Reflections on Budget 2022 – Defence

The 2022 defence budget reinforces and accelerates India’s ongoing indigenisation of defence manufacturing. Three things stand out.

First, the amount of funding allocated to capital acquisition from domestic industry has risen from 58% to 68%. This is a big jump with optimistic goals, the reality is that India doesn’t yet have the R&D, technology, or manufacturing capacity to replace with a domestic alternative the equipment it previously bought overseas.

Indian industry can only meet the country’s defence equipment requirements with an infusion of foreign technology and know-how; just as foreign firms can only play in this market if they are invested in or partnering with India. Now is the right time for UK firms to re-examine their business plans and start planning for long-term, on-the-ground participation in India’s defence market.

We know that’s not an easy or risk-free decision to make in advance of firm orders. However, there are innovative ways for UK MSMEs to participate in the Indian market without making premature, expensive investments.

For example, we believe UK firms should be considering how to build India into their global supply chains – at worst is a potential double-digit reduction in input costs and at best they will have forged partnerships with Indian firms which can then be leveraged to win contracts in India.

Another idea is to collaborate with an Indian counterpart on a joint feasibility report or commit to several visits to each other’s operations each year. Such things build the wiring that is essential for long term, successful collaboration.

And consider UKIBC’s Launchpad service – where UKIBC provides an on-the-ground consultant to the UK client to explore market conditions, business opportunities and build connections on the ground. This allows firms to explore the market without committing to a legal entity in market.

Second is the announcement to reserve 25% of the R&D budget for starts ups and private enterprise. The aim of this fund is to build capacity in advanced technologies in India. We believe this represents an exciting opportunity for UK firms (and academia) to collaborate with Indian counterparts. Perhaps in some sort of SPV. Nevertheless, it’s hard to say more before we see the fine print.

Thirdly, it’s worth noting that while the allocation to the Ministry of Defence has risen about 10% on last year, this isn’t spread evening across departments. The capital budget for maritime has risen nearly 45% and that of the Coast Guard has increased by 60%. Maritime represents an area of opportunity and interest for UK firms.

It’s not all positive news. Recently GOI announced it was reviewing the ‘Buy Global’ category of DAP20, which if implemented would effectively mean all initiatives need to be led by Indian industry. This may not materialise. If it does, it’s not clear how this will impact UK and foreign firms and we look to the Indian MOD for more clarity on how foreign firms can participate in the Indian market – to provide India’s forces with the technology and solutions they need – in compliance with Atmanirbhar Bharat. Clarity here will aid investment into the sector – lack of it risks driving away non-Indian expertise and investment.