Why is India’s Defence Sector Thriving?

Why is India’s Defence Sector Thriving?

For almost a year, defence stocks have been stealing the spotlight, sparking a significant rally. Discover the intriguing factors driving defence stocks.

Over the past year, the Nifty India Defence Index has offered a compounded annual growth rate of 64.8%. In contrast, the Nifty Index has only yielded a modest compounded annual growth rate of 7.85%. 

During this same one-year period, companies in the defence sector have shown impressive performance. For instance, Mazagon Dock Shipbuilders Limited has offered a remarkable return of 494.34%, and HAL has offered a solid return of 67.31% as of 17th August 2023.

Now, the question arises: What is driving the upward trend in the defence sector? 

Let’s find out. 

What’s Happening?

India is achieving impressive strides in its defence sector to self-reliance in manufacturing and exporting defence equipment. For example, the state-owned Hindustan Aeronautics Limited is in demand globally. It is actively engaged in discussions with four countries to sell its Tejas light-combat aircraft, as reported by Economic Times. According to Zee Business, India sold three BrahMos missiles to the Philippines for $375 million.

But things were different a decade back. India was the second-largest arms importer of defence equipment globally between 2015 and 2019. But now, it has transitioned into an arms exporter. From 2013-17 to 2018-22, exports have surged beyond $1.6 billion, coupled with an 11% reduction in imports, as reported by WION.

In FY22, India accomplished a noteworthy milestone by sourcing 68% of its defence needs domestically. This commitment to self-sufficiency has considerable results, evident in the remarkable year-on-year growth of over 12% in defence production in FY23, surpassing Rs 1 trillion ($12 billion), as reported by Mint.

India’s Remarkable Rise in Global Arms Exports

An analysis of Ministry of Defence data by Mint reveals that India’s defence exports have witnessed a tenfold increase over the past six years. In the fiscal year 2022-23, defence exports reached an all-time high of Rs 15,918 crore, indicating a 24% surge compared to the preceding year’s exports of Rs 12,815 crore.

According to the Minister of State for Defence, Ajay Bhatt, the government aims to achieve a total defence manufacturing worth Rs 1,75,000 crore, including defence exports amounting to Rs 35,000 crore, by the year 2024-25.

The chart depicts India’s defence exports by defence public sector undertakings and the year-on-year change.

India and US Defence Relations

India and the United States are working together more closely in the defence sector due to concerns about China’s activities in the Indo-Pacific region. They have come up with a plan to cooperate in making defence equipment. This includes things like technology and military gear, as reported by Economic Times. 

In the past few years, India and the US have become better friends when it comes to defence. They have signed important agreements about defence and security. One of these agreements is the Logistics Exchange Memorandum of Agreement (LEMOA), signed in 2016. This agreement lets both countries use each other’s military bases for repair and replenishments and getting more supplies, as per the Hindu. 

What’s Next?

Even though India is not on the list of the top 25 defence exporters, according to SIPRI (a research institute), small steps and consistent efforts will help India get there.

The chart displays the countries with the biggest portion of arms exports from 2018 to 2022.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The companies mentioned are for information purposes only. This is not an investment advice.

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