27th July 2010

UK defence suppliers stand to benefit from an overhaul of India's armed forces, involving a major procurement programme by the Indian government, according to KPMG which says this offers the UK defence sector growth opportunities their home market no longer provides. Already one of the world's top 10 military markets, India's increasing importance to defence contractors should be recognised given the Indian Ministry of Defence recently committed extensive resources to growing and enhancing its profile, specifically increasing its defence budget by 34 percent this year.

As UK, European and North American defence budgets come under increasing pressure due to government budget deficits, the UK defence sector must look beyond these traditional core markets in order to drive growth. In line with wider global economic trends the greatest prospects are emerging in the East, with a particular window of opportunity in India. However, KPMG warns that the opportunity to enter this market comes with strings attached.

The Indian government currently procures approximately 70 percent of its defence requirement from abroad. It intends to reduce this to 30 percent through a combination of encouraging Foreign Direct Investment (FDI) in Indian Defence companies and Offset Regulations (whereby a foreign supplier must spend a proportion of the value of the contract in India). The limit on FDI is 26 percent though the Indian Government is considering increasing it to as much as 49 percent on a case by case basis.

The long term nature of many defence programs is such that if UK companies fail to grasp the Indian opportunity and select the right strategic Indian partners then they may find themselves locked out of a high growth market.

Glynn Bellamy, Associate Partner in KPMG's Aerospace & Defence practice, said: "The Indian defence market offers significant opportunities to UK companies at a time when core Western markets are weakening. There are, however, challenges over and above traditional commercial ones. These include the requirement to select indigenous partners for joint ventures, management of Intellectual Property and structuring of the operational footprint in order to meet offsetting requirements.

"Contractors that manage to successfully address these challenges will be in a good position to exploit more than just the defence contracts that attracted them to India. Establishing strong manufacturing operations with the right partners should see UK corporates benefitting in two ways; taking advantage of the competitive Indian cost base should improve their competitiveness in other global markets, while also opening up further indigenous opportunities for their non defence operations in India's growing commercial sector.”

Demonstrating the type of alliance that the Indian government is keen to encourage, BAE Systems has signed a deal with Mahindra & Mahindra to focus on supplying the Indian military with Land Systems and Anglo/Italian helicopter company, AgustaWestland is establishing a joint venture in India with Tata to assemble, complete and deliver its AW119 helicopter to customers worldwide. Such tie-ups are typical, combining both a cost efficient operational footprint with access to the Indian market.