Published on 6/03/2017 3:35:57 PM | Source:  India Nivesh Securities Ltd

Sector Update Defense Sector - India Nivesh Sec

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Political Developments:

* Jaishankar discusses counter‐terrorism, bilateral relations with McMaster

In order to take forward partnership defined with Barack Obama administration, post the Trump government taking over Indian Foreign Secretary Subrahmanyam Jaishankar met US National Security Adviser Lt. Gen H R McMaster. Both of them discussed counter terrorism, bilateral relations and ways to take forward the India‐USA Defense partnership.

Over the last few years, India has signed with USA Logistics Exchange Memorandum of Agreement (LEMOA), which makes it possible for both the militaries to use each other’s bases for repair and replenishment of supplies. Also, India is designated as ‘Major Defense Partner’ by the USA. Recently, Indian Defense Minister in a telephonic chat with his counter‐part discussed co‐operation under the Defense Technology Trade Initiative (DTII), which would allow for joint development of Defense Platforms.

On another side, top US Senators, Mark Warner and Dan Sullivan are strongly pushing for sale of state‐of‐the‐art Guardian Drones (armed with 40mm cannon) to India. This development comes after India had requested for purchase of 22 Guardian Drones for Maritime Surveillance.


Our View:

In the back‐drop of ‘America First’ approach adopted by Trump administration, recent replacement of Michael Flynn with McMaster as National Security Adviser, this meeting was required to take‐up the Indo‐USA relations forward. Notably, this is the third meeting at the diplomat level to take things forward in the Defense sector after Trump won the Elections. Also, this meeting is looked upon to define basic ground framework for much hyped Indian and US PM’s maiden meet scheduled some time later in the year.

On the sidelines another positive development is emerging. US Senators have been strongly pushing for the sale of Guardian Drones, after India in Feb‐2016 officially sent Letter of Request (LoR) for procurement of 22 Unarmed Muti‐mission Predator Guardian Drones. This sale was being considered under the ‘Foreign Military Sale’ route and had hit roadblock after Obama’s tenure came to end. With new administration and shift in policies, this development would be looked positive as procurement of Guardian UAV’s would strengthen India’s position in the Indian Ocean.


* NSA Ajit Doval meets Israeli leadership

India‐Israel are celebrating 25 years of diplomatic ties this year. In order to strengthen ties, Ajit Doval, India’s National Security Adviser visited Israel and held talks with Israeli PM Benjamin Netanyahu, and his Israeli counterpart, Brig. Gen. (retd) Jacob Nagel. This meeting is expected to prepare the groundwork for Indian PM’s visit scheduled sometime in Jun‐2017.


* Indian Defense procurement from Russia in jeopardy

US imposed Specially Designated National (SDN) sanction on Russian Defense firms (including United Shipbuilding Corporation, Zvezdochka Shipyard, Almaz‐Antey, amongst others). Defense tendering at the time of bidding, makes it mandatory for all foreign vendors to furnish guarantees from designated Indian banks before bidding for a project. Given that procurement happens in Dollar currency with sanctions imposed, India would find it difficult to procure defense equipments from Russian firms as they are unable to furnish the requisite bank guarantees from Indian banks.


Our View:

This development would make it tough for Indian Defense to procure recently signed projects from the Russian Defense companies, unless Indian government makes changes to the procurement rules. As a result of this development, we expect the following projects to see slow‐down in their procurement: S‐400 Missile shield (from Almaz‐Antey), 4 Stealth class Frigates (inter‐governmental agreement; 2 of them to be made in India). Even Russia is looked upon as a key contender for the upcoming P75I Submarines tender, for which awarding is scheduled sometime in FY2018‐19. Even overhaul of 2 Kilo class submarines, under the life extension program could be impacted because of this development.


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