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Defence Sector: Much needed structural transformation looks possible as Govt unveils Agnipath Scheme!!

ICICI Securities 16 Jun 2022

What's Buzzing

Agnipath scheme for soldiers recruitment by Govt aims to cut the ballooning salary & pension bills; creates opportunity for increase in capital outlay

Context

Govt has unveiled "Agnipath" a recruitment scheme for soldiers into the Army, the Navy and the Air Force. The scheme is largely based on a short-term contractual basis with an aim to cut the ballooning salary and pension bills and enable a youthful profile of the armed forces.

Our perspective

We believe that the step taken by the govt is a structural transformative for Indian defence sector as this would help in reducing its revenue expenditure and pensions in the sector (which constitute ~67% of the total defence budget) and increase allocation towards capital outlay. India’s total defence expenditure stands at 2.1% of GDP (which is much lower as compared to nations like Saudi, Russia, US, Israel, South Korea). This percentage is even lower at 0.6% of GDP taking only capital outlay into account. We think that govt has realised that the country's overall capital outlay in defence needs to increase considering the geopolitical risks. Defence capital outlay has increased at ~11% CAGR over FY20-23BE with 68% of procurement budget has been reserved for domestic defence industry (vs. 58% for FY22), which implies ~29% YoY increase in indigenous defence procurement budget. Govt has also already notified lists of 768 defence items which will be procured locally in next 3-5 years (including 310 major equipments/platforms like Combat Aircrafts, Submarines, Armoured Vehicles, Light Weight Tanks, Missiles, Radars etc. and 458 sub-systems, assemblies, components). As per the estimates, ~Rs 3.5 lakh crore contracts will be placed to the domestic defence companies for the defence platforms/equipments/components in the next 5 years.

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