Given the growing state of the Indian economy, India’s defence spending can be expected to swell correspondingly, thus providing market opportunities for indigenous as well as traditional global arms suppliers.

The global market for military aircraft is one that is unlikely to shrink—except for short, temporary periods of time—given the propensity human nature has for power projection. India has made a mark in the market by way of its Bangalore-based biennial Aero India show. However, it is yet to carve out for itself a place in the market as its indigenous manufacturing capability in the aviation regime remains unimpressive. Indeed, worldwide, the aerospace and defence market is dominated by four major players: EADS, Boeing, Lockheed Martin and Northrop Grumman. However, new emerging entities are gradually showing their strength especially as the world market for military aviation continues to grow; leading this demand are the US, China, India, UK, France, Russia, Italy, Germany, Japan and Saudi Arabia. India is amongst the world’s largest importers of defence hardware but its name does not feature even among the first 15 largest exporters of defence hardware. This skewed import versus export picture is remarkable, and especially so as India has an impressive technological base and a sizeable defence budget.

Given the growing state of the Indian economy, India’s defence spending can be expected to swell correspondingly, thus providing market opportunities for indigenous as well as traditional global arms suppliers. According to the Government of India’s Thirteenth Finance Commission Report 2010-15, India is expected to spend $80 billion ( Rs. 4,00,000 crore) over the next four to five years for the Indian armed forces. The more significant military aviation procurements currently in process (or under planning) are the medium multi-role combat airplanes (MMRCA), fifth-generation fighter aircraft, C-130 Hercules transport aircraft and air-toair refuelling planes. Approval is also likely to be provided for modernisation of airfield infrastructure, for which requests for proposals have been floated to global aerospace and defence (A&D) firms while further technology requirements have been described in the areas of unmanned air vehicles (UAVs), tactical missiles, radar-based electronics, warfare systems and munitions.

Learning from past experiences in procurement for the military, the Ministry of Defence has issued a new Defence Procurement Procedure (DPP) and a new Defence Production Policy. The new DPP includes procuring Indian goods for homeland security and civil aviation, including simulators and training, as part of offset programmes. This has widened the list of goods that can be procured from Indian industry as offset by overseas companies, which was otherwise becoming an unachievable task for these companies. Through the new production policy, the Indian Government aims to make the Indian defence sector self-reliant. This policy envisages external procurement, only where the local industry has no capability to design or manufacture in a given timeframe. Going forward, an Indian Government initiative to promote participation by the Indian private sector industries is inviting bids from Indian industry to participate in future military requirements under the “make” category. The increased emphasis on procuring from the Indian private sector may result in a higher number of merger and acquisition deals. Recently, some private companies, including Mahindra and Tata groups, have made acquisitions outside and in India. Maini Global Aerospace (MGA), well known as the maker of the country’s first ever electric passenger car Reva, has recently raised $10 million from an overseas private equity (PE) fund, signalling the growing interest of foreign investors in Indian A&D companies. MGA plans to use the funds to build an aerospace manufacturing factory. There are many such private players set to make a contribution to the military aviation market.

Para 12 of the Defence Production Policy reads: “In all cases of transfer of technology (ToT), the Department of Defence Production (DDP) along with Defence Research and Development Organisation (DRDO), Integrated Defence Staff and Services’ HQ will be involved in identification and evaluation of requisite technology, and subsequently would be responsible to ensure that appropriate absorption of technology takes place in the Indian industry. Thereafter, successive generations of the weapon systems/platforms will be developed in the country.” Transfer of technology has thus become an important “mantra” for defence procurement; there is a significant change from our earlier contentment with licence production with only production plans changing hands and there being no substantial ToT. While this objective is indeed laudable, it has the potential pitfall of actually keeping us away from leading edge technology. As aviation is perhaps the most technology intensive of all military fields, this could become a stumbling block for the Indian military aviation market, and especially for the capital market i.e. new aircraft or equipment acquisitions. The US, for one, is unlikely to part with technology, especially if it of the leading edge variety.

Moving on to upgrades, according to one estimate by Visiongain, a UK-based business information provider, the sales in the global military aircraft modernisation, upgrade and retrofit market totals up to around $12.43 billion ( Rs. 62,150 crore) for 2011; this figure includes government spending on airframe, power plant and avionics upgrades. The figure is impressive especially as intense economic pressures have troubled national defence budgets across the globe. Visiongain’s analysis demonstrates that the global military aircraft modernisation, upgrade and retrofit market; is a growing marketplace offering government contract opportunities that are likely to see a range of companies realising commercial success, from the major defence and security systems integrators to niche avionics specialists. Indian industry, with a strong technological background and performance, has the potential to exploit this section of the military aviation market. However, it will take some time to do so because private sector has had inadequate incentive and regulatory support to penetrate this area in the historical past, while the Hindustan Aeronautics Limited (HAL) has performed with characteristic public sector inefficiency.

Private equity players in India, facing intense competition to find the right deals, have shown rising interest in defence and aerospace sectors in recent years. Their increasing interest is fired by the expectation of possible expansion in defence budget, coupled with increased participation from the private sector. According to one estimate, India’s defence budget is likely to grow at a compound annual growth rate (CAGR) of 15 per cent over the period financial year (FY) 2012-22. It is slightly more than the estimated nominal GDP growth of 12.5 per cent. This is in pleasantly placed comparison with the figures for the past decade; over the period 2101-11, defence budgets grew at 10.3 per cent CAGR and the GDP by 12.8 per cent. Centrum Broking, an Indian fund mobilisation company, recently organised an investor conference on the Indian defence sector; more than 40 PE firms participated and their interest was evident across all the segments of the sector. According to Sandeep Nayak, CEO, Centrum Broking, “Defence is a non-interest ratesensitive sector and demand is assured for the next three-five years due to the required military spend.”