Clsa U Blue Book Oct 2016 PDF

Blue Books
Experts views for expert investors
India
Market Strategy
7 October 2016
Mahesh Nandurkar
Executive Director
mahesh.nandurkar@clsa.com
+91 22 6650 5079
Guest author
Prashant Dikshit
Retired Air Commodore &
Strategic Affairs Expert
Modis realignment
Reshaping Indias defence policy

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Prashant Dikshit
Air Commodore VM (Gallantry) Retired

An alumni of the National Defence College (1992) in New Delhi with an MA
in Defence Science from Allahabad University, Dikshit was the editor of
Salute Magazine from 2008 to 2015. The magazine is devoted to Indian
armed forces and security issues. He was also a senior fellow and air force
member at the Institute for Defence Studies and Analyses (IDSA) between
1993 and 1995 and a Deputy Director of the Institute of Peace and Conflict
Studies (IPCS) for three years until November 2005.
After serving in the transport and bomber squadrons in the early years of
his air-force career, Dikshit concentrated on the disciplines of imagery
reconnaissance and surveys. Over two tenures, he spent five years in the
Indian Air Forces photographic reconnaissance Canberra squadron. He was
awarded the Vayu Sena Medal for gallantry in operations conducted in 1971.
He has also served as Assistant Director at the Directorate of Offensive
Operations, Air Headquarters, dealing with photo reconnaissance and survey
operations, and served on deputation to the National Remote Sensing
Agency under the Department of Space. He has been Senior Personnel Staff
Officer at Central Air Command, Allahabad; and commanded Air Force
Station Begumpet in Secunderabad as a Group Captain and Air Force Station
New Delhi as an Air Commodore.
Dikshit is a life member of the United Services Institution (USI), New Delhi,
which is an armed-forces think-tank. He is also a member of the Institute
for Defence Studies and Analyses in New Delhi.
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7 October 2016
Blue Books
Modi has made several

statements with his
assertive foreign policy
Foreword
Prime Minister Modis proactive foreign-policy initiatives have surprised and

impressed many. He has raised the countrys global profile, bolstering the
economy. Indias military has also become increasingly assertive. Last weeks
surgical strikes on terror camps across the border in Pakistan-Occupied
Kashmir demonstrate this greater self-confidence.
India is shifting
away from its earlier
leadership of the NonAlignment Movement
The more aggressive military stance under Modi is partially countered by

deepening India-US defence ties. In August, the two nations signed the
Logistics Support Agreement, which many see as a historic deal. The treaty
will allow the two militaries to use each others land, air and naval bases for
resupplies, repairs and conducting operations. This is a shift away from
Indias earlier leadership of the Non-Alignment Movement.
Defence ties with USA

have strengthened
Another reason for the US shift in stance is that India is now the worlds
largest importer of defence equipment and it is likely to stay that way for the
foreseeable future. This has implications for defence spending, which is now
greater than that of France at about US$50bn or 2.0-2.5% of GDP. A potential
increase in Indian spending may come either at the cost of other
developmental expenditure or fiscal deficit.
Domestic defence
production could
benefit big names
A thrust to substitute imports with domestic production is now on the cards.

Many Indian companies such as Larsen & Toubro (L&T), Tata Power, Mahindra
& Mahindra (M&M), Bharat Forge, Reliance Infra, Bharat Electronics (BEL) and
BEML (formerly Bharat Earth Movers) could benefit from the trend.
Expert in the field of

security, defence and
strategic affairs
Mr Prashant Dikshit spent 33 years in the Indian Air Force, including active
participation in the 1971 Indo-Pakistan war, for which he won the Vayu Sena
Medal for gallantry. He is a well-known expert in the field of security, defence
and strategic affairs. In this report, he explains the background to Indias
military relations with neighbours, other global powers and larger policy
issues. I am sure you will find his insights on the key issues enlightening.
Enjoy the read.
Mahesh Nandurkar
India Strategist, Executive Director
7 October 2016
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Blue Books
Contents
Disputes with neighbours ................................................................. 5
Policy under Modi - new alignment? .................................................. 8
Military capabilities..........................................................................17
Also see our recent report
on developments in
Koreas defence industry
Developing story under Modi
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7 October 2016
Blue Books
Section 1: Disputes with neighbours
Most of Indias armed

conflicts have been due to
border-related issues
Disputes with neighbours
When the states of India and Pakistan were created upon independence from
the British Empire in 1947, border divisions left significant scope for conflict.
India has since been involved in several military clashes with its neighbours,
most of which have been over borders. Major interactions were the 1947-48
war with Pakistan over Kashmir; the 1962 war with China over borders; the
1965 war with Pakistan over Kashmir; the 1971 war with Pakistan, which led
to the creation of Bangladesh; and the 1999 Kargil war, again with Pakistan.
Indo-Pakistan wars and conflicts
India and Pakistan have

fought four wars; three
over Jammu and Kashmir
Soon after independence in 1947, India and Pakistan fought the first IndoPakistan war over the princely state of Jammu and Kashmir (J&K), which was
contiguous to both countries but had not acceded to either of them. Irregular
forces from Pakistan invaded J&K, leading the maharaja to sign an Instrument
of Accession to India, which thus triggered the first war between the two
nations on 1 October 1947. The conflict lasted until a ceasefire in December
1948, after which J&K was divided between India and Pakistan.
Hostilities between the two neighbours continued, leading to another war in
1965, when Pakistan tried to invade J&K. India responded by attacking the
Punjab region of Pakistan. The USA and USSR brokered a ceasefire via the
Tashkent Agreement, after nearly a month of war.
The 1971 war followed a peoples revolt in erstwhile East Pakistan against the
government being run from West Pakistan. This led to a major refugee influx
into eastern India and eventually full-scale war. The conflict ended with
Pakistani forces surrendering in East Pakistan and Bangladeshs creation.
Figure 1
Bangladesh created from

the 1971 war between
India and Pakistan
Pakistani forces surrendering to India, ending 1971 war
Source: Indian Navy
India retaliated against

Pakistans invasion of
Kargil with full-scale
conventional warfare
7 October 2016
Another armed conflict between the two, though on a limited scale, took place
in 1999, when Pakistan invaded the Kargil area of J&K. India retaliated with
full-scale conventional warfare, leading to Pakistans withdrawal from the
region. Pakistan maintained that the combatants were not its regular forces
but J&K freedom fighters. However, India was able to prove Pakistans direct
involvement to the international community by providing call intercepts and
recovered weapons, among others.
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Media today is again

talking about possible
armed conflict
Blue Books
On two other occasions, after the attack on Indian parliament in 2001, and
the 2008 Mumbai attacks, both by Islamic militant organisations based in
Pakistan, the media discussed imminent armed conflict. A similar situation
exists today and the media is talking about the possibility of a military action
in the aftermath of the Uri army-base attack, where 19 Indian soldiers died.
India subsequently conducted surgical strikes in Pakistan-Occupied Kashmir
to eliminate terrorist hideouts
Other conflicts
Line of Actual Controls

unclear demarcation has
led to disputes with China
India and China were involved in a brief war in 1962, where ill-prepared
Indian forces suffered severe setbacks, cementing Chinas control of the Aksai
Chin region of J&K, which India also claims. The nations have not had any
major conflicts since then. However, military standoffs between the two have
been reported at various instances as the border (Line of Actual Control) is
not clearly demarcated.
J&K a major bone of contention

J&K unique in sharing
border with India
and Pakistan
We have to go back some decades to understand the J&K issue. When India
was partitioned in 1947 there were several princely states in the region which
were given a right to merge with either India or Pakistan. (Princely states had
internal autonomy and were not formally part of British India, but were under
indirect rule, subject to subsidiary alliances.) In several places, plebiscites
took place but J&K was unique in that it had a shared border with both India
and the newly-created Pakistan.
Princely state of J&K,

initially decided to
be independent . . .
The scenario became all the more complex as J&Ks maharaja and state ruler,
Hari Singh, was Hindu, while the majority of the population was Muslim.
However, Singh had not shown any inclination to join either India or Pakistan,
expecting to rule the state himself. But under the leadership of Sheikh
Abdullah, the people revolted against Singh. Sheikh Abdullah was close to the
then prime minister of India, Jawaharlal Nehru, as well as several other
leaders of the Congress, and was inclined to join India.
. . . but later acceded to

India following
Pakistans invasion
In October 1947, irregular Pakistani forces attacked J&K. Hari Singh

approached India to request troops and agreed the states accession to India,
which mobilised its forces to counter the offensive and the first Indo-Pakistan
war began. In agreeing the ceasefire, J&K was divided between India and
Pakistan with the latter taking control of nearly one-third of the region in the
west and north-west.
UN required a
plebiscite in J&K
At the time of accession, Nehru promised a plebiscite to determine the future

of the region, once the situation had normalised. As part of the same process,
a United Nations (UN) resolution required Pakistani forces to exit the entire
J&K state and mandated that the vote should be held under the watch of the
UN with a minimum, yet sufficient, presence of Indian forces. The plebiscite
has never occurred.
While the border as it was after the 1948 ceasefire remains largely unaltered,
three events did result in some changes. The state also had a border with
China, which did not recognise the boundary as India had demarcated it,
laying claim to the Aksai Chin region in the north-east. Eventually in 1962,
the Sino-India war led to the Chinese taking control of the Aksai Chin region,
which remains the case today. Soon thereafter, Pakistan settled its J&K border
issues with China, ceding a chunk of disputed territory (1,942km) in 1963,
with China accepting this territory as subject to final border settlement.
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7 October 2016
Blue Books
Figure 2
Areas of contention
in Jammu and Kashmir
Map of Jammu and Kashmir as divided between India, China and Pakistan
Note: Bold shows the original border of the princely state of J&K, Pok = Pakistan-Occupied Kashmir.
Source: CLSA, CIA
The borders of India and Pakistan remained unaltered even after the 1965
and 1971 wars. After the 1971 war, the dispute over J&K was converted to a
bilateral issue as per the Simla Agreement signed in 1972.
However, there was another twist in 1984, when India captured Siachen in
north J&K (the highest battleground in the world). When the international
border was established between India and Pakistan by the Karachi
agreement of 1949, the area of Siachen in North J&K was not divided with
clarity on the maps.
The loss of Indian lives in J&K over the years, particularly on account of
militant violence, has been significant. The valley has seen a marked decline
in violence in recent years but again we are witnessing a new wave of
militancy in Kashmir, which is a cause for concern.
Figure 3
Violence in J&K
has declined over
the past decade
Number of lives lost in Jammu and Kashmir due to violence

800
Civilians
(No. of deaths)
Security personnel
700
600
500
400
300
200
100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
YTD
Source: South Asian Terrorism Portal (SATP)
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Blue Books
Section 2: Policy under Modi - new alignment?
Modi has been assertive

and communicative in
dealing with other nations
Policy under Modi - new alignment?
There is a perceptible change in how foreign policy has been handled since PM
Modi came to power in India. He seems more assertive and communicative in
dealing with other nations as is the case with Pakistan. Modi extended the
hand of friendship by inviting Prime Minister Nawaz Sharif to his swearing in
ceremony. He has tried to maintain good personal relations with Sharif.
Figure 4
Modi extended a warm

welcome to Nawaz Sharif
PM Modi and PM Sharif shake hands during a visit to India
Source: Government of India
However, there was never an expectation of a significant improvement in ties,

given the duality of power in Pakistan. It is well known that the army has a
much higher say when it comes to relations with India and J&K policy. India
also understands that the democratically-elected government in Pakistan does
not make every decision and yet has chosen not to hold talks with the army.
Pathankot terror attack
changed the equation
The good relations between the two nations did not last long, which became
evident with repeated cross-border firing from both sides. India felt that this
was a part of a larger design by Pakistans armed forces, which did not want
improved associations. As relations with Pakistan plummeted, a meeting
between the two PMs, in July 2015, on the sidelines of the Shanghai
Cooperation Organisation summit in Ufa, Russia came as a surprise. Both
showed renewed willingness to take discussions forward and as a result
secretary-level talks were scheduled for January 2016. But a terrorist attack
on Indias airbase in Pathankot, Punjab brought things to a halt.
The situation has only worsened since then. India provided evidence showing
that Pakistan-based terrorists had been involved in the attacks and also
provided Pakistans intelligence agency with access to the army camp that was
attacked, but there has been no progress in the probe on the Pakistani side.
Affairs have deteriorated further since July, with ongoing protests in J&K after
the killing of Burhan Wani, a commander of a banned terror group active in
J&K. There has been a total shutdown in the Kashmir region and over 100
people have lost their lives in the confrontation with the security forces in the
valley. India has blamed Pakistan for fostering tensions. More importantly,
provocative statements by Pakistani politicians and efforts to internationalise
the Kashmir issue enraged India further.
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7 October 2016
Blue Books
Recent Uri attack has

worsened the situation
The recent attack on Indias Uri army base in J&K, which killed 19 soldiers,
has taken Indo-Pakistan relations to a multiyear low. PM Modi has to some
extent recalibrated Indias approach to its neighbour by talking about the
human-rights issues in the restive region of Baluchistan (a province in
Pakistan). India is also expected to provide asylum to a leading Baloch leader
Brahumdagh Bugti, who lives under exile in Switzerland. Overall, India
appears more proactive diplomatically in isolating Pakistan on terror grounds.
Indias diplomatic
offensive against Pakistan
after the Uri attack has
been swift and effective
As India has found itself constrained in terms of responses to attacks on

Indian soil by non-state actors, as is the case in the recent Uri attack, there
were talks, particularly in the media, about India abrogating the Indus Water
Treaty (signed in 1960) between India and Pakistan to share the Indus and
other rivers in the J&K region. I believe that abrogation of this longstanding
treaty is not only difficult operationally but also inadvisable, given the
international reputational issues. India has decided to stick to the Indus
treaty but has chosen to maximise its own use of river water by building
dams expeditiously, which is well within the treaty but will hurt Pakistan. All in
all, I believe Modis approach after the Uri attacks, particularly on the
diplomatic front, has been swift, pointed and effective.
Surgical strikes against Pakistan-administered Kashmir
Indian army lost 19 men

in attack on its Uri base
The 19 lives claimed by the attack on the Uri army base was one of the worst
personnel losses India has suffered in years. Its investigative agencies traced
the root of these attacks to Pakistan-based terrorist organisations. This
created uproar in India with public opinion building towards a reprisal.
India claims to have

conducted surgical
strikes on Pakistani
side of Kashmir
The Ministry of Defence and the Ministry of External Affairs of India conducted
a joint press conference wherein the Director General of Military Operations
(DGMO) Lieutenant General Ranbir Singh said that Indian defence personnel
had carried out surgical strikes on terrorist launchpads across the Line of
Control. These inflicted significant damage on terrorists and those trying to
shield them, with heavy casualties. The DGMO said that India does not have
any plans to conduct further strikes. He also said that he has spoken to his
Pakistani counterpart and given information about this operation.
Pakistan refuted Indian

claims but confirmed the
death of two soldiers
Leading Pakistani newspapers quoted local military officials, who confirmed

the death of two soldiers. But the Pakistani has army rejected the claims of
surgical strikes. As the Pakistani army denies that there have been any
strikes, the chances of a further escalation appear limited.
Armed conflict between India and Pakistan unlikely
Much less probability of

an armed conflict
The chance of a full-blown armed conflict between India and Pakistan today is
much lower than it was 10 to 15 years ago. There are two major reasons for
the lower probability of war. The first is that both nations are nuclear powers.
Second, in a more globalised world, a war between India and Pakistan has
significant economic risks for other nations such as the USA and China, who
have investments in both countries. As a result, there is more likelihood of
substantial international pressure on the two.
India has shown

strategic restraint
On the nuclear part, Pakistan clearly believes that nuclear weapons deter
Indian retaliation in the case of a terrorist attacks on Indian soil that emanate
from Pakistan. This has worked for Pakistan, particularly if we look at the
attack on Indian parliament in 2001 and the Mumbai attacks in 2008, both of
which were executed by Pakistan-based proscribed terrorist groups.
Diplomatic accounts suggest that India was close to attacking Pakistan on
both instances but was forced to show restraint due to international pressure
and the possibility of a drawn-out conflict that could turn nuclear.
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Economic losses will deter

both countries
Blue Books
We must understand that both nations, and particularly India, are more
integrated today in the global economic order. India was the largest recipient
of foreign direct investment (FDI) last year. In that setting, an armed conflict
has the potential to hurt investment, which will have long-term repercussions,
particularly when PM Modi is focused on wooing investors. At the same time,
China is undertaking the China-Pakistan Economic Corridor (CPEC), a massive
US$46bn investment in Pakistan.
This project is part of Chinas One Belt, One Road initiative aimed at reviving
old silk routes. CPEC will provide China with direct access to the Arabian Sea
via the Gwadar port in Pakistan. As Chinas stake in Pakistan increases, the
latter will have more reason to behave responsibly and avoid conflict. The
Chinese have also been unequivocal in stating that regional stability is a must
for investment. Moreover, the project has been subject to Pakistani media hype
surrounding the viability and benefits. Recently, in its third report, a Senate
special committee on CPEC in Pakistan raised questions over Gwadars fate.
Situation is still sensitive
Having said all of this, we must also understand that despite the checks and
balances in place, the situation remains sensitive. Lets not forget that the
two conditions were largely true in 1999 but the Kargil War still happened and
continued for over a month. Pakistans use of non-state actors could be a
tipping point. What has happened at Pathankot and more recently at Uri, has
the potential to spiral into an armed conflict, given the presence of hawkish
elements on both sides of the border and sudden swings in public opinion.
Sino-India military relations
India and China have

US$70bn in bilateral trade
It has been said that the 21st Century belongs to China and India. The
economic rise that China has witnessed over the past two decades or so is
nothing short of miraculous. As China has progressed, China-India trade has
advanced in leaps and bounds with the total bilateral figure at US$70bn in
2015-16 but heavily skewed towards Chinese exports to India.
When Modi came to power, Chinese Premier Xi Jingping was among the first
high-profile guests he hosted in India. But, as the two were meeting, it was
reported that there was a military standoff between the armed forces of the
two nations at the border. This explains the complexity of Sino-India
relations. It bears reminding that India and China have long-standing borderrelated issues and the two fought a brief war in 1962.
Figure 5
Modi hosted Chinese

premier as first highprofile guest since
coming to power
PM Modi and Chinese Premier Xi Jingping
Source: PIB
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7 October 2016
Modi has not been afraid of

responding to the Chinese
Blue Books
India has grown more assertive in its relations with China under Modi. The PRC
had been seen to be tilting towards Pakistan; evident in the CPEC project.
China also blocked Indias move to designate Masood Azhar, a Pakistan-based
operative of a proscribed terror group as a terrorist. India, which had stayed
away from the South China Sea conflict began mentioning the dispute in IndiaUS joint statements. Subsequently, India was not admitted into the Nuclear
Suppliers Group (NSG), which India blamed on the Chinese.
India responded by extending a US$500m credit line to Vietnam, which is
expected to be used for defence deals. Clearly, Modi has not been afraid of
responding to the Chinese. More importantly, this also highlights that India has
levers to counter Chinese moves, which it sees as detrimental to Indian
interests. But we must also stress that India and China have shown maturity in
their relations. Despite long-standing border issues, with no resolution in sight,
the two nations have become deeply involved economically. The cooperation at
various levels, such as the establishment of BRICS Bank, is also commendable.
Figure 6
India and China have

cooperated at bilateral
and multilateral levels,
despite unresolved issues
Leaders of the BRICS nations
Source: PIB
India has moved to beef

up infrastructure in the
north-eastern states
bordering China
Interestingly, PM Modi has not shied away from upgrading Indias woefully
inadequate military infrastructure bordering China. Previous administrations
had reservations about pursuing military upgrades near the border to avoid
antagonising the Chinese. But now India is taking decisive and bold steps to
improve infrastructure. It has increased the overall deployment of forces at
the border and is also improving road infrastructure. Work on the critical
255km Darbuk-Shyok-Daulat Beg Oldi road is ongoing, with completion
expected by the end of the year.
India has improved its rapid airlift capabilities by operationalising advanced
landing ground at 16,000 feet in the region. In addition, several other roads
along the route are being upgraded and strengthened, which will facilitate the
movement of heavy vehicles. India has also recently deployed Brahmos
missiles (jointly developed with Russia) in the region. While some progress
has happened, the upgrade process should keep going, as India is
significantly behind China in terms of military preparedness in the region.
7 October 2016
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Blue Books
Figure 7
India has a long border

with China in north and
north-eastern India
Indias borders with various countries
Source: https://commons.wikimedia.org/wiki/File:IndiaMap.png, CLSA
Deepening of Indo-US military ties
India led the

Non-Alignment Movement
Indias ongoing shift towards the USA has been happening for over 10 years
but it is not taking place at the expense of relations with other major powers.
If we look at the progression of Indias relations with the USA and Russia,
India chose not to align with the superpowers as Indias first prime minister
Nehru believed in the principle of non-alignment. He was the founding father
of the Non-Alignment Movement in 1961.
However, India had to move towards one of the superpowers as it continued
to face threats and its military capability was grossly inadequate. Nehru and
several major political leaders were inclined towards socialism and as a result
the USSR was the natural choice. Pakistan had by then become a member of
military blocs such as Southeast Asia Treaty Organization (SEATO) and
Central Treaty Organization (CENTO), led by the USA.
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7 October 2016
Blue Books
Since 2000, Indian and US

governments have further
improved relations
The USSR consistently supported India during wars with Pakistan, both
diplomatically in the UN and militarily with defence equipment. Its support in
the 1971 Indo-Pakistan war was particularly important as the USA was firmly
behind Pakistan. But from 1999 onwards, when the USA supported India
during the Kargil War, the relationship began to change. President Clinton
visited India in 2000 and the two new allies havent looked back since.
Successive Indian and US governments have only further improved the
relations between the two nations. President George W Bush earned India
several concessions and waivers for the civil nuclear deal signed in 2008.
Figure 8
Civil nuclear deal signed

after concerted efforts
from George W Bush and
Manmohan Singh
George W Bush and Manmohan Singh meeting in New Delhi in 2006
A defining moment in
India-US relations
Source: White House
USA has backed India

on NSG and UNSC
More recently, the USA has supported Indias entry into the Nuclear Suppliers
Group (NSG) and its permanent membership of the United Nations Security
Council (UNSC). From the US perspective, a militarily strong India acts as a
counterweight to Chinas growing influence in the region, while its higher
defence spending could benefit US manufacturers. Recently, a senior
Lockheed Martin official agreed to shift most of its F-16 global production to
India if it agreed to buy a certain number of aircraft. Globally, the USA is the
biggest exporter of major arms and India the biggest importer.
Figure 9
Figure 10
Global share in major arms exports, 2010-14
Global share in major arms imports, 2010-14

16
(%)
14
30
12
25
10
20
15
6
4
10
Singapore
South Korea
USA
Turkey
Australia
Pakistan
UAE
China
Israel
Ukraine
Italy
Spain
UK
France
Germany
China
Russia
USA
Saudi Arabia
India
35
(%)
Source: SIPRI
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Blue Books
No absolute alignment
Indias relationship with the USA is at an unprecedented high but the recently
concluded India-US deal on military logistics should not be seen as absolute
alignment. The seeds of the agreement were put in place by the previous
Manmohan Singh government and the current administration has taken further
steps to formalise it. However, it is a fairly routine agreement and in the past
the USA has used Indian airbases for refuelling etc, on a case-by-case basis.
Russia continues to be the

biggest supplier to India
on defence equipment
I believe that too much is being made of closeness between India and the
USA. India is far from aligning with any nation and ties with other major
powers remain strong. This is evident from the fact that India signed a deal
with a French firm for modernisation of its ageing aircraft fleet, despite strong
lobbying by the Americans and British.
At the same time, India and Russia will continue to be strong partners as the
bulk of its defence equipment was either bought from Russia or co-developed
with it. India co-developed its recently commissioned and most important
naval asset, INS Vikramaditya, with Russia. At the same time, the two
countries are jointly developing the Brahmos II missiles, while Russia is also
developing nuclear power plants in India. Notably, as per the Stockholm
International Peace Research Institute (SIPRI) in 2011-15, Russia supplied
70% of Indias arms imports, the USA 14% and Israel 4%. SIPRI reports also
suggest that despite increasing imports from the USA, Russia is likely to
remain the biggest arms importer to India in the foreseeable future.
Russia to remain biggest

arms exporter to India
Figure 11
Figure 12
Indias military imports by geography, 2006-10

Poland
3.0%
USA
2.2%
Others
3.6%
Uzbekistan
3.9%
Indias military imports by geography, 2011-15

UK
3.6%
Italy
1.7%
France
1.6%
Others
4.4%
Israel
4.5%
Israel
4.9%
USA
13.8%
UK
5.8%
Russia
76.5%
Russia
70.4%
Source: SIPRI
Figure 13
Brahmos is worlds
fastest anti-ship
cruise missile
Brahmos missile developed jointly by India and Russia
Source: PIB
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Indo-US defence ties

are improving
Strengthening US-India defence ties

As discussed, since the early 2000s, the USAs proximity to India has
continued to grow while it has increasingly distanced itself from Pakistan. As
the US-Indian relationship has evolved at a political level, defence ties have
also strengthened over the past decade or so. Links have moved forward on
various fronts including joint-exercises, shared military infrastructure and
high-grade technology, and procurement of defence equipment. Notably, from
almost zero a decade ago, the USA is now among the major arms exporters
to India.
India and the USA resumed the Malabar exercise in 2002, which is an annual
naval joint-exercise.
Figure 14
India and the US

conducting Malabar
exercise annually
India and USA conducting the Malabar exercise in 2012
Source: US Navy
LGA between
India and USA
In August 2016, India and the USA signed the Logistics Support Agreement,
which many see as historic. The arrangement allows the two militaries to use
each others land, air and naval bases for resupplies, repairs and to conduct
operations. At the same time, Indias access to US defence technology has
increased substantially. A US official recently said that India now has access
to nearly 99% of US defence technologies, which is at par with Americas
treaty allies.
India was recently admitted to the Missile Technology Control Regime, which
allows India to freely trade short-range (up to 300km) missiles. US support
was critical to its admission. India also expects entry to other multilateral
export-control regimes such as the Wassenaar Arrangement (for export
control on conventional arms), the Australia Group (for control of chemical
and biological technology) and the NSG, partly due to US support. Bilateral
defence ties should only grow in the years ahead, as India and the USA
continue to work together, especially regarding maritime security.
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Indias military ties with other neighbours

Good relations with
other neighbours
India has extended a line

of credit to Bangladesh
Many of Indias neighbours, including Pakistan, Bangladesh, Nepal and the

Maldives have faced political disturbances that have made engagement
challenging. Despite these problems, India has improved military involvement
with its neighbours, particularly Bangladesh and Myanmar. Relations with
Nepal and the Maldives saw some hiccups but are gradually improving.
Bangladesh
There has been good progress in its military ties with Bangladesh in recent years
and the settlement of long-standing border issues earlier this year has removed
a major thorn in the relationship. Improvements started in 2007-08, when the
military caretaker government in Bangladesh worked to enhance relations with
India. There have been regular exchange visits between the top leadership of
their respective armed forces and the two countries carry out army-to-army staff
talks to increase cooperation. In June 2016, Indian army chief General Dalbir
Singh Suhag visited Bangladesh to boost bilateral military cooperation.
India and Bangladesh have also participated in joint exercises against
terrorism. More importantly, PM Sheikh Hasina has been cracking down on
hard-line elements in her country. Bangladesh also voiced support for Indias
surgical strike against terrorist hideouts on the Pakistani side of J&K.
Bangladesh has also provided logistical assistance in setting up a power plant in
Tripura. In March 2016, India extended a US$2bn line of credit to Bangladesh,
which is the most it has ever extended. Overall, developments look promising.
Defence assistance deal

with Myanmar; building a
India-MyanmarThailand highway
Political turmoil in
Maldives set back
relations but they are
now improving
Visa- free travel with

Nepal but ties need
to be rebuilt
16
Myanmar
Relations with Myanmar have clearly improved. In mid-2015 the two countries
signed a defence-assistance deal, which will see India help the Myanmars army
and navy modernise. Myanmar is an important part of Indias Act East Policy.
This announcement came just after Indian forces had entered the territory of
Myanmar to pursue rebels that attacked the army in north-eastern Indian. But
India is significantly behind China and Southeast Asia in terms of relations with
Myanmar. The construction of the India-Myanmar-Thailand highway, is expected
to improve Indias position in the region.
Maldives
India-Maldives relations suffered a setback owing to political turmoil in the
archipelago. Modi had to cancel a visit to the Maldives but since President
Yameens visit to India in April 2016, there has been some improvement.
Indias major concern is Chinas growing clout in the country but the recent
deal between India and the Maldives targets greater defence cooperation.
More importantly, Yameens comments that his country continues to have an
India first policy is heartening. However, certain issues, such as the
cancellation of GMR Infrastructures airport contract are yet to be resolved.
Nepal
India has traditionally had a strong relationship with Nepal, which includes
visa-free travel, open borders and negligible restrictions on work permits.
Recently, relations became strained over Nepals new constitution, which India
considered detrimental to the Madhesi people, who are closer to India. There
has since been a change in the government and things are expected to
improve. Nonetheless, India will need to work to change public opinion in the
country, which became anti-Indian after it was cut-off from essential supplies
in September 2015, which Nepal believes was an unofficial blockade, although
India argued that supplies to the land-locked nation were blocked by Madhesi
protestors who were unhappy with the new constitution.
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Section 3: Military capabilities
Military capabilities
India is among the top-five nations in the world in terms of military capability
on most parameters. As per SIPRI, its defence spending was US$51bn in
2015, the sixth highest but significantly lower than the top-two globally with
the USA at US$596bn and China at US$215bn. As a percentage of GDP,
Indias defence spend has been in the range of 2.0-2.5%.
Indias annual
military expenditure is
about US$51bn
Figure 15
Figure 16
Defence expenditure of select countries, 2015
Defence expenditure as a % of GDP, 2015
(US$bn)
596
600
13.7
10
400
87
1.0
1.2
1.9
2.0
2.1
2.3
5.4
5.4
Israel
66
3.4
Pakistan
55
3.3
USA
51
India
51
France
Israel
41
UK
16
39
Germany
10
Pakistan
200
China
215
Russia
300
Saudi Arabia
USA
China
Saudi Arabia
Russia
UK
India
France
Japan
0
Germany
(% of GDP)
14
12
500
100
16
Japan
700
Source: SIPRI
In terms of land systems, India has the fourth-highest number of heavy

battle-ready tanks after Russia, China and the USA. At 1.3m, Indias active
military personnel is the third highest in the world, while China has the
highest number of active military personnel at 2.4m. India also has good
missile capability with Prithvi missiles, for short-range (less than 600km)
surface-to-surface attacks; Agni missiles, for long-range (up to 8,000km)
surface-to-surface attacks; Akash and Trishul missiles, for surface-to-air
attacks; and Dhanush missiles, for sea-to-sea and sea-to-surface attacks.
Also, Brahmos missiles are cruise missiles with a range of 300km that can be
launched from land, air or ship.
Nuclear submarines
give India a regional edge
India has a total of 295 naval ships, which include aircraft carriers, frigates,
corvettes and submarines. However, it has two aircraft carriers versus Chinas
one. This is part of Indias attempts to be battle ready on the two waterfronts
of the Bay of Bengal and the Arabian Sea. More importantly, India is one of
only six countries that possess nuclear submarines, which are important in
war times as they can remain under water for months since they are powered
by nuclear energy. INS Arihant, Indias first nuclear submarine has cleared
trials but is yet to be included in the fleet.
Indias air force has the worlds fourth-highest number of aircraft at 2,100.
This includes 809 attack aircraft. Its major fighter aircraft is the Sukhoi Su30MKI developed by Russias Sukhoi. It will include the Dassault Rafale once
delivery commences from 2019. Other aircraft are the Mirage 2000, MIG-29,
HAL Tejas (developed in India), MIG-27 and Jaguar.
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Figure 17
Arms strength, 2015
India lags China but is far

ahead of Pakistan
India
China
Pakistan
Total population (m)
1,252
1,367
199
Aircraft (all types)
2,086
2,942
923
Attack aircraft
809
1,385
394
Fighter aircraft
679
1,230
304
346
507
151
Tank strength
6,464
9,150
2,924
Towed artillery
7,414
6,246
3,278
292
1,770
134
Submarines
14
68
Frigates
14
48
10
Destroyers
10
32
Corvettes
26
26
Serviceable aircraft
Artillery seems high
but only about half
is operational
Multi-launcher rocket system

Aircraft carriers
51
215
10
7,000
14,500
1,046
13,888
22,457
7,257
Annual defence spend - 2015 (US$bn)

Coastline coverage (km)
Shared borders (km)
SIPRI. Source: Global Firepower
Where Indias government needs to invest more
Indias defence preparedness has suffered over the past decade or so, owing
to several factors, most glaring of which is the lack of requisite equipment. All
three dimensions, land, air and sea, have suffered due to delays in
manufacturing at the local level, delays in finalising deals with exporters and
corruption plaguing the procurement system. For example, in the Tatra
vehicles deal, massive irregularities were unearthed involving high-level BEML
officials, as well as senior army and government officials. The case however
did not see much progress due to a lack of evidence.
Defence preparedness has

suffered due to various
bureaucratic issues
As China and Pakistan have continued to increase their defence spending,

India has been compelled to raise its budget. Chinas phenomenal economic
growth has led to its defence expenditure posting a robust 17% Cagr over the
past 10 years. India and Pakistan have seen their defence expenditure record
a more modest 8% Cagr over the same period.
Figure 18
Figure 19
Chinas defence expenditure
Pakistans defence expenditure
250
(US$bn)
10
215
200
200
178
157
150
138
106
100
50
7
6
6
5
86
68
46
10
9
116
(US$bn)
55
2
1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Stockholm International Peace Research Institute (SIPRI)
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: SIPRI
7 October 2016
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Figure 20
Chinas military spend is

now four times Indias
Indias expenditure on defence

70
(US$bn)
60
50
46
50
47
47
2012
2013
51
51
2014
2015
39
40
33
28
30
23
24
2005
2006
20
10
0
2007
2008
2009
2010
2011
Source: SIPRI
India lacks main battle tanks (MBT) and infantry-combat vehicles, which are a
mainstay of any army. Modernisation is taking place with the development of
Arjun (MBT) and imports of the 310 T-90S MBTs from Russia. Artillery
modernisation is also required, with the recently inducted 155mm guns
providing some relief. The militarys air-defence system is largely obsolete
and needs to be replaced with more responsive modern air-defence systems.
Surveillance capabilities are limited. The army does not yet have a dedicated
military satellite for its space-surveillance needs. Cyber warfare capabilities
are also in a nascent stage.
Figure 21
Despite delays, Arjun has

been able to fulfil Indian
armys MBT requirement
Arjun main battle tank
Source: PIB
Submarine and aircraft

carrier a welcome
addition to navy, but
some equipment is ageing
7 October 2016
Indias naval capabilities have improved to some extent in recent years after
the commissioning of the INS Chakra (Akula-class submarine stationed on the
eastern coast), INS Vikramaditya (aircraft carrier) and INS Arihant (nuclear
submarine). But an ageing fleet leaves defence gaps. India has suffered two
major naval disasters: INS Sindhurakshak in 2013, when 18 officers and
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sailors died due to a major fire that led to it sinking in Mumbais naval
dockyard; and INS Sindhuratna in 2014, when two officers died from smoke
inhalation. Both accidents were partly related to the fleets age. There has
been severe bureaucratic interference in the naval defence procurement,
which has not only led to delays but also to Admiral Devendra Joshi becoming
the first head of the navy to resign, in 2014. Reports suggest that the
submarine fleet has dwindled to 40% of the minimum requirement.
Figure 22
INS Vikramaditya is
Indias major
aircraft carrier
INS Vikramaditya, Indias recently commissioned aircraft carrier
Source: PIB
India needs to prepare for

a war on two fronts, some
beefing up needed . . .
The air force only has 33 fighter squadrons when at least 42 are required
should there be an escalation of hostilities on both the Pakistan and China
borders. Airborne warnings and control systems are also inadequate. While
finalisation of the Rafale acquisition deal with France has brought some cheer,
delivery will only begin from 2019 and, more importantly, is insufficient to
fight a war at two fronts, which could be the case for India.
Figure 23
. . . although the recent

Rafale deal helps
Dassault Rafale
Source: Rafale
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State-owned enterprises involved in defence manufacturing
India has consistently

worked on indigenising
defence production but
with limited success
India has consistently stressed increasing the share of indigenous content in

its total defence procurement but it has not worked the way India would have
liked. In 1992, the then Scientific Advisor to the Defence Minister, Dr APJ
Abdul Kalam (later Indias president) formulated 10-year self-reliance plan to
take indigenous content from 30% during 1992-93 to 70% by 2005. However,
India has not yet achieved this level. Its indigenous content has varied from
36% to 48% between 2006-07 and 2010-11.
India consistently features among the biggest importers of defence
equipment with its global share only ever rising. Over 2006-10, its share of
total international arms imports was 8.5%, which rose to 14% over 2011-15.
During the same period China brought down its arms import share from 7.1%
to 4.7%. This shows that India so far has not succeeded in indigenising
defence production.
Figure 24
Indias share of arms

imports has gone up
Major arms importing countries by value

16
(% of total global arms imports)
2006-10
2011-15
14
12
10
8
6
4
2
0
India
Saudi
Arabia
China
UAE
Australia
Turkey
Pakistan
Source: SIPRI
There are three major entities involved in defence-equipment production in

India: ordnance factories, which produce small arms, guns, mortar bombs
and tanks; defence public-sector undertakings (DPSU), which are involved in
manufacturing aircraft and submarines; and the Defence Research and
Development Organisation (DRDO), which is the organisation that works for
defence R&D.
The failure to achieve the desired results is attributed to slow progress of all
the three arms and at the same time a lack of coordination between the
armed forces and the state-owned enterprises.
HAL is the largest defence
PSU in India
7 October 2016
Major DPSUs in India includes Hindustan Aeronautics (HAL), Bharat

Electronics (BEL), BEML (formerly Bharat Earth Movers), and Hindustan
Shipyard (HSL). HAL is the largest DPSU accounting for half of all DPSUs
production. HAL is credited with manufacturing Indias first indigenous fighter
aircraft, LCA Tejas, which was recently inducted into the Indian Air Force. HAL
also manufactures Indias major fighter aircraft Sukhoi Su-30MKI. HAL is also
conducting trials of light combat helicopter. But overall, its performance has
been subpar, given continuous delays and cost overruns on several projects.
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Figure 25
HAL has the highest sales

among DPSUs
Revenue of defence PSUs, FY15

180,000
(Rsm)
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
HSL
MIDHANI
GSL
GRSE
MDL
BDL
BEML
BEL
HAL
Note: HSL = Hindustan Shipyard, MIDHANI = Mishra Dhatu Nigam, GSL = Goa Shipyard, GRSE = Garden
Reach Shipbuilders and Engineers, MDL = Mazgaon Dock, BDL = Bharat Dynamics, BEML = formerly
Bharat Earth Movers, BEL = Bharat Electronics, HAL = Hindustan Aeronautics. Source: Companies
Indias failure to succeed in boosting its indigenous defence industry is partly

attributable to the lack of R&D focus. However, DRDO has developed over 500
technologies, which have been transferred to the industry. These include a
range of missile systems, radars, electronic-warfare systems, combat
vehicles, unmanned aerial vehicles (UAV), robotic systems, submarine escape
suits and ready-to-eat meals. As on 1 March 2015, the cumulative production
value of all DRDO-developed items (inducted or in the induction process)
touched nearly Rs1,748bn.
Can Make in India improve defence production?
Project delays have hurt

domestic production
Make in India is the current governments pet programme aimed at providing

a fillip to domestic manufacturing. While there has been significant focus on
indigenising production, the Make in India initiative provides a much needed
boost. As one of the worlds major defence-equipment importers, India is
focusing on indigenising defence manufacturing. While efforts in defenceequipment production have been ongoing for several years, success has been
limited. The recently commissioned LCA Tejas is a classic case of Indias
modest achievements. Originally conceptualised in the 1980s, the project has
been significantly delayed.
Figure 26
Several key projects saw

delays of many years
Project schedule changes

Project
Original date
Revised date
Delay (yrs)
Light combat aircraft (LCA)
Dec 08
Dec 15
Naval light combat aircraft
Mar 10
Dec 14
Aero Engine - Kaveri
Dec 96
Dec 09
(under revision)
19 and
counting
Airborne early warning & control

(AWE&C) system
Apr 11
Oct 14
Air to air missile system - Astra
Aug 12
Dec 16
Mar 12
Dec 15
2012-2017
Dec 15 onwards
Long range surface to air missile (LR-SAM)

Project P75 - 6 Scorpene submarines
Source: CLSA, Media
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Make in India
programme could change
but its still early days
Make in India is fundamentally changing the whole process of defence

manufacturing. As a first step, in March 2016, the government unveiled the
Defence Procurement Procedure (DPP) 2016. Under the new DPP, the
government has introduced a newly-incorporated procurement class called
Buy (Indian-IDDM) - IDDM stands for Indigenous Designed Developed and
Manufactured. This would be the first preference in all acquisitions starting
April 2016, when the DPP will go into effect.
The category refers to the procurement from an Indian vendor of either
products that have been indigenously designed, developed and manufactured,
with a minimum of 40% indigenous content, or products having 60% of it on
a cost basis but not designed and developed indigenously. The policy has also
significantly liberalised the offset liability for foreign vendors, which makes it
compulsory for companies to invest, or source, at least 30% of the contract
value in India.
Additionally, defence FDI was recently increased from 26% to 49%, which in
select cases can go up to 100%, where the deal involves high-end technology
transfer after approval from the Ministry of Defence (MoD).
The government is, indeed, taking steps to promote indigenisation and at the
same time trying to meet the immediate needs of the armed forces. However,
it is too early to see a significant impact from the Make in India programme.
Future of defence manufacturing
Investments made by
private players to come to
fruition as Make in India
initiative kicks off
As India improves its defence-manufacturing capabilities, it will aim to

become more self-reliant in terms of defence capabilities and increase
defence exports. The aim should be to eventually move towards becoming a
net exporter of defence equipment.
In terms of indigenisation, the goal is to reach 70% by 2027 versus 40%
currently. This most important factor would be the increased participation of
private entities in defence manufacturing. DPSUs dominate the industry,
accounting for over 90% of total production. Capacity and capability building
has happened in the past decade:
Defence Research and Development Organization (DRDO) in missiles

backed by private sector - L&T and Tata Power SED
Setting-up a dedicated yard without any commitment of business
Precision component manufacturing by L&T (Coimbatore), Punj Lloyd
(Malanpur)
Figure 27
Figure 28
Figure 29
L&Ts Pinaka rocket launcher
L&T Kattupalli shipyard
Tata Power SED - 155mm Howitzer
Source: L&T, Tata
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Several major Indian

names are targeting
significant revenue from
the defence space
Over the past two years, there has been substantial interest from private
players for participation in defence contracts. Several Indian names, such as
L&T, Bharat Forge, Punj Lloyd, M&M and Reliance Defence are targeting
significant revenue from the defence space. The government is widely
expected to soon award a Rs45bn contract for Vajra-T Howitzer, which has
been under negotiations for quite some time. L&T is the only company that
has entered the final stage of negotiations after the testing phase. L&T, which
has Samsung as its technology partner for the contract, will produce the guns
in India under a JV company once it gets the order. Close to 50% of guns will
be indigenised and manufactured in India at L&Ts Strategic Systems Complex
at Talegaon near Pune.
Bharat Forge is working on five artillery-gun platforms and is targeting to be
among the top three in artillery systems and export artillery equipment out of
India. Its CEO has said the company has defence JVs with two Israeli players
and SAAB from Sweden. Anil Ambanis Reliance Group has created a new
defence arm: Reliance Aerospace and Defence and is looking at helicopter
projects. Reliance Defence recently signed a JV with Dassault Aviation.
The Indian defence minister has set a target of US$2bn of defence exports
over the next two years. Indian exports in the recent past have included light
helicopters to Afghanistan, Nepal and Namibia, DRDO developed HMS-X2
sonars to Myanmar and protective armour to Turkey.
Indias internal security concerns
Internal security is of
prime importance to
national stability
The nations internal security is more important than the external threats it
faces. National Security Adviser Mr Ajit Doval rightly said that India cannot
become a powerful country without managing its internal security. A country
which is internally unstable is more likely to disintegrate, as we are seeing
unfold in Syria, Egypt, Yemen and Iraq, and what we have seen in Yugoslavia
and Sudan in recent history.
India has suffered significant loss of life due to various internal-security
issues across the north-eastern region, J&K and Naxal-impacted area.
However, it is heartening to note that the number has dropped substantially
since 2010.
Figure 30
Internal security concerns

are slowly reducing
Indias loss of lives due to security-related issues

1,800
(No. of deaths)
Civilians
Security personnel
1,600
1,400
1,200
1,000
800
600
400
200
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
YTD
Source: SATP
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But what exactly is an internal security threat? There is a wide spectrum of

issues that fall under internal security. India being a plural, multilingual and
multi-religious society with a wide income-level gap is beset by a multitude of
issues. Communalism, militancy, left-wing extremism (naxalism), cybercrimes, regionalism, caste-related issues and inter-state conflicts are some of
the issues that fall under internal security.
Figure 31
Naxal movement is the

biggest threat to the
internal security
Areas impacted by naxal issues as of 2013
Source: https://commons.wikimedia.org/wiki/File:India_map_Naxal_Leftwing_violence_or_activity_affected_districts_2013.SVG; CLSA
India continues to face these issues on a regular basis. We are seeing casterelated violence by Jats and Patidars, interstate issues in the Cauvery water
dispute, militancy issues in J&K and communalism-related violence in several
parts of the nation on a regular basis.
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Figure 32
Figure 33
Civilian lives lost by region, 2015
Security personnel lives lost by region, 2015
Others
7%
Others
3%
181 deaths
North-east
29%
Left-wing
extremism
impacted
51%
Left-wing
extremism
impacted
37%
J&K
11%
155 deaths
North-east
32%
J&K
26%
Punjab
2%
Punjab
2%
Source: SATP
But Indias response burden largely falls on the police, who are often illequipped and ill-trained. At the same time they are largely dealt with at state
level and for a more pan-India issue, such as naxalism, there are substantial
coordination issues. Indeed, wherever states have struggled to control law
and order for prolonged periods, central forces have taken over. For instance,
naxal issues are tackled by Central Reserve Police Force (CRPF); or the Assam
Rifles, in the north-eastern region; and so on.
However, on most of these longstanding issues, even central forces have not
been able to bring about sustained periods of peace. This is primarily due to
neglect at state level to modernise police forces. A responsive police force to
tackle modern challenges could only come about if states take part in
improving training methods, procure modern weapons, depoliticise police
forces, improve coordination with the centre and create special divisions to
tackle crime, such as cyber-attacks. Control of law and order for long periods
should not be left to the armed forces but on the other hand central police
forces should be trained and indoctrinated to fight the fourth-generation war
being waged by left-wing extremists and insurgents.
26
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Important disclosures
Companies mentioned
BEML (N-R)
Bharat Dynamics Limited (N-R)
Bharat Electronics (N-R)
Bharat Forge (BHFC IB - RS897.3 - SELL)
Dassault Systemes (N-R)
Defence Research and Development Organization (N-R)
Garden Reach Shipbuilders and Engineers Limited (N-R)
GMR Infrastructure (N-R)
Goa Shipyard Limited (N-R)
Hindustan Aeronautics Limited (N-R)
Hindustan Shipyard Limited (N-R)
Larsen & Toubro (LT IB - RS1,436.5 - BUY)
Lockheed Martin (N-R)
M&M (MM IB - RS1,364.3 - OUTPERFORM)
Mazgaon Dock Limited (N-R)
Mishra Dhatu Nigam Limited (N-R)
Punj Lloyd (N-R)
Reliance Defence (N-R)
SAAB (N-R)
Samsung Electronics (005930 KS - 1,600,000 WON - BUY)
Sukhoi (N-R)
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member of companies covered by the analyst
unless disclosed herein. In circumstances where an
analyst has a pre-existing holding in any securities
under coverage, those holdings are grandfathered
and the analyst is prohibited from trading such
securities.
Unless
specified
otherwise,
CLSA/CLSA
Americas/CLST
did
not
receive
investment
banking/non-investment banking income from, and
did not manage/co-manage a public offering for, the
listed company during the past 12 months, and it
does not expect to receive investment banking
compensation from the listed company within the
coming three months. Unless mentioned otherwise,
CLSA/CLSA Americas/CLST does not own a material
discloseable position, and does not make a market,
in the securities.
As analyst(s) of this report, I/we hereby certify
that the views expressed in this research report
accurately reflect my/our own personal views about
the securities and/or the issuers and that no part of
my/our compensation was, is, or will be directly or
indirectly related to the specific recommendation or
views contained in this report or to any investment
banking relationship with the subject company
covered in this report (for the past one year) or
otherwise any other relationship with such company
which leads to receipt of fees from the company
except in ordinary course of business of the
company. The analyst/s also state/s and confirm/s
that he/she/they has/have not been placed under
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any undue influence, intervention or pressure by any

person/s in compiling this research report. In
addition, the analysts included herein attest that
they were not in possession of any material,
nonpublic
information
regarding
the
subject
company at the time of publication of the report.
Save from the disclosure below (if any), the
analyst(s) is/are not aware of any material conflict
of interest.
Key to CLSA/CLSA Americas/CLST investment
rankings: BUY: Total stock return (including
dividends) expected to exceed 20%; O-PF: Total
expected return below 20% but exceeding market
return; U-PF: Total expected return positive but
below market return; SELL: Total return expected to
be
negative.
For
relative
performance,
we
benchmark the 12-month total forecast return
(including dividends) for the stock against the 12month forecast return (including dividends) for the
market on which the stock trades.
In the case of US stocks, the recommendation is
relative to the expected return for the S&P500 of
10%. Exceptions may be made depending upon
prevailing market conditions. We define as Double
Baggers stocks we expect to yield 100% or more
(including dividends) within three years at the time
the stocks are introduced to our Double Bagger
list. "High Conviction" Ideas are not necessarily
stocks with the most upside/downside, but those
where the Research Head/Strategist believes there
is the highest likelihood of positive/negative
returns. The list for each market is monitored
weekly.
Overall
rating
distribution
for
Americas only /CLST only Universe:
CLSA/CLSA
Overall rating distribution: Buy / Outperform CLSA: 60.57%; CLSA Americas only: 58.89%; CLST
only: 70.42%, Underperform / Sell - CLSA: 39.28%;
CLSA Americas only: 41.11%; CLST only: 29.58%,
Restricted - CLSA: 0.00%; CLSA Americas only:
0.00%; CLST only: 0.00%. Data as of 30 September
2016.
Investment banking clients as a % of rating
category: Buy / Outperform - CLSA: 2.78%; CLSA
Americas only: 0.00%; CLST only: 0.00%,
Underperform / Sell - CLSA: 2.79%; CLSA Americas
only: 0.00%; CLST only: 0.00%, Restricted - CLSA:
0.00%; CLSA Americas only: 0.00%; CLST only:
0.00% . Data for 12-month period ending 30
September 2016.
7 October 2016
There are no numbers for Hold/Neutral as

CLSA/CLSA Americas/CLST do not have such
investment rankings.
For a history of the recommendations and price
targets for companies mentioned in this report, as
well as company specific disclosures, please write to:
(a) CLSA Americas, Compliance Department, 1301
Avenue of the Americas, 15th Floor, New York, New
York 10019-6022; (b) CLSA, Group Compliance,
18/F, One Pacific Place, 88 Queensway, Hong Kong
and/or; (c) CLST Compliance (27/F, 95, Section 2
Dun Hua South Road, Taipei 10682, Taiwan,
telephone (886) 2 2326 8188). 2016 CLSA
Limited, CLSA Americas, and/or CLST.
2016 CLSA Limited, CLSA Americas, LLC
(CLSA Americas) and/or CL Securities Taiwan Co.,
Ltd. (CLST)
This publication/communication is subject to and
incorporates the terms and conditions of use set out
on
the
www.clsa.com
website
(www.clsa.com/disclaimer.html.).
Neither
the
publication/communication nor any portion hereof
may be reprinted, sold, resold, copied, reproduced,
distributed, redistributed, published, republished,
displayed, posted or transmitted in any form or
media or by any means without the written consent
of CLSA group of companies (excluding CLSA
Americas, LLC) (CLSA), CLSA Americas (a brokerdealer registered with the US Securities and
Exchange Commission and an affiliate of CLSA)
and/or CLST.
CLSA, CLSA Americas and CLST has/have
produced
this
publication/communication
for
private circulation to professional, institutional
and/or
wholesale
clients
only.
This
publication/communication may not be distributed
or redistributed to retail investors. The information,
opinions and estimates herein are not directed at,
or intended for distribution to or use by, any person
or entity in any jurisdiction where doing so would
be contrary to law or regulation or which would
subject CLSA, CLSA Americas and/or CLST to any
additional registration or licensing requirement
within such jurisdiction. The information and
statistical data herein have been obtained from
sources we believe to be reliable. Such information
has not been independently verified and we make
no representation or warranty as to its accuracy,
completeness or correctness. Any opinions or
estimates herein reflect the judgment of CLSA,
CLSA Americas and/or CLST at the date of this
7 October 2016
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Blue Books
publication/communication and are subject to

change at any time without notice. Where any part
of the information, opinions or estimates contained
herein reflects the views and opinions of a sales
person or a non-analyst, such views and opinions
may not correspond to the published view of CLSA,
CLSA Americas and/or CLST. This is not a
solicitation or any offer to buy or sell. This
publication/communication
is
for
information
purposes only and does not constitute any
recommendation, representation, warranty or
guarantee of performance. Any price target given in
the report may be projected from one or more
valuation models and hence any price target may
be subject to the inherent risk of the selected
model as well as other external risk factors. This is
not intended to provide professional, investment or
any other type of advice or recommendation and
does not take into account the particular
investment objectives, financial situation or needs
of individual recipients. Before acting on any
information in this publication/communication, you
should consider whether it is suitable for your
particular circumstances and, if appropriate, seek
professional advice, including tax advice. CLSA,
CLSA Americas and/or CLST do/does not accept any
responsibility and cannot be held liable for any
persons use of or reliance on the information and
opinions contained herein. To the extent permitted
by applicable securities laws and regulations, CLSA,
CLSA Americas and/or CLST accept(s) no liability
whatsoever for any direct or consequential loss
arising
from
the
use
of
this
publication/communication or its contents. Where
the publication does not contain ratings, the
material should not be construed as research but is
offered as factual commentary. It is not intended
to, nor should it be used to form an investment
opinion about the non-rated companies.
Subject to any applicable laws and regulations at
any given time, CLSA, CLSA Americas, CLST, their
respective affiliates or companies or individuals
connected with CLSA/CLSA Americas/CLST may
have used the information contained herein before
publication and may have positions in, may from
time to time purchase or sell or have a material
interest in any of the securities mentioned or
related securities, or may currently or in future
have or have had a business or financial
relationship with, or may provide or have provided
investment banking, capital markets and/or other
services to, the entities referred to herein, their
advisors and/or any other connected parties. As a
result, investors should be aware that CLSA, CLSA
29
Blue Books
Americas, CLST and/or their respective affiliates or

companies or such individuals may have one or
more conflicts of interest. Regulations or market
practice of some jurisdictions/markets prescribe
certain disclosures to be made for certain actual,
potential or perceived conflicts of interests relating
to research reports. Details of the disclosable
interest can be found in certain reports as required
by the relevant rules and regulation and the full
details
are
available
at
http://www.clsa.com/member/research_disclosures
/. Disclosures therein include the position of CLSA,
CLSA Americas and CLST only. Unless specified
otherwise, CLSA did not receive any compensation
or other benefits from the subject company covered
in this publication/communication.. If investors
have any difficulty accessing this website, please
contact webadmin@clsa.com on +852 2600 8111.
If you require disclosure information on previous
dates, please contact compliance_hk@clsa.com.
company. For further details of associates of CLSA

India please contact Compliance-India@clsa.com.
This publication/communication is distributed for

and on behalf of CLSA Limited (for research
compiled by non-US and non-Taiwan analyst(s)),
CLSA Americas (for research compiled by US
analyst(s)) and/or CLST (for research compiled by
Taiwan analyst(s)) in Australia by CLSA Australia Pty
Ltd; in Hong Kong by CLSA Limited; in India by
CLSA India Private Limited (formerly CLSA India
Limited), (Address: 8/F, Dalamal House, Nariman
Point, Mumbai 400021. Tel No: +91-22-66505050.
Fax
No:
+91-22-22840271;
CIN:
U67120MH1994PLC083118; SEBI Registration No:
INZ000001735; in Indonesia by PT CLSA Sekuritas
Indonesia; in Japan by CLSA Securities Japan Co.,
Ltd; in Korea by CLSA Securities Korea Ltd; in
Malaysia by CLSA Securities Malaysia Sdn Bhd; in
the Philippines by CLSA Philippines Inc (a member of
Philippine Stock Exchange and Securities Investors
Protection Fund); in Thailand by CLSA Securities
(Thailand) Limited; in Taiwan by CLST and in United
Kingdom by CLSA (UK).
Canada: The delivery of this research report to

any person in Canada shall not be deemed a
recommendation to effect any transactions in the
securities discussed herein or an endorsement of any
opinion expressed herein. Any recipient of this
research in Canada wishing to effect a transaction in
any security mentioned herein should do so by
contacting CLSA Americas.
India: CLSA India Private Limited, incorporated in

November 1994 provides equity brokerage services
(SEBI Registration No: INZ000001735), research
services (SEBI Registration No: INH000001113) and
merchant banking services (SEBI Registration
No.INM000010619) to global institutional investors,
pension funds and corporates. CLSA and its
associates may have debt holdings in the subject
company. Further, CLSA and its associates, in the
past 12 months, may have received compensation
for non-investment banking securities and/or nonsecurities related services from the subject
30
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United States of America: Where any section of

the research is compiled by US analyst(s), it is
distributed by CLSA Americas. Where any section is
compiled by non-US analyst(s), it is distributed into
the United States by CLSA solely to persons who
qualify as "Major US Institutional Investors" as
defined in Rule 15a-6 under the Securities and
Exchange Act of 1934 and who deal with CLSA
Americas. However, the delivery of this research
report to any person in the United States shall not
be deemed a recommendation to effect any
transactions in the securities discussed herein or an
endorsement of any opinion expressed herein. Any
recipient of this research in the United States
wishing to effect a transaction in any security
mentioned herein should do so by contacting CLSA
Americas.
United Kingdom: In the United Kingdom, this

research is a marketing communication. It has not
been prepared in accordance with the legal
requirements designed to promote the independence
of investment research, and is not subject to any
prohibition on dealing ahead of the dissemination of
investment research. The research is disseminated
in the EU by CLSA (UK), which is authorised and
regulated by the Financial Conduct Authority. This
document is directed at persons having professional
experience in matters relating to investments as
defined in Article 19 of the FSMA 2000 (Financial
Promotion) Order 2005. Any investment activity to
which it relates is only available to such persons. If
you do not have professional experience in matters
relating to investments you should not rely on this
document. Where the research material is compiled
by the UK analyst(s), it is produced and
disseminated by CLSA (UK). For the purposes of the
Financial Conduct Rules this research is prepared
and intended as substantive research material.
Singapore: In Singapore, research is issues
and/or distributed by CLSA Singapore Pte Ltd
(Company Registration No.: 198703750W), a Capital
7 October 2016
Markets Services license holder to deal in securities

and an exempt financial adviser, a solely to persons
who qualify as an institutional investor, accredited
investor or expert investor, as defined in s.4A(1) of
the Securities and Futures Act. Pursuant to
Paragraphs 33, 34, 35 and 36 of the Financial
Advisers (Amendment) Regulations 2005 of the
Financial Advisers Act (Cap 110) with regards to an
institutional investor, accredited investor expert
investor or Overseas Investor, sections 25, 27 and
36 of the Financial Adviser Act (Cap 110) shall not
apply to CLSA Singapore Pte Ltd. Please contact
CLSA Singapore Pte Ltd (telephone No.: +65 6416
7888) in connection with queries on the report. MCI
(P) 013 11 2015
The
analysts/contributors
to
this
publication/communication may be employed by any
relevant CLSA entity (including CLSA Americas),
CLST or a subsidiary of CITIC Securities Company
Limited which is different from the entity that
distributes the publication/communication in the
respective jurisdictions.
MSCI-sourced information is the exclusive
property of Morgan Stanley Capital International Inc
(MSCI). Without prior written permission of MSCI,
7 October 2016
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Blue Books
this information and any other MSCI intellectual

property may not be reproduced, redisseminated or
used to create any financial products, including any
indices. This information is provided on an "as is"
basis. The user assumes the entire risk of any use
made of this information. MSCI, its affiliates and any
third party involved in, or related to, computing or
compiling the information hereby expressly disclaim
all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose
with respect to any of this information. Without
limiting any of the foregoing, in no event shall MSCI,
any of its affiliates or any third party involved in, or
related to, computing or compiling the information
have any liability for any damages of any kind.
MSCI, Morgan Stanley Capital International and the
MSCI indexes are service marks of MSCI and its
affiliates. The Global Industry Classification Standard
(GICS) was developed by and is the exclusive
property of MSCI and Standard & Poor's. GICS is a
service mark of MSCI and S&P and has been licensed
for use by CLSA.
EVA is a registered trademark of Stern, Stewart
& Co. "CL" in charts and tables stands for
CLSA/CLSA Americas and CT stands for CLST
estimates unless otherwise noted in the source.
31
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Company Limited*
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Taipei 10682
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USA - Dallas
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Korea
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Thailand
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Pathumwan, Bangkok 10330
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USA - New York

CLSA Americas, LLC
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New York 10019
Tel: +1 212 408 5888
Fax: +1 212 261 2502
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Malaysia
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Menara Dion
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50250 Kuala Lumpur
Tel: +60 3 2056 7888
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United Kingdom
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USA - San Francisco

CLSA Americas, LLC
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(formerly CLSA India Limited)
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Tel: +852 2600 8888
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* CLST is an exclusive Taiwan research

provider to CLSA
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2016 CLSA Limited (CLSA), CLSA Americas, LLC (CLSA Americas) and/or CL Securities Taiwan Co., Ltd. (CLST)
Key to CLSA/CLSA Americas/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total
expected return below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected
return to be negative. For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12month forecast return (including dividends) for the market on which the stock trades. For example, in the case of US stock, the recommendation is
relative to the expected return for S&P of 10%. Exceptions may be made depending upon prevailing market conditions. We define as Double
Baggers stocks we expect to yield 100% or more (including dividends) within three years at the time the stocks are introduced to our Double
Bagger list. "High Conviction" Ideas are not necessarily stocks with the most upside/downside but those where the Research Head/Strategist
believes there is the highest likelihood of positive/negative returns. The list for each market is monitored weekly.
12/09/2016

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Experts views for expert investors

Reshaping Indias defence policy

For important disclosures please refer to page 27.

Prepared for: haresh@premjiinvest.com

Straight to the source with CLSA

Air Commodore VM (Gallantry) Retired

Modi has made several

Prime Minister Modis proactive foreign-policy initiatives have surprised and

The more aggressive military stance under Modi is partially countered by

Defence ties with USA

A thrust to substitute imports with domestic production is now on the cards.

Expert in the field of

Disputes with neighbours ................................................................. 5

Policy under Modi - new alignment? .................................................. 8

Developing story under Modi

Section 1: Disputes with neighbours

Most of Indias armed

Disputes with neighbours

Indo-Pakistan wars and conflicts

India and Pakistan have

Bangladesh created from

Pakistani forces surrendering to India, ending 1971 war

Source: Indian Navy

India retaliated against

Section 1: Disputes with neighbours

Media today is again

Line of Actual Controls

J&K a major bone of contention

Princely state of J&K,

. . . but later acceded to

In October 1947, irregular Pakistani forces attacked J&K. Hari Singh

At the time of accession, Nehru promised a plebiscite to determine the future

Section 1: Disputes with neighbours

Number of lives lost in Jammu and Kashmir due to violence

Source: South Asian Terrorism Portal (SATP)

Section 2: Policy under Modi - new alignment?

Modi has been assertive

Policy under Modi - new alignment?

Modi extended a warm

PM Modi and PM Sharif shake hands during a visit to India

Source: Government of India

However, there was never an expectation of a significant improvement in ties,

Section 2: Policy under Modi - new alignment?

Recent Uri attack has

As India has found itself constrained in terms of responses to attacks on

Surgical strikes against Pakistan-administered Kashmir

Indian army lost 19 men

India claims to have

Pakistan refuted Indian

Leading Pakistani newspapers quoted local military officials, who confirmed

Armed conflict between India and Pakistan unlikely

Much less probability of

India has shown

Section 2: Policy under Modi - new alignment?

Economic losses will deter

Situation is still sensitive

Sino-India military relations

India and China have

Modi hosted Chinese

PM Modi and Chinese Premier Xi Jingping

Section 2: Policy under Modi - new alignment?

Modi has not been afraid of