a 100% offset clause. India has given the offset clause a new twist—unlike most governments, it has specified the plough back can only be in the defence sector. The ramifications for India Inc are significant, bigger than anything that has happened so far. In the short- to medium-term, foreign defence manufacturers and their vendors will start or step up their purchases from Indian vendors to meet the 30% requirement. This will build an ecosystem. If Indian companies are able to deliver good quality at low cost, foreign defence manufacturers could set up facilities in the country and even Indian companies can think of making top-of-the-line defence equipment.The opportunity unfolding for Indian companies is huge. Between now and 2012, India needs to spend $100 billion. At 30% offset, that’s a plough back of $30 billion (Rs 1,50,000 crore) into the Indian defence industry.
www.ghallabhansali.com
Page 9
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Recent News • MKU Pvt Ltd., a manufacturer and exporter of armored solutions in Asia and one of the biggest suppliers to the Indian forces, has bagged the prestigious contract of armoring the high speed patrol boats from Goa Shipyard and Garden Reach Shipyard and Builders for Ministry of Home Affairs, India with an fleet of 186 boats worth US $ 35 m. • Mahindra Defence Systems (MDS), one of India’s leading providers of special light military vehicles, inaugurated the Mahindra Special Military Vehicles (MSMV) facility at Prithla in Faridabad. Spread across six acres, this modern plant has facilities for specific military manufacturing applications. Aside from manufacturing, the plant also has an advanced facility for R&D, product development, design and prototyping of special vehicles to meet specific customer requirements. • Larsen & Toubro announced the formation of a JV company with EADS Defence & Security to develop and manufacture defence electronics products including radars, avionics, electronic warfare in India to cater to domestic and overseas markets. The venture, which is awaiting clearances from the Government, would target to clock Rs 2,000-2,500 cr revenue in 5-7 years. The JV would be based at Talegaon in Pune, where the engineering major has an existing facility, and will invest Rs 100 crore to start with which would go up as per the requirements. Conclusion India is forging a reputation as a manufacturing hub for world corporations wanting to exploit the sector’s proven skills in product design, reconfiguration and customisation with creativity and assured quality. With its defence sector now more accessible for foreign investment, India is poised to become a key outsourcing hub for global defence majors. The Indian government is fully committed to the development of a vibrant and proactive defence industry. Its objective is to ensure that the resources, capabilities and infrastructure, including intellectual capital, available both in the public and private sector are treated as national assets and harnessed to the fullest extent. For a foreign company, the benefits are twofold. On the one hand, equity investment in an Indian defence company will appreciate rapidly, while on the other, the Indian company can act as a manufacturing base to supply high-quality components in a cost-effective manner. A strong and healthy partnership between the public and private sector will be critical in delivering the defence capability the country needs and in sustaining a powerful domestic industrial base for the future.
www.ghallabhansali.com
Page 10
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Company Prospects
Bharat Electronics Ltd.
L&T
Astra Microwave Products Ltd.
NELCO
BEML
www.ghallabhansali.com
Page 11
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Disclaimer: This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited(Ghalla Bhansali ) . This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such.Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansali reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Information Source: Wikipedia IDSA CII Defence Business Outlook
www.ghallabhansali.com
Page 12
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Mahesh Babaria [email protected]
Mittal Dharod [email protected]
www.ghallabhansali.com
Overview India has a land frontier of 15,200km, a coastline of 7,516.6 km and an exclusive economic zone of 2.2 million sq km, as well as island territories, vital offshore installations and airspace to defend. The armed forces, therefore, have to be kept prepared and well equipped to repel any external threat. India is also a major participant in international peacekeeping missions with the UN, sending its troops into conflict zones around the world. A nation’s military strength is determined by its economic might. Industry provides the military with the wherewithal to fight the nation’s wars. Since independence the policy relating to Strategic Defence Production has been evolving. For too long, India depended on foreign industries for its military hardware. The desire to achieve self-reliance has always been there. Constraints of technology and resources prevented the process from fructifying to the extent desired. The first phase, was characterized by the State led industrialization. Since the era of liberalization, which began in 1991, the role of private sector and also that of competition, both domestic and international is playing a much greater role in the national economy. Naturally, this also meant changes in policy for Defence production. Production of defence equipment has been under the purview of Government right from its inception. The Industrial Policy of the country had kept defence production in the public sector since First Industrial Policy outlined in the Industry Policy Resolution of 1948. The Industries (Development & Regulation) Act, 1951 gave statutory base to the Industrial Policy. Under this policy, the Defence Industry, which required heavy investments, strong R&D backing and on which there could be total reliance because of its criticality, remained under Government Control at all times. The control over defence industry was exercised under the Industries (Development & Regulation) Act, 1951, which made licensing compulsory. As a consequence of the then industrial policy, a large infrastructure for Defence production consisting of 39 Ordnance Factories, 8 Defence PSUs and 50 Research & Development laboratories was created in the country. the Private Sector has been playing significant role in the Defence industry sector as sub contractors and ancillary industry. The private sector mainly has been involved in supply of raw materials, semi-finished products, parts and components to Defence PSUs and Ordnance Factories to a great extent and also to Base Workshops of Army and Base Repair Depots of Air Force and the Dockyards of the Navy. Defence PSUs and Ordnance Factories are outsourcing their requirements from private sector (mainly SMEs) in the range of 20-25%. Out of this outsourcing, about 25% requirement is met through small-scale sector.
Page 1
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Several hi-tech equipments have also been successfully produced by the private sector. In the quest for self-reliance in the crucial sector of defence, the Government has been continuing its efforts to indigenize defence equipment wherever technologically feasible and economically viable. It has been a part of indigenization efforts to locate and develop broad-based indigenous supply source – both in the public sector and in the civil trade for many complicated and intricate equipments. The economic liberalization in 1991 resulted in the high degree of deregulation and allowed the private industry to progress more rapidly. With the initial difficulties encountered by the Indian Industry today one has witnessed positive impact of this liberalization. There has been tremendous growth in the private sector and today many Indian companies are global players. After considering the capital intensive nature of defence industry sector as also the need to infuse foreign technology and additional capital including FDI, Govt. decided in May, 2001 to open Defence industry for private sector participation up to 100% with FDI permissible up to 26% - both subject to licensing. Now with this policy change all defence related items have been removed from Reserved Category and transferred to the licensed category, as a result of which private sector can manufacture all types of defence equipment after getting a licence. Consequent to the Government’s announcement about the policy change, Department of Industrial Policy & Promotion (DIPP) in consultation with Ministry of Defence, issued detailed guidelines regarding the modalities for consideration of applications for grant of Industrial Licence. After the announcement of policy changes, there has been a paradigm shift in the role of private sector in the field of indigenisation, i.e., from the role of supplier of raw materials, components, sub-systems, they have now become partners in the manufacture of complete advanced equipment/system. The basic objective of allowing private sector participation is to harness available expertise in the private sector towards the total defence efforts and search for self-reliance. In-built advantages of the private sector are its reservoir of management, scientific and technological skills coupled with its ability to raise resources. The involvement of private sector with its worldclass expertise and high technology would not only augment India’s indigenous defence production capability but also lead to creation of employment and infrastructure in the country, giving a strong impetus to the economy. It must be acknowledged that the policy change of May 2001 for allowing private industry to produce any defence item under licence was a logical outcome of liberalization initiated in India in 1991. The private sector industry in India is now just beginning to become significant partner in production and development of Defence items. www.ghallabhansali.com
Page 2
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd DEFENCE INFRASTRUCTURE Ordnance factories India’s 39 ordnance factories (OFs) are government units producing armaments under five categories: • Ammunition and explosives; • Weapons; • Vehicles and equipment; • Armored vehicles; and • Ordnance equipment (other military supplies, including general stores). They were built to meet the growing needs of India’s armed forces over the past 60 years. Defence public sector undertakings The eight defence public sector undertakings (PSUs) are public-sector corporations managed by the Indian government. They are: • Bharat Dynamics Ltd; • Bharat Earth Movers Ltd; • Bharat Electronics Ltd; • Hindustan Aeronautics Ltd; • Garden Reach Shipbuilders and Engineers Ltd; • Goa Shipyard Ltd; • Mazagon Dock Ltd; and • Mishra Dhatu Nigam Ltd. The defence PSUs produce a range of defence equipment. They also provide overhaul and maintenance facilities. Defence research and development India also has a defence research and development (R&D)capability: the Defence Research and Development Organisation (DRDO). The DRDO draws on the work of the 50 R&D laboratories/establishments. Defence spending India is among the world’s top ten countries in terms of defence expenditure and it is the third-largest importer of defence hardware. Indian defence procurements include strategic defence capabilities on land, sea and air.
www.ghallabhansali.com
Page 3
May, 12 2009
DEFENCE SECTOR Ghalla Bhansali Stock Brokers Pvt Ltd World’s top ten countries in terms of defence expenditure Rank
Country
Military expenditures (USD)
1
United States
651,163,000,000
2
People's Republic of China
70,242,645,000
3
France
61,571,330,000
4
United Kingdom
56,889,000,000
5
Japan
48,860,000,000
6
Germany
45,930,000,000
7
Italy
40,050,000,000
8
Russian Federation
39,600,000,000
9
India
32,700,000,000
10
Saudi Arabia
31,050,000,000
List of countries by size of armed forces Rank by number of active troops
Country
Active troops (thousands)
Tanks
NS
S
Air
Nu
1.
People's Republic of China
2,250
7,580
8
55
1,700
200
2.
United States of America
1,452
7,821
71
14
2,604
9,200
3.
India
1,325
5,000
0
16
706
45-100
4.
Russian Federation
1,245
22,800
40
20
1,600
16,800
5.
Democratic People's Republic of Korea
1,106
3,500
78
400
0
6.
Republic of Korea
687
2,300
0
11
388
0
7.
Pakistan
650
2,451
0
8
530
55-90
8.
Turkey
617
4,205
14
900+
0
9.
Iran
545
1,800
3
180
0
10.
Vietnam
484
1,829
2
459
0
*NS – Nuclear Powered Submarine S - Submarine
www.ghallabhansali.com
Air – Fighter Aircraft Nu – Nuclear Weapons Page 4
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd India’s Defence Budget 2009-10 In its interim budget for 2009-10 the Union Government has allocated Rs. 1,41,703 crores for the country’ Defence Services that include three Armed Forces (i.e., the Army, the Navy and the Air Force), and other Departments, primarily Defence Research and Development Organisation (DRDO) and Defence Ordnance Factories. This is apart from Rs. 24,960 crores which have been earmarked to defray civil expenditures of Ministry of Defence (MoD) and its affiliated organisations, including, the Coast Guard, and for defence pension (Rs. 21,790 crores). In other words, the total resource available for the MoD and its various establishments is Rs. 1,66,663 crores. By convention, only budgetary provisions for the Defence Services constitute India’s defence budget. Though the allocations made in the interim budget are not binding for the next government to follow, it is unlikely that the new government will make any major changes in the allocation, given the mandatory increases in certain components of the defence budget, the worsening security situation in the country’s neighbourhood and the gap in the country’s defence preparedness. This commentary examines the various components of the defence budget, analyses the impact of the budget on the modernisation requirements of the Armed Forces, and the problem of under-utilisation of resources under the capital head. Vital Components The defence budget for 2009-10 has increased by 34.19 per cent over the previous year’s budget estimate (BE) of Rs. 1,05,600 crores. However, BE of 2008-09 has been scaled upward by 8.52 per cent (Rs. 9,000 crores) to Rs. 1,14,600 crores at the revised estimate (RE) stage. This means, this year’s allocations has increased by 23.65 per cent over the RE of 2008-09. Of the total defence budget, revenue expenditure, which caters to the ‘running’ or ‘operating’ expenditure of the three Services and other departments, is pegged at Rs. 86,879 crores. Capital expenditure, which mostly caters for modernisation requirements, accounts for Rs. 54,824 crores. Of these two, revenue expenditure has been increased - in comparison to its last year’s growth of less than 7 per cent - at a much faster rate of 50.85 per cent (Rs. 29, 286 crores). The growth of capital expenditure has however declined, over the previous year’s growth, to 14.20 per cent (Rs. 6,817 crores). The sharp rise in revenue expenditure has taken its share in the defence budget to 61.31 per cent, from 54.54 per cent a year before. In other words, the share of capital expenditure has gone down by nearly 7 percentage points in these two years.
www.ghallabhansali.com
Page 5
May, 12 2009
DEFENCE SECTOR Ghalla Bhansali Stock Brokers Pvt Ltd Key Statistics of Defence Budgets, 2008-09 and 2009-10 2008-09
2009-10
Defence Budget (Rs. in crores)
1,05,600
1,41,703
Growth of Defence Budget (%)
10.00
34.19
57,593
86,879
54.54
61.31
6.50
50.85
48,007
54,824
45.46
38.69
14.51
14.20
Revenue Expenditure (Rs in crores) Share of Revenue Expenditure in Defence Budget (%) Growth of Revenue Expenditure (%) Capital Expenditure (Rs. in crores) Share of Capital Expenditure in Defence Budget (%) Growth of Capital Expenditure (%)
The faster growth of revenue expenditure is primarily due to the hefty increase in pay and allowances flowing from the implementation of Sixth Central Pay Commission (CPC). To put the figure in perspective, total budgeted pay and allowances debited from the Services’ budgets has more than doubled from 21,891.67 crores in 2008-09 to Rs. 44,500.69 crores in 200910.
Impact on Modernisation The Indian Armed Forces are on a modernisation drive. The shopping list of the Services includes virtually all types of weapons and systems, including big-guns, fighter aircrafts, armoured vehicles, radars, missiles, naval vessels, among others. The most pertinent question is whether the latest budget makes necessary provisions to meet these requirements. Given the fact that the modernisation programme of the armed forces largely depends on capital acquisitions, it boils down to how capital budget is allocated. www.ghallabhansali.com
Page 6
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Assuming that nearly 80 per cent of the capital budget is meant for capital acquisitions, the latter consisting of 60 per cent of committed liabilities and 40 per cent of new schemes, the main sub-divisions of the capital budget are as below: • Total Capital Budget: Rs. 54,824 crores • Capital Acquisition: Rs. 43,859 crores • Committed Liabilities: Rs.26,316 crores • New Schemes: Rs.17,544 crores From the above, it is evident that a substantial amount will be available for capital procurement. Moreover, over Rs. 17,500 crores (nearly 30 per cent of the capital budget) will be available for new weapons and systems that the Armed Forces have planned for induction. While this augurs well from the modernisation point of view, much depends on how much and how the resources are spent in the coming fiscal. Higher Allocation and Under-utilisation of Resources The growth of over 34 per cent in India’s defence budget is one of the highest in the country’s history of defence spending (the last time the defence budget was increased by over 30 per cent was in 1987-88 when allocation was increased by 43.4 per cent to Rs. 12,512 cores). In the recent past, the defence budget, despite registering modest growth rates, has been subjected to criticism in view of its declining shares in total central government expenditure and gross domestic product. In fact, the defence budget had decreased to below two per cent of GDP in the last fiscal year. The new budget, defying all criticism, has made a substantial increase in allocations. From the perspective of resources allocation, the defence budget for 2009-10 represents 14.87 per cent of total central government expenditure, and 2.35 per cent of gross domestic product (GDP). The corresponding figures for 2008-09 are 14.06 per cent and 1.95 per cent respectively.
www.ghallabhansali.com
Page 7
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd However, accompanying the growth in defence budget is the problem of utilisation of resources under the capital head. As the latest budget reveals, the budgeted capital expenditure for 2008-09 has decreased by Rs. 7,007 crores (15 per cent) from Rs. 48, 007 crores to Rs. 41,000 crores at the RE stage. Its implication is also seen in the wide variation in the growth of the capital budget. If the defence establishments had fully spent the entire 2008-09 capital budget, the 2009-10 capital expenditure would have seen only 14.2 per cent growth instead of 33.72 per cent rise (Rs. 13,824 crores) that has been registered over the previous year’s RE.
Government Control Production of defence equipment has always been under the purview of the government. India has kept defence production in the public sector since its first industrial policy, outlined in the Industry Policy Resolution of 1948. The Industries (Development & Regulation) Act 1951 gave statutory base to that policy. As a consequence, a large infrastructure for defence production was created in India. Limited Private Sector Involvement The private sector has played a significant role in the defence industry as subcontractors and ancillary industry, although until recently its participation was largely restricted to the supply of raw materials, semi-finished products, parts and components to: • defence PSUs; • OFs; • the base workshops of the army; • the base repair depots of the airforce; and • the dockyards of the navy.
www.ghallabhansali.com
Page 8
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Opening Up The Defence Sector In its quest for self-reliance in the crucial sector of defence, the Indian government has been continuing its efforts to indigenise the production of defence equipment wherever technologically feasible and economically viable. It originally planned to source 70% of its defence requirements from indigenous suppliers by 2010. In May 2001, the Indian government decided to open the defence industry for private sector participation up to 100%om of equity, with foreign direct investment (FDI) permissible up to 26%. Both were subject to licensing restrictions. Following the policy change, all defencerelated items have been removed from government’s reserved category and transferred to the licensed category. As a result, the private sector can now manufacture all types of defence equipment after obtaining a government licence. India Offset Policy Attract Global Attention The overwhelming presence of the foreign stamp on the final product is not changing—not just yet. However, the ‘Made In India’ stamp on what goes into the final product is set to see a manifold increase. The trigger for this change is the fleshing out, in August, of a clause introduced in the Defence Procurement Policy 2002: the ‘offset clause’. Under this clause, all companies that get a defence contract of above Rs 300 crore from the Indian government will have to bring back 30% of the contract value into the country, either by way of purchases or as investments in the sector. China, which is tipped to see the biggest increase in defence spending in the next 10 years, has a 100% offset clause. India has given the offset clause a new twist—unlike most governments, it has specified the plough back can only be in the defence sector. The ramifications for India Inc are significant, bigger than anything that has happened so far. In the short- to medium-term, foreign defence manufacturers and their vendors will start or step up their purchases from Indian vendors to meet the 30% requirement. This will build an ecosystem. If Indian companies are able to deliver good quality at low cost, foreign defence manufacturers could set up facilities in the country and even Indian companies can think of making top-of-the-line defence equipment.The opportunity unfolding for Indian companies is huge. Between now and 2012, India needs to spend $100 billion. At 30% offset, that’s a plough back of $30 billion (Rs 1,50,000 crore) into the Indian defence industry.
www.ghallabhansali.com
Page 9
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Recent News • MKU Pvt Ltd., a manufacturer and exporter of armored solutions in Asia and one of the biggest suppliers to the Indian forces, has bagged the prestigious contract of armoring the high speed patrol boats from Goa Shipyard and Garden Reach Shipyard and Builders for Ministry of Home Affairs, India with an fleet of 186 boats worth US $ 35 m. • Mahindra Defence Systems (MDS), one of India’s leading providers of special light military vehicles, inaugurated the Mahindra Special Military Vehicles (MSMV) facility at Prithla in Faridabad. Spread across six acres, this modern plant has facilities for specific military manufacturing applications. Aside from manufacturing, the plant also has an advanced facility for R&D, product development, design and prototyping of special vehicles to meet specific customer requirements. • Larsen & Toubro announced the formation of a JV company with EADS Defence & Security to develop and manufacture defence electronics products including radars, avionics, electronic warfare in India to cater to domestic and overseas markets. The venture, which is awaiting clearances from the Government, would target to clock Rs 2,000-2,500 cr revenue in 5-7 years. The JV would be based at Talegaon in Pune, where the engineering major has an existing facility, and will invest Rs 100 crore to start with which would go up as per the requirements. Conclusion India is forging a reputation as a manufacturing hub for world corporations wanting to exploit the sector’s proven skills in product design, reconfiguration and customisation with creativity and assured quality. With its defence sector now more accessible for foreign investment, India is poised to become a key outsourcing hub for global defence majors. The Indian government is fully committed to the development of a vibrant and proactive defence industry. Its objective is to ensure that the resources, capabilities and infrastructure, including intellectual capital, available both in the public and private sector are treated as national assets and harnessed to the fullest extent. For a foreign company, the benefits are twofold. On the one hand, equity investment in an Indian defence company will appreciate rapidly, while on the other, the Indian company can act as a manufacturing base to supply high-quality components in a cost-effective manner. A strong and healthy partnership between the public and private sector will be critical in delivering the defence capability the country needs and in sustaining a powerful domestic industrial base for the future.
www.ghallabhansali.com
Page 10
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Company Prospects
Bharat Electronics Ltd.
L&T
Astra Microwave Products Ltd.
NELCO
BEML
www.ghallabhansali.com
Page 11
DEFENCE SECTOR
May, 12 2009
Ghalla Bhansali Stock Brokers Pvt Ltd Disclaimer: This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited(Ghalla Bhansali ) . This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such.Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansali reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Information Source: Wikipedia IDSA CII Defence Business Outlook
www.ghallabhansali.com
Page 12
Related Documents
Defence
May 2020 13
Civil Defence
June 2020 10
Thesis Defence
April 2020 11
Gis Defence
June 2020 13
The Defence Review1
October 2019 4