Modi’s Game Changing Plan For Defence Sector

Modi’s Game Changing Plan For Defence Sector

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Modi’s Game Changing Plan For Defence Sector

Want to buy a stake in an aircraft-carrier builder? How about a fighter-jet maker?

India is about to start an $11 billion sale of government assets, including holdings in the shipyard and factories that supply India’s military, offering investors a share of some of the region’s more profitable manufacturers that are benefiting from soaring defence spending.

India is the world’s largest arms importer and Prime Minister Narendra Modi wants to change that while at the same raising money to reduce the fiscal deficit. Among the biggest stakes to be sold are in Hindustan Aeronautics Ltd., or HAL, which is trying to build a domestic fighter, and Cochin Shipyard Ltd., currently building India’s first home-made aircraft carrier. The shipbuilder has seen profit almost double in the last five years, while earnings at most big global shipyards have slumped.

Modi has pledged to spend $250 billion by 2025 on weapons and military equipment for a nation that has territorial disputes with Pakistan and China. India makes about 70 percent of its defence purchases abroad and has topped the Stockholm International Peace Research Institute’s list of the largest defence importers for the last seven year

As India builds its status in the region, “it will find it even more essential that it becomes self-sufficient in designing and manufacturing high-tech weapon systems,” said Deepak Sinha, a consultant with the New Delhi-based Observer Research Foundation. Non-state investors can help make the arms-makers more efficient and focused, he said.

Economic growth in Asia in the past decade is spurring countries like India, China and Indonesia to upgrade their armed forces in the face of geopolitical tensions. That’s pushed Asia-Pacific to the forefront of the growth in defence spending. The region’s military outlay rose 5.4 percent to around $436 billion in 2015, compared with a 1.7 percent increase in Europe and a drop across Africa and the Americas, according to SIPRI, although spending, as a percentage of GDP, has been in line with economic growth in these countries.
ndia is also asking private equity funds to invest in profitable state-controlled companies such as helicopter maker Pawan Hans Ltd. and BEML Ltd., which makes military and mining vehicles and rail cars.

Modi’s administration has budgeted for a 35 percent increase in earnings from asset sales in the current year, taking advantage of a stock market that just had its best three months since 2014. Modi has pledged to shrink Asia’s widest budget deficit to 3.2 percent of GDP in the year ..

The timing seems good as the market has started making new highs,” said Deepak Mohoni, founder of market strategy firm Trendwatch India Pvt., who coined the term “Sensex” for the Mumbai stock exchange index. “Funds will pick them up.”

India has met or beaten its so-called annual disinvestment target only five times since 1998.

India has traditionally relied on Russian weapons, with Sukhoi and MiG fighters forming the backbone of its air strike capability. It has recently moved towards buying defence equipment from the U.S. HAL has been developing the Tejas home-made fighter jet for more than three decades, but it has yet to produce a version that plays a major role in the air force.

The aircraft carrier that Cochin Shipyard is building for the Indian Navy forms a “significant part” of the company’s current order book, according to regulatory filings. The nation’s only existing carrier in service is a former Soviet vessel that was decommissioned by the Russians in 1996 and refitted for India a decade later.

India opened its defence manufacturing to private companies 15 years ago, but a lack of infrastructure for niche military manufacturing and a government preference for imported products mean the sector effectively remains a monopoly of state-run firms. Modi raised the cap on foreign ownership of defence contractors to 49 percent, from 26 percent, after he took power in 2014 with special dispensation for full ownership if the deal would bring India advanced military technology.