Friday, June 25, 2021

Defence stocks increases after Ministry of Defence puts 108 items on import ban list

Defence stocks such as Bharat Electronics Ltd, BEML, Hindustan Aeronautics Ltd, Garden Reach Shipbuilders, Astra Microwave Products, Bharat Dynamics, Mishra Dhatu Nigam, Mazagon Dock Shipbuilders and Bharat Forge are trading higher. An increase in defence stocks is seen because the Ministry of Defence (MOD) approved imposing restrictions on the import of 108 military weapons and systems such as next-generation corvettes, tank engines, airborne early warning systems and radars.

All the 108 military items will now be obtained from indigenous sources as per provisions given in a Defence Acquisition Procedure (DAP) 2020. The first negative list of defence imports containing 101 items was issued last year. “The Defence industry can productively utilise this golden opportunity to build robust Research and Development facilities, capabilities and capacities to meet the futuristic demands of the Armed Forces. This list also presents an excellent opportunity for ‘start-ups’ as well as to MSMEs which will get a tremendous boost from this initiative,” MOD said.

The ‘Second Positive Indigenisation List’ includes sensors, simulator, complex systems, weapons and ammunitions like Helicopters, Airborne Early Warning and Control (AEW&C) systems, Tank Engines, Next Generation Corvettes, MRSAM Weapon Systems, Medium Power Radar and many more such items to meet the demands of Indian Armed Forces. This second list is designed to be achieved progressively with effect from December 2021 to December 2025.

Increase in defence shares prices

After taking these decisions by the government of India, the prices of defence shares increased. On Tuesday, June 1, 2021, after the end of the day trading, Garden Reach Shipbuilders & Engineers and Hindustan Aeronautics Ltd share prices rose 5 per cent, each, to Rs 187.45 and Rs 1,045.95, respectively. Similarly, Astra Microwave Products surged 4.4 per cent, Bharat Dynamics gained 4.5 per cent, BEML was up 1.7 per cent, Mishra Dhatu Nigam (MIDHANI) gained 1.14 per cent, Bharat Forge gained 1.3 per cent and Mazagon Dock Shipbuilders shares were increased by 1.6 per cent. In comparison, the BSE Sensex was trading flat at 51,965.

Market Dynamics

India’s defence sector has been observing a CAGR of 3.9% between 2016 and 2020. The central government has set the defence production target of $25.00 billion by 2025, including $5 billion from exports by 2025. Defence exports in India were expected to be at $1.29 billion in 2019-20. India’s defence import value stood at $463 million for the financial year 2020 and is expected to be at US$ 469.5 million in the financial year 2021. Defence exports in the country observed strong growth in the last two years. India targets to export military hardware worth $5 billion in the next 5 years. As of 2019, India ranked 19th in the top defence exporters list in the world by exporting defence products to 42 countries.

Government Initiatives to boost defence sector

To increase more participation from start-ups and MSMEs in Defence Research & Development (R&D) in achieving the ‘AatmaNirbhar Bharat’ goal, Defence Minister Rajnath Singh released a new version of ‘Defence Research and Development Organisation (DRDO) Procurement Manual 2020’ on October 20, 2020.

– There are plans to build new infrastructure, including a defence park in Kerala to manufacture defence equipment for the armed forces. The project is intended at promoting MSMEs and boosting the ‘Make in India’ initiative.

– In November 2020, the Department of Defence, in partnership with the Directorate General Defence Estates (DGDE) and the Armed Forces, established a land management system (LMS) as part of efforts to enhance the overall defence land management.

– In February 2021, Defence Research and Development Organisation (DRDO) handed over Licensing Agreements for Transfer of Technology (LAToT) for 14 DRDO developed technologies to 20 industries at Aero India 2021 in Bengaluru.

To boost defence manufacturing in India and make the country a reliable weapon supplier to friendly countries, the Indian government allowed the following FDI limits in September 2020. For new licensees, FDI allowed up to 74 per cent through automatic route. FDI above 74 per cent would need to be permitted under the Government route. For existing licensees, Infusion of new foreign investments up to 49 per cent can be added by making declarations of change or transfer within 30 days.

Road Ahead for defence sector

The Indian government is concentrating on innovative solutions to empower the country’s defence and security via ‘Innovations for Defence Excellence (iDEX)’, which has provided a platform for start-ups to connect to the defence establishments and develop new technologies and products in the next five years (2021-2026)

The Defence Ministry has set a target of 70 per cent independence in weaponry by 2027, creating tremendous prospects for industry players. Introduced Green Channel Status Policy (GCS) to encourage and promote private sector investments in defence production, to strengthen the role of the private sector in defence production.

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