There is a lot of excitement about defence stocks these days. Having seen such bouts of excitement before, the team at Marcellus is a more than a little circumspect about such excitement. For those who are excited about investment opportunities in the context of defence spending in India, the legendary TN Ninan has some sobering thoughts: “What few know is that India has the third- or fourth-largest budget for defence research and development (counting space and atomic energy as part of defence). The money spent is a lot less than by either the US or China, but it is bigger than the defence R&D budgets of the UK, Germany, and France, all of which make frontline defence weaponry in a way that India does not.

In fact, for leading public sector defence companies in aerospace and electronics, R&D has accounted for a bigger share of total expenditure than the international average.

The paradoxes don’t end there. On the one hand, it is evident that indigenously produced weaponry is slowly coming into its own, examples being the Tejas and Brahmos, a range of other missiles, and impressive shipyard capabilities. On the other, while officials who have dealt with the subject talk of a sharp increase in the sales of domestic defence units, a greater share for the private sector, and reduced dependence on imported hardware, the available numbers suggest that defence production has been more or less static in dollar terms, as indeed have defence exports.” [Underling is ours]

So, why inspite of spending so much taxpayer money on R&D aren’t India’s defence scientists being able to bring in the big bucks? Mr Ninan’s answer: “The defence procurement system remains a stumbling block for many. The armed forces take too long to accept products based on domestic R&D, and the standard practice of going for the cheapest bidder does little to encourage vendors who have developed technology with government funding.”

Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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