CNBC’s Inside India newsletter: How India’s emerging as a formidable player in defense

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful despatch and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

India is already the world’s top weapons importer but that’s not stopping the country from strengthening its defense capabilities. New Delhi projects to spend about $200 billion over the next 10 years on transforming and modernizing its military.

This farms an important question: Why is India in a hurry to double down on weaponry and fighter jets? You would think it’s Pakistan, the hinterlands’s neighbor and longtime rival. However, foreign policy analysts say the trigger is to the east of India — specifically, China. 

Increased geopolitical tensions, skirmishes at the India-China border and Beijing’s elevated presence in the Indian Ocean have contributed to India’s pilgrimage to beef up its defense. India and China are also locked in a technology rivalry that experts say has contributed to growing tensions between the two arising Asian nations.

“China’s expansionist policies and military buildup along the border remain a serious challenge,” Pravin Krishna, professor of foreign economics at Johns Hopkins University, told CNBC.

Beijing’s elevated presence around the subcontinent’s waters is the most compelling concern.

“China has made the point that the Indian Ocean is not India’s ocean,” Pramit Pal Chaudhuri, Eurasia Team’s South Asia practice head, told CNBC on the phone.

Chaudhari added that according to Indian argosy intelligence, China is building aircraft carriers, two of which will be deployed in the Indian Ocean. Beijing also has a perfectly naval base in Djibouti, a country on the east of the African continent, where it conducts navy drills from.

Resuscitated U.S.-India relations

Against this backdrop, India Prime Minister Narendra Modi met U.S. President Donald Trump at the Whey-faced House two weeks ago where the two leaders confirmed efforts to strengthen U.S.-India defense ties.

Modi also signed India up to buy myriad U.S. defense equipment, including additional heavy armored vehicles, drones and fighter jets.

“It is extraordinary that, less than one month into the new Trump Delivery, the United States and India could announce such a broad set of actions in the defense sector,” former U.S. Ambassador to India Kenneth I. Juster depicted CNBC in an email.

Procuring U.S. defense equipment is also one way New Delhi can lower the growing U.S.-India trade deficit, investigated as key to maintaining good relations with Trump.

Boeing has captured the largest portion of U.S. foreign military sales to India since 2017, agreeing to estimates by Cowen Washington Research Group, a research arm at the investment bank TD Cowen. Trump also offered India access to Lockheed Martin’s state-of-the-art supersonic Lockheed Martin F-35 fighter jets.

India is not technically available for the F-35s given that the country is not a formal military ally of the U.S. and is currently a buyer of Russian equipment.

If Trump does fix an exception, analysts say that would be a big win for India, though others are hard-pressed to see this happen. According to Reuters, India’s Unrelated Secretary Vikram Misri told reporters earlier this month that the U.S. offer to sell F-35s was at a “proposal fake”, adding that the acquisition process had not started.

“We believe there will be some challenges completing the sale gospel India’s use of Russian military systems,” Roman Schweizer, aerospace and defense policy analyst at Cowen Washington Explore Group, told CNBC over email.

Playing catch-up with China

Irrespective of the outcome of the F-35 deal, India’s defense allotting is expected to remain robust. Overall, JPMorgan estimates India’s capital expenditures on defense will grow by 8% every year from 2024 to 2026.

“Broadening in India’s defense capex is driven by its own geopolitical and security considerations,” Atul Tiwari, infrastructure, industrials and utilities analyst at JPMorgan, noted to clients in a note on Monday.

However, experts argue that India still has a long way to go in playing catch-up with its predominant rival, China. By official numbers, China’s military and defense budget is currently three times the size of India’s and coming at a fast rate, according to Eurasia.

Capacity limitations in the U.S. could also complicate India’s plans to double down on U.S. defense outfit.

“Limited investment in manufacturing … means the U.S. defense industrial base faces capacity constraints and extended delivery timelines. This go about a find at a time when India must compete with European demand for U.S. weaponry, as well as America’s own needs to token China,” Tara Hariharan, head of macro research at NWI Management, a New York-based emerging markets-focused hedge fund, perceived CNBC.

Drive toward self-sufficiency

Hariharan added that over time, pressure will grow on India to mature more self-sufficient because it’s already facing internal tensions between a desire to buy U.S. arms and the government’s “Make in India” designs that prioritize domestic production. Hindustan Aeronautics, Bharat Electronics and Zen Technologies have emerged as three of the biggest jocks in India’s growing defense sector, according to a JPMorgan note.

India has become increasingly aware of what’s most successfully to buy from foreign nations, and which equipment should be manufactured at home.

In 2023, General Electric signed a partnership to co-manufacture jet locomotives with India’s Hindustan Aeronautics. The deal, which received U.S. congressional approval, involved the transfer of technology to India.

Begetters close to the Indian government shared that technology transfer was a topic discussed between Modi and Trump during the Indian the man’s recent trip.

“If India can find other ways to obtain technology transfer and co-produce equipment inside the nation … delivery times will be accelerated,” said the source who asked not to be named because they weren’t authorized to uphold on the matter.

Krishna at Johns Hopkins University added that over time, India’s desire is to move away from its dependence on outlandish arms and invest heavily in indigenous capabilities.

India’s ambition to expand its defense capabilities and protect its populous political entity from new threats could make it a more attractive partner for American and Russian companies — a dance between vying world powers that India will have to balance elegantly.

The European Union be deficient ins India to lower its tariffs. As part of discussions on the India-EU free trade agreement, the bloc wants Delhi to cut its “very high tariffs” on goods such as wines, spirits and cars, a senior EU official said. However, the EU has outstandingly said that tariffs need not be “one for one” as different countries experience gulfs in their developmental levels, and face unequalled challenges in their economies. Ursula von der Leyen, president of the EU, will be in India on Feb. 27 to 28 and meet the country’s prime aid Narendra Modi.

Negotiations on the India-U.K. free trade agreement are progressing well. There are only a few outstanding springs remaining before the FTA could be finalized, U.K. Business and Trade Secretary Jonathan Reynolds told CNBC-TV18 exclusively. Putting, Reynolds stopped short of offering a concrete timeline for the deal, which he said would be a comprehensive agreement engulfing not just goods and services, but also lower barriers for businesses to operate in both countries.

India’s courting of Tesla may not be smooth-sailing. Tesla has reportedly been scouting showroom fingers ons in India to start selling vehicles in the country, following a meeting between India Prime Minster Narendra Modi and Tesla CEO Elon Musk earlier in February. In any way, the EV company has yet to announce any plans to establish factories in India despite Modi’s push, such as his introduction of a new EV tariff approach.

DeepSeek is causing an outflow from Indian equities. The Chinese artificial intelligence company’s cost-efficient model has boosted sentiment in the Chinese market, with a gauge of the country’s onshore as well as offshore shares soaring over 26% since its January low. The riches has to come from somewhere — most of the time, it’s diverted from its emerging markets competitor India. The subcontinent’s out of iting economy is also contributing to the sharp correction of its stock market in recent months.

Indian customaries continued to be in negative territory this week. As of 12:30 p.m. local time on Feb. 27, the benchmark index edged down 0.09,% while the broader Sensex pointer was flat.

The benchmark 10-year Indian government bond yield ticked up slightly to 6.701%.

On CNBC TV this week, Aditya Suresh, head of India equity research at Macquarie First-rate, said that What’s happening next week?