Agnipath scheme will recruit soldiers for short-term and long-term on an ‘All-India All- Class’ basis. Around 45,000 to 50,000 soldiers are expected to be recruited annually under this scheme, which will be called Agniveers.

• Eligibility: Ages between 17.5 to 21.0 years will be eligible to apply.

• Educational qualification: Class 10th/ Class 12th (depending on the service and assigned role).

• Recruitment: The centre will recruit Agniveers and the induction process will repeat every six months. The recruitment of women will depend on the requirements of their respective services.

• Training: The training will go on for a maximum of six months, after which an Agniveer will be deployed for the remaining 3.5 years.

• Selection process: An online centralized system will be used for enrolment of Agniveers and the selection will be the exclusive jurisdiction of the armed forces.

• Permanent enrolment: After completing 4 years of service, Agniveers will be eligible to apply for permanent enrolment in the armed forces. Up to 25% of them will be selected on an objective basis and enrolled as regular cadre. They will have to serve for a further minimum of 15 years. Adequate re-employment opportunities will be created for the rest 75% who will move out of the services.

• Pension: Agniveers will not be eligible for any pension or gratuity benefits under the scheme.

• Exemption: The scheme does not apply to defence officers for whom there is a provision called Short Service Commission or SSC.

• Salary: An annual package of Rs 476,000 (1st year) to Rs 692,000 (4th year).

• Allowances: Paid allowances for travel and uniform.

• Honours and awards: As per existing guidelines

• Seva Nidhi: Agniveers will contribute 30% of their salaries to a fund that will be matched by the government. This fund will accrue interest, and at the end of the four years, each soldier will get Rs 1.17mn as a lump-sum tax-free amount, which includes interest accumulated on the absolute amount.

• Insurance cover: Agniveers will be provided non-contributory life insurance cover of Rs 4.8mn during their service in the armed forces.

• Leaves: Agniveers will be granted 30-day annual leaves while sick leave will be based on medical advice.

• Insurance cover: Agniveers will be provided non-contributory life insurance cover of Rs 4.8mn during their service in the armed forces.

  How Agnipath will be a game changer:

  • As highlighted above, rising inflation and increased wages, pay & allowances (P&A) have been increasing over the years in line with whatever the periodic pay commissions have recommended.

  • Total P&A for the three services was close to Rs 1.5tn in FY23. Along with the Rs 1.5tn in pensions, the budgeted government allocation for FY23 for just defence salary and pension is Rs 3.2tn, twice the amount of Rs 1.6tn allocated for capital outlay – which is used for modernising the defence forces.

  • We look at the historical record to get a better idea about how much the bills have soared – in FY10, total defence budget was Rs 1.77tn, of which Rs 0.35tn was allocated for defence pensions, Rs 0.5tn for pay and allowances, and nearly Rs 0.5tn for capital outlay.

  Improvisation in Domestic Defence:

  The Indian defence sector opened up to private participation in 2001. However, due to preference given to PSUs and OFBs, private-sector participation remained negligible until recently. In the past few years, the scene changed as the government introduced various measures to remove bottlenecks for the private sector. The measures:

  1. Excise/customs duty exemptions enjoyed by DPSUs were discontinued to provide a level playing field to private companies.

  2. Exchange-rate variation was made applicable for the Indian private sector, at par with PSUs

  3. Customs duty exemptions on imported equipment were removed.

  4. Industrial licensing was simplified – a large number of parts/components were de- licensed, the validity of industrial licenses was increased (to 15 years from 7 earlier), and online tendering of various items began.

  As per the strategic partnership policy, four specific areas have been identified for the private sector involving a total capital outlay of Rs 2tn over 10 years. Besides this, few tenders were exclusively reserved for the private sector, such as landing platform docks, transport aircraft, and pilotless target aircraft (DRDO partnered with L&T). We believe increasing involvement of the private sector will open up new opportunities for investors.

  The ordnance companies in India have struggled in recent years to satisfy production goals, maintain quality control, and maintain cost competitiveness. However, the government embarked on a journey of corporatization and restructuring in a concerted effort to promote independence and modernize the defense industry. The OFB (Ordinance Factory Board) has struggled with a wide range of problems, including unpredictable workload variations and delayed deliveries as well as inadequate processes, degraded quality, and a dearth of technical developments. These difficulties caused valid worries about the OFB's effectiveness and efficiency. Furthermore, concerns about the organization's dependability and dedication to safety were raised by claims that poor ammunition contributed to accidents. Faced with challenges and slow pace of change, a breakthrough finally emerged with the decision to corporatize the OFB. This pivotal decision marked a turning point, bringing renewed hope for the organization's future. The establishment of seven new defence companies, with a focus on streamlining processes, fostering indigenization, and promoting technological advancements, breathed new life into the defence industry. The move also aligned with the larger national vision of the 'Make in India' initiative, aiming to bolster self-reliance and reshape India's defence manufacturing landscape. 

  In June 2021, the Cabinet approved a long-pending proposal to restructure the over 200-year-old OFB that operated 41 ammunition and military equipment production facilities into seven state-owned corporate entities to improve its accountability, efficiency and competitiveness. Seven new defence companies, carved out of Ordnance Factory Board (OFB), were dedicated to the nation by Prime Minister Narendra Modi on Friday over video conference facility, as part of a major defence sector reform. The new companies are: Munitions India Ltd (MIL), Armoured Vehicles Nigam Ltd (AVANI), Advanced Weapons and Equipment India Ltd (AWE India), Troop Comforts Ltd (TCL), Yantra India Ltd (YIL) and India Optel Ltd (IOL). All the seven new defence companies carved out of erstwhile OFB improved their performances and six reported provisional profits in their first six months of business, numbers released by the defence ministry show. The companies managed to bag some export contracts – a key priority area for the government that is looking at accelerating weapon sales abroad as part of its strategy to boost indigenous production of arms. The biggest turnaround story has been Khadki-based Munitions India Ltd, which reported a profit of Rs 280mn vs. average six monthly losses of Rs 6.8bn for the last three years.

  Indigenization will imparts further growth:

  India now imports 60% of its defense needs, although this number is expected to go down because to the "Make in India" and "Atma Nirbhar Bharat" programs. To become self-sufficient, the GoI is concentrating on expanding domestic defense production. This will probably help domestic businesses. Foreign players are forming strategic alliances with Indian businesses as a result of the defence sector's opening up to private sector engagement. These alliances enable the former to take advantage of opportunities in domestic markets and the latter to explore both home and international markets. A list of 351/107/780/928 defense products that the Ministry of Defense released forbids importation beyond a specified date (which ranges from December 2020 to December 2027). The Indian defense sector now has a fantastic opportunity to produce these things either using their own design and development capabilities or utilizing technologies created by the DRDO. Not just basic components but also sophisticated military systems like artillery cannons, assault weapons, corvettes, sonar systems, transport planes, light combat helicopters (LCHs), and radars are included in the embargoed commodities. Between April 2015 and August 2020, the defence services had contracted 260 programmes of these items for Rs 3,500 billion (US$ 47 billion). The MoD predicts that within the next five years, contracts worth Rs 5,500 billion (US$ 70 billion) will be awarded to domestic industry due to the most recent ban. For the Army, Air Force, and Navy, respectively, it anticipates purchases of Rs 1,500 billion and Rs 1,400 billion (US$ 17.5 billion). A distinct chunk of the FY23 defense capital budget, totaling Rs 834 billion (US$ 10.5 billion) (or 68% of the capital-acquisition budget), has been set aside by the MoD for domestic purchase.

  Clear Indigenization policy intends to develop an industry ecosystem to localize imported alloys and special materials as well as subassemblies for defense platforms and equipment made in India. By 2025, it is suggested that about 5,000 of these things be locally produced. The following initiatives for indigenization have been suggested by the GoI:
  • Indigenization portal to offer MSMEs, startups, and industry development support for import substitution.
  • The Make-II process should be improved and closely monitored to make it simpler to offer homegrown solutions.
  • Intergovernmental procedures to domesticate parts and pieces for older platforms and machinery.
  • The Public Procurement Order will be applied to purchases of defense-related goods for which domestic production capacity already exists.The current rules allowing start-ups and MSMEs to engage in the procurement process will be further reinforced and evaluated.
  • The DDP's Defence Investor Cell offers assistance to MSMEs, investors, and vendors in the defense industry in order to help them resolve conflicts with the federal, state, and other authorities.

  Offset Guidelines:

  As in civil trade, offsets in defense are recompenses that the buyer requests from the seller in exchange for the acquisition of commodities and/or services. Offset policy in defense was first implemented in India as part of DPP 2005. The offset policy has undergone a number of adjustments since then. By requiring that the vendor allocate 30% (or as appropriate under the specific category) of the overall contract cost to either source defense equipment / components from India or assist knowledge transfer, defense offsets aim to offset the foreign import expense. The provision directly affects how the Indian defense eco-system is developed. Defense offsets' goals include promoting the growth of globally competitive businesses and enhancing the capacity for research, design, and development of defense-related goods and services. All capital purchases for the defense industry that are labeled "Buy (Global)," that is, outright purchases from foreign or Indian vendors, or "Buy and Make" types of procurements, and if the projected cost of the acquisition proposal is US$ 268 million or more, are subject to the offset policy. If the vendor purchases the equipment from Micro Small and Medium Enterprises (MSMEs), it also receives an additional benefit in the discharge of offsets, which in turn stimulates the tier 2/3 supply ecosystem.

  Aiming For higher Export till 2025:

  Because of numerous reforms and measures bolstered by the government's efforts to make doing business easier, India's defense exports increased 5.5 times between FY15 and FY19. Due to its vast skilled workforce, India has a significant cost advantage over its international competitors, which allows international OEMs to use India as a base for production and exports. To benefit from lower costs, they collaborate with domestic manufacturers or service providers. Italy, the Maldives, Sri Lanka, Russia, France, Nepal, Mauritius, Sri Lanka, Israel, Egypt, the United Arab Emirates, Bhutan, Ethiopia, Saudi Arabia, the Philippines, Poland, Spain, and Chile are a few of the top export destinations for defense products.

  Personal protective equipment, offshore patrol boats, ALH helicopters, SU Avionics, Bharati Radio, Coastal Surveillance Systems, Kavach MoD II Launchers, FCS, replacement parts for radar, electronic systems, and light engineering mechanical parts are among the primary defense products exported. Exports decreased in 2020–21, primarily as a result of supply chain and production interruptions that have since subsided. The following actions would help the Indian government reach its goal of increasing defense exports from Rs 116bn in FY22 to Rs 350bn in FY25:
  1. By 2025, DPSUs and the Ordnance Factory Board (OFB) must boost their share of export revenue to at least 25%.
  2. Supporting the export of domestic defense products, with a few DPSUs acting as export promotion organizations.

  3. The Department of Defense Production's (DDP) export authorization procedure.
  4. A general open export license will be used to promote the export of certain defense equipment.
  5. Establishing a cell to boost exports of defense through concerted activity.
  6. Positioning Aero India and the Defense Expo as significant international events to highlight India's defense industrial capabilities.

  We anticipate that missile systems (Akash, BrahMos, Astra, and Nag) and aero platforms like LCAs will account for a significant portion of new exports, which can hasten the awarding of contracts to domestic firms. This may spur them to develop further defense equipment, creating the conditions for the following round of export prospects.

  Under the government’s Scheme for Promotion of Defence Exports prospective exporters can get their product certified by the Government of India. It provides access to the testing infrastructure of the Ministry of Defence for initial validation of the product and its subsequent field trials. Prospective exporters can use this certificate to market their products in the global market. The Indian government has introduced a scheme to provide financial support to Defence Attaches (stationed overseas in various nations) for promoting exports of India-made defence products, from both the public and private sectors. 

  LCA Tejas, an aircraft carrier built entirely by India, was well appreciated abroad. The Malaysian Air Force is almost finished with a potential order for 36 Tejas, which is expected to have an export potential of Rs 111 billion (US$ 1.5 billion) at a cost of Rs 3.1 billion (US$ 42 million) per aircraft. There is also room for providing additional overseas services, which would add at least 20% to the deal value, potentially bringing the total deal size to US$ 1.8 billion. The Indian LCA's pricing, which is relatively modest at around US$ 42 million per unit, is made possible by the economies of scale the company was able to acquire after the IAF ordered 83 fighter jets in the Mk1A configuration. In an effort to increase its exports to the Middle East and North Africa, India has proposed to establish production facilities in Egypt for the production of helicopters and light combat aircraft (LCA). A number of high-level meetings with allied countries, including Egypt, Argentina, Indonesia, and Malaysia, have reportedly taken place, and these meetings could result in orders for HAL, according to media sources. In another major development, indigenously developed Akash Surface-to-Air missile has also been approved for exports by the government. Akash has received interest from at least a dozen foreign countries, including the UAE, Vietnam, and Philippines. The list of 156 defence systems/sub-systems for export marks India’s first definitive move in its journey of the exports of weapon systems. The list includes key missile systems – Akash and BrahMos – that have a good long history of being deployed by the armed forces after their induction 10-15 years ago. The recent show of support and strength from the ‘Quad’ countries against the rising influence of China in the South China Sea also bolsters India’s case for growing defence exports with neighbouring countries. Some of these neighbouring countries have shown interest in India’s missile systems and the first such government-to-government deal with Philippines (BrahMos) may be closed soon. India's defence ecosystem has transformed significantly, creating favourable conditions for small defence players. With a focus on indigenization, streamlined procurement, and the Make in India initiative, the government has provided opportunities for small defence players to contribute collaborate with larger companies, and showcase their to the domestic supply chain, capabilities.

  An effective defense acquisition pipeline:

  The Ministry of Defence (MoD) plans to buy platforms and weapon systems from domestic producers for Rs 8 trillion over the long term. The following areas of the armed forces' planned and actual modernization have significant gaps:
  1. The IAF only operates roughly 30 fighter squadrons, which is well below the recommended 42 squadrons.
  2. For all services, helicopters
  3. AEW&C and transport aircraft with special missions
  4. Warships: Submarine, destroyer, and frigate gaps that must be filled
  5. Artillery, IFVs, and tanks
  6. Anti-missile defense systems
  The MoD intends to award contracts for warships (Rs 2.1 trillion), combat aircraft (Rs 3.5 trillion), missiles (Rs 1 trillion), and armored battle vehicles (Rs 700 billion).

  Global Trends:

  Stockholm International Peace Research Institute – SIPRI – excerpts
  Despite the pandemic's negative economic effects, global military spending increased in 2021, reaching an all-time high of US$ 2.1 trillion. The US, China, India, the UK, and Russia were the top five spenders in 2021, accounting for 62% of total spending. Just the US and China contributed 52%. In 2021, military spending in Asia and Oceania reached $586 billion USD. Spending in the area increased by 3.5% from 2020 to 2021, following a steady growing trend that dates back at least to 1989. The rise in military spending in China and India was the main cause of the increase in 2021. The combined military spending of the two nations in the region in 2021 was 63%.

  The Russo-Ukrainian War's disruption of the international defense system has accelerated reforms in the defense sector worldwide. The war, which has had the greatest impact on international defense markets in the last two decades, has come at a time when NATO countries are in the midst of planning processes for strategic national security and military build-up, particularly in light of China's possible threat.
  The EU needs to rapidly revise its approach as a result of Russia's invasion of Ukraine. The Council of the EU calls Russian aggression "a tectonic change in the history of Europe," which necessitated a "quantum leap" in the development of military capabilities in order to act as a "assertive protective force," realizing the gap between military power and threats. War will significantly alter the competitive environment in the global defense sector, as well as the expectations, requirements, and long-term military build-up plans among NATO members. The threat of Russian involvement is growing, which is changing European defense spending and military readiness. Germany has lifted restrictions on the purchase of armed UAVs and permitted the transfer of offensive weapons for the first time since World War II. It is still too early to say how the different reforms would alter the world defense market after the conflict. However, given that Eastern and Western armament systems and operational ideas are currently in conflict for the first time in decades, some particularly noteworthy areas stand out.

  Various Countries defense budgets have increased
  • The US has proposed a military budget of US$ 813.3 billion for 2023, an increase of US$ 31 billion year over year.
  • In comparison to 2021, China's defense budget climbed by 6.8%, or 7.1%, to US$ 229 billion in 2022. Its defense budget for 2022 is three times that of India, which is $5.25 trillion (about $70 billion).
  • While the United Kingdom, France, and Canada are still debating it, other big nations like Germany, Poland, Denmark, Sweden, and Romania have already announced an increase in their defense budgets.
  In 2021, global military spending surpassed US$ 2.1 trillion for the first time, with the US and China contributing for more than half of that amount. China led an increase in military spending in Asia and Oceania.

   

  

  Conclusion:

  Significant reforms in the Indian defense industry have increased productivity, independence, and capability. Domestic defense capital procurement increased from 38% of the total in FY13 to 68% of the total in FY23 as a result of the Make in India initiative. Foreign investment has been encouraged by the easing of the offset clause and the streamlining of the defense procurement processes (DPP). The newly corporatized Ordnance Factory Board (OFB) has successfully turned profitable, exemplifying how accountability drives performance. Defence Sector Stocks looks favourable because they provide the following benefits: (1) long-term execution growth visibility supported by a strong order book and a healthy pipeline; (2) timely execution due to localization, integrated modular construction, and subcontracting; (3) domain expertise/moat of government preference; (4) cash-rich balance sheets that avoid significant working capital issues due to stage payments; (5) in-house R&D investments and appropriate tech support from DRDO (6) The demand for indigenization and the efficiencies that have been created over time may result in higher margins from core defense products.