India File: Turning military might into big business
The deadly India-Pakistan conflict last month showcased the military might of the South Asian foes, putting on display their modern fighter jets, missiles and drones.
For India, military modernisation is about more than just holding its own against neighbouring rivals, as it seeks military self-reliance and, eventually, a place among the world's big arms exporters. That's the focus of our analysis this week.
And India's central bank meeting this week is expected to cut rates for a third time in a row despite strong growth in the January-March quarter. Scroll down to our "Market Matters" section for more on that.
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India's defence production and purchases were already on a fast growth track before last month's armed conflict with Pakistan, as the government sought to modernise the military, ease equipment shortages and boost domestic manufacturing.
Now that campaign has gone full throttle.
Within days after the fighting, India approved $4.6 billion in emergency procurement funds to acquire more military equipment. It also moved ahead with plans for a stealth fighter jet and the procurement of up to $470 million worth of drones. Just weeks earlier it approved the purchase of 26 Rafale naval fighter jets worth $7 billion.
The objectives are twofold: to expand India's military industrial base - and the manufacturing jobs and exports that go with it - and to ease its dependence on foreign arms suppliers, which could be a vulnerability in times of conflict.
India already has the world's fourth-largest military and is the fifth-biggest spender on defence, as it steadily builds up defences against neighbours China and Pakistan while diversifying its forces beyond predominantly Soviet-era fighter jets and military equipment.
It has also been the number-one importer of arms globally throughout the last decade, taking in an estimated 10% share.
Recent purchases have included modern fighter jets from France, transport helicopters and planes from the U.S., an advanced air defence system and aircraft carrier from Russia, as well as missile systems, radar equipment and drones from Israel.
Washington wants a further increase in military sales to New Delhi with President Donald Trump even offering F-35 stealth fighter jets, as defence cooperation takes a central role in deepening India-U.S. ties.
In recent years, however, India has stressed manufacturing more defence equipment and platforms at home, with global firms pushed to produce in India - either on their own or in collaboration with domestic partners - while increasing their exports of India-made equipment.
India had already been making plenty of its own weaponry, from fighter jets and helicopters to warships, submarines and missiles.
Private-sector entrants, often working with foreign partners, have also brought fresh energy to a sector long dominated by less-nimble state firms that often delivered behind schedule.
India's military exports - including missiles, missile-related systems, munitions, small aircraft, patrol vessels and electronics - jumped 12% in the fiscal year to March to $2.76 billion. Five years back, they totalled just $1.07 billion.
But foreign competition is stiff, both from high-tech producers such as France, Israel and Russia, and from low-cost rivals such as China and Turkey.
A May report by Jefferies said that Prime Minister Narendra Modi's praise for how Indian equipment performed against Pakistan "points to further domestic manufacturing focus".
The outlook for Indian defence firms, it added, looks bright with the rise in global military spending, up 9.4% in 2024 and the highest since the end of the Cold War. Europe could be a particularly good source of business as it considers sharply increasing defence spending while tensions mount with Washington.
But there are challenges ahead.
A KPMG report published last week listed budgetary constraints, red tape, dependence on imports and a shortage of skilled workers among the obstacles to growth in the arms sector.
"Addressing these challenges requires strategic planning, increased budget allocations, streamlined procedures, robust policy frameworks, and fostering a culture of innovation and collaboration between the public and private sectors," the report said.
Can India reduce its dependence on imports and become a major global defence supplier? Write to me at yp.rajesh@thomsonreuters.com, opens new tab
Global makers of surveillance gear have clashed with Indian regulators over new security rules that require manufacturers of CCTV cameras to submit hardware, software and source code for assessment in government labs.
The security-testing policy has sparked industry warnings of supply disruptions and added to a string of disputes between Prime Minister Narendra Modi's administration and foreign companies over regulatory issues and what some perceive as protectionism.
Don't miss this report.
Markets will be closely watching a meeting of the Reserve Bank of India's rate-setting panel on Friday after economic growth surpassed estimates in the January-March quarter.
GDP growth hit 7.4% versus a year earlier but the central bank is still expected to cut rates for a third consecutive meeting, given subdued inflation that is expected to hold near the RBI's 4.0% target.
Read here to catch up on growth in the January-March 2025 quarter and here for a Reuters poll on the expected outcome of the monetary policy review.
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