Budget series – Sector focus on Defence

By Richard McCallum

We at UKIBC see the budget as a reinforcement or amplification of the reforms made by the Government of India throughout 2020, reflecting the Government of India’s hard focus on making in India and indigenising production. UKIBC’s Dickie McCallum outlines those reforms in a previous blog here.

In terms of numbers, while the total defence budget (almost USD67Bn) increased by just 1.45%, the budget for capital outlay increased significantly by almost 19%, driven in part by the situation on India’s northern frontier, split between the services as follows: Army (27.01%), Navy (24.62%) Air Force (39.4%), with ‘others’ accounting for the 8.97% balance.

This means that over the next 7 years orders worth USD56Bn will be made to qualified domestic – rather than foreign – industry.

Fortunately, the UK is exceptionally well-placed to take advantage of this change. For 5 reasons given below, we think a real opportunity exists for UK Plc.

Firstly, the UK has a very strong intellectual base in terms of technology and intellectual property which can be deployed in India. On a rolling ten-year basis, the UK is still the 2nd largest defence exporter in the world after the USA – in practice this means that the UK defence ecosystem includes hundreds of niche, high-technology companies whose solutions can be incorporated in India’s ongoing major platforms. Even where primary contractors are selected from other countries, the UK defence sector is so deep and broad that UK technology can easily be slotted into the supply chain.  For example, in maritime, UK companies have supplied equipment to two of the OEMs shortlisted for India’s P-75I. In electric propulsion, which is being considered for India’s future carrier and destroyer programmes, British firms are market leaders.

Secondly, UK technology is already well embedded in existing Indian platforms. The Indian Air Force is currently updating its Light Combat Aircraft (LCA) programme and the current version, the HAL-Tejas, contains critical systems which were indigenously built using British technology; for example, Cobham’s quartz radome and in-flight refueling probe, and Martin Baker’s ejections seats.  The augurs well for British involvement in the aircraft under development, the LCA Mk2.

Thirdly, there is now a unified recognition within British government, industry and trade organisations that the relationship with India must move beyond a transactional one – simply selling stuff from the UK to India – and focus on co-creation, co-development and making in India together with Indian firms. This new approach is a more sophisticated and sensitive approach to India’s requirement and it presents British firms with an opportunity to make in India for global supply chains, taking advantage of the country’s industrial capacity and low manufacturing costs. The Government of India is single-mindedly focused on Make in India and UK industry can play a role in meeting that challenge, through collaboration and production of systems and sub-assemblies for India’s future defence programmes.

Fourthly, in April 2019, the British and Indian governments signed the MoU on Defence Technology and Industrial Capacity Cooperation (colloquially called the DEC MoU), the first time the British government has signed such a ‘G2G’ agreement with any country, a recognition of the new direction of travel for defence procurement between nations and of the critical importance to the UK of this strategic bilateral partnership. This new G2G framework, which has a 5-year recurring term, is intended to facilitate partnerships and cooperation in design, development, manufacturing, logistics support, life cycle management and disposal of defence platforms, equipment and services that will enhance the defence capabilities of the participants and support military operations.

We see this framework as essential to the success of UK industry in India and cooperation between both countries because India has traditionally taken comfort in government-to-government deals, preferring negotiations at the sovereign rather than commercial level. In the absence of a government-to-government approach, other countries moved up the list of trusted defence partners for India – Russia, US, France and Israel are considered far more significant providers than the UK.

Pleasingly, under this agreement Rolls Royce and GTRE have already announced an implementation agreement to co-develop a new engine to power future Indian fighters. More are in the pipeline, which demonstrates that this new approach is working already – it meets the needs of India’s military while supporting British industry in a fully collaborative way.

Fifth and finally, as part of Team UK’s new approach to India, the UK India Business Council (UKIBC) was asked to form the Aerospace & Defence Industry Group (ADIG), a forum of UK companies which are already engaged in India or keen to explore the market; members include Avon Protection, Babcock International, BAE Systems, Cobham, Leonardo, MBDA, Pexa Ltd, Rolls Royce, Smiths Group, Thales UK, TVS SCL, Ultra Electronics. KPMG, EY and HSA Advocates act as knowledge partners to the group.

The purpose of the group is to help members access information, opportunities, and overcome challenges in India. Our work is divided into two main pillars: future aerospace platforms and maritime (especially aircraft carriers and carrier propulsion systems).  To this end we are, alongside colleagues at UK Defence and Security Exports (UK DSE), pursuing dialogue with organisations such as the Aeronautical Development Agency (ADA) and private and DPSU shipyards across India.

The group also aims to help improve the procurement environment in both the UK and India. While India is not yet an easy enough place in which to do business, it is getting much easier year by year. In the World Bank’s EODB Ranking 2019, India was placed 63rd – up from 142nd in 2014. UKIBC released its 6th annual Doing Business in India Report in October 2020, in which 66 percent of respondents said they think it is getting easier to do business in India and ‘Improving bureaucratic processes with accountability’ and ‘Increasing regulatory certainty’ were the most popular reforms.

The UK was once a key provider of defence and security equipment to India. In 2010, the value of UK defence exports to India was £966m ($1.4Bn). In 2015 this fell to just £34m. For a country which has approximately 16% of the global defence market (2019), the UK has under-performed in India. However, with the British government’s renewed focus on India following Brexit, and for the reasons listed above, the economic partnership between the UK and India in defence is above to a new and powerful phase.

It is fitting that in 2021 the UK’s new aircraft carrier HMS Queen Elizabeth II and its strike group will make its maiden deployment – to the Indian Ocean. This powerful flotilla is an apt demonstration of the UK’s commitment to India’s defence requirement and a showcase of our world-leading technology and companies.

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