Impact Analysis: India’s defence capital expenditure is set to increase by over 80% by 2020; Offset clause and drive for indigenisation to provide immense opportunity for the country’s fast evolving defence sector

Impact: Positive

India, which has emerged as the world’s largest importer of defence equipment over the 2012-16 period has increased its global share to 13% from under 10% recorded in the year 2007 (SIPRI data). As India modernizes its third largest armed force in the world, it is planning to double its defence expenditure and increase capital expenditure by 80%. NITI Aayog, in its ‘Three Year Action Agenda’ has been targeting to increase the allocation for defence acquisition in order to expedite the process in an increasingly volatile geopolitical environment. India’s defence expenditure for FY18 stands at Rs. 2.6 lakh crore while capital expenditure is pegged at Rs. 0.86 lakh crore. As per the plan, by 2020, the defence expenditure will stand at Rs.5.2 lakh crore while capital expenditure will be pegged at Rs. 1.7 lakh crore. India is expected to spend at-least Rs. 33 lakh crore over the next ten yearsin order to build its armed forces for meeting any eventuality, with China’s annual military budget in the background already touching Rs 15 lakh crore.

Much of this funding will be funneled to Indian Government’s indigenization effort as the country depends on imports for over 60% of its equipment requirements. India’s nascent yet fast evolving defence sector will hugely benefit from the increased capital expenditure as Contractual Offset Obligations will help incubate the domestic players. This is apart from the buy Indian philosophy currently inculcated in defence procurement processes. What this means is that even though India will continue to import much of its defence requirements, foreign suppliers will be under an obligation to source 30% of the contract value from their Indian partners. The ploughing back of capital expenditure will provide not only much needed capital but aid transfer of technology as well. Indian companies are evolving well in the current environment of high growth as large players are already maintaining profit margins in double digits and industry best Debt to Equity Ratios. As defence expenditure increases, Indian defence industry is in a process of identifying ‘Strategic Partners’ among private Indian players, who will in turn forge partnerships with foreign suppliers and make develop highly classified technologies domestically. The vision is to develop India in to a self-reliant as well as defence exports hub in the near term.Major thrust of India’s capital expenditure plan will revolve around warships (including force multiplier platforms such as Aircraft Carriers), Avionics, Jet Engines, Aero frames, Armed Transport Vehicles, Cruise Missiles and Ammunition.

Government expenditure on defence equipment (Rs. Crore)

* Actual expenditure