Guns and Growth: India's Transition to an Export Powerhouse in the Defence Sector

The Russia-Ukraine war saw Western countries scramble to produce weapons to supply to Ukraine. Russia, on the other hand, was unable to procure military supplies from other countries. This underlined the need for self-reliance in defence systems.

For India, which has long had the distinction of being the largest global arms importer, the narrative of arms exports is a paradigm shift.

In less than a decade, India not only indigenised the manufacturing of a large number of defence items but also turned into an arms exporter.

A striking feature of this success story is that defence public sector units (DPSUs) and private-sector companies have both played a great role in this story.

The Skyrocketing Numbers

India's defence exports have touched a record Rs 210.8 billion (bn) (approximately US$ 2.6 bn) in the financial year 2023-24.

This is a growth of 32.5% over the last financial year. If the last decade is compared with the previous one, the growth picture gets more dramatic. Defence exports have grown 21 times from Rs 43.1 bn from 2004-05 to 2013-14 to Rs 883.2 bn from 2014-15 to 2023-24.

This explosive growth is fuelled by a strong indigenisation push by the government aimed at achieving self-reliance in defence. The rapid growth in defence manufacturing and exports has powered many PSU defence stocks to new highs.

Though the private sector has led the growth, defence PSUs too have made significant contributions. The private sector and the PSUs have contributed about 60% and 40% respectively.In addition, there has been a rise in the number of export authorisations issued to the defence exporters during 2023-24. From 1,414 export authorisations in 2022-23, the number jumped to 1,507 in 2023-24.

What Does India Export?

According to the Ministry of Defence, India exports systems such as the Dornier-228 aircraft, 155 mm advanced towed artillery guns, Akash missile system, radars, simulators, mine-protected vehicles, armoured vehicles, Pinaka rockets and launchers, thermal imagers, body armour, line replaceable units, parts and components of avionics (aviation electronics), and small arms.

A Big 'First' for India

In a major fillip to India's hopes of becoming an exporter of defence platforms, the Philippines signed a deal to buy three batteries of the BrahMos missile in January 2022.

The US$ 375 million (m) agreement is understood to be the first major military export deal for New Delhi. India, the top importer of weapons in the world, has been pushing aggressively for greater self-reliance in this arena.

The country has also set ambitious defence export targets and aims to eventually become a net exporter of defence products.

This delivery of the weapons system to the Philippines is a big victory for India in that direction. It is crucial for morale in the military-industrial complex (MIC) domestically.

Internationally, and especially in the Southeast Asian region, it serves to bolster India's reliability as a reliable new player when it comes to weapons exports. BrahMos missiles alone can take India's defence exports to US$ 3 bn by 2026.

While Indian defence manufacturers have progressed significantly over the past 10 years, foreign companies are also coming to India for manufacturing.

Notably, the Israel Weapon Industries (IWI) is collaborating with the PLR company to manufacture rifles in the country.

A Korean company is partnering with L&T to manufacture Howitzer guns. Likewise, Airbus is manufacturing C-295 aircraft for the Indian Air Force in Vadodara, Gujarat. Additionally, the Israeli company Elbit Systems and Aerospace in collaboration with Adani Defence gave the Indian Navy its first 'Made In India' long-endurance drone, the Drishti 10 Starliner UAV.

To promote self-reliance, the Defence Ministry has initiated the issuance of multiple 'import embargo' or negative arms import lists. As of May last year, the Modi government had announced a list of 928 military items that will come under a phased import ban between December 2023 and December 2029.

Stalled Projects Back on the Cards

Defence projects stalled for decades have gained momentum. Projects that were initiated in the 1980s saw progress.

The prime example of this is India's indigenous combat aircraft, LCA Tejas. Tejas was sanctioned in the 1980s, with its maiden successful flight occurring during the Vajpayee government in 2001. Subsequently, the project continued to progress at a sluggish pace.

In 2016, Tejas was inducted into the Air Force for the first time. Currently, the Indian Air Force has about 40 Tejas Mk1 aircraft, while it has placed an order for approximately 83 more Tejas Mk1 (improved versions Tejas Mark-1) with Hindustan Aeronautics Limited (HAL).

Recently, the Indian Air Force has also inducted formidable combat helicopters, which were also long overdue. Additionally, the army has ordered the production of 118 Arjun Mark-1A tanks.

The country now possesses an indigenous aircraft carrier INS Vikrant, primarily built under the Modi government.

Furthermore, the Modi government has strengthened the military by finalising several long-pending defence deals. The biggest example of this is the procurement of 36 Rafale jets for the Air Force. The Air Force needed new generation fighter aircraft for a long time, and the Modi government purchased these aircraft by signing a government-to-government deal with France.

Additionally, the Modi government has acquired helicopters like Chinook and Apache to enhance the Air Force's capabilities. For the Indian army, the Modi government has procured rifles from the SIG Sauer company.

Top Countries Which Purchase Defence Equipment from India

The US has emerged as the number one destination for India's defence exports, accounting for over 50% of total exports, exceeding US$ 2.8 bn in the last five years.

Joint ventures and collaborations between US companies and Indian entities, such as Lockheed Martin-Tata Advanced Systems, Boeing-HAL, BAE Systems-HAL, and GE-HAL, are fostering technology transfer, innovation, and skill development.

The creation of over 28,000 direct jobs and gainful employment for an additional 20,000 individuals by the US defence industry in India, along with initiatives in STEM education, skilling, health, and sustainability benefiting over 2.6 m people.

In January 2022, the Philippines concluded a US$ 375 m deal with India for three batteries of shore-based anti-ship variant of the BrahMos supersonic cruise missiles, becoming the first export customer for the joint venture missile between India and Russia.

India is actively selling military gear to over 85 nations, with over 100 domestic enterprises participating in the exports. It exports missiles, artillery guns, rockets, armoured vehicles, offshore patrol vessels, personal protection equipment, radars, surveillance systems and ammunition. Light combat aircraft, helicopters, and even tanks are examples of equipment with export potential.

According to defence ministry data, India exports bullet-proof jackets to 34 countries, including Australia, Japan, Israel, and Brazil.

It exports ammunition (ranging from 5.56 mm to 155 mm) to around 10 countries, including the United Arab Emirates, Egypt, Indonesia, and Thailand

Fast interceptor boats are exported to Mauritius, Seychelles, and the Maldives

Defence electronics are exported to the US, the UK, and France.

Besides the Philippines, Vietnam is reportedly seeking to buy BrahMos supersonic cruise missiles, jointly developed by Russia and India. Indonesia is also a potential buyer of the missiles.

New Projects Under the Pipeline

The Indian armed forces are undergoing modernisation with state-of-the-art technology, and efforts are actively underway in this direction.

Recently, the Modi government has approved the development of fifth-generation fighter jets. The first flight of these jets is expected to take place by 2030.

Additionally, efforts are underway to acquire new submarines for the Navy. A new lightweight tank is being developed for the army, primarily aimed at countering China. Work is also progressing on several other missiles, many of which have undergone successful testing.

With countries like Vietnam, the Philippines, and Armenia seeking cutting-edge Indian-manufactured weapons such as the BrahMos supersonic cruise missiles, Pinaka multiple rocket launchers, Akash anti-aircraft missiles, and Tejas fighter aircraft, exports are expected to skyrocket in the next five-years.

In Conclusion

With credible technology at our disposal, exports remain one of the biggest inflection points for India's military production.

However, following the recent run up in almost each and every defence company's stock price, selecting stocks in India's defence ecosystem must be done with sufficient diligence. Going with under the radar stocks that offer long term upside is the best way to go about it.

For more information on the stocks exporting critical components, watch this video on Equitymaster's YouTube channel.

Happy Investing!

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