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In a book Why So Stupid, Edward De Bono has described the Gang of Three—Socrates, Plato and Aristotle as the ‘standard software’ of western thinking.

According to De Bono, the advocacy of Gang of Three is based upon pattern recognition. This has led to ‘box-thinking’ rather than ‘spectrum-thinking’. For instance, one might have three boxes—friends, enemies and neutral. Now once we create these labels, there is no space to accommodate half-friend and half-enemy. Or simply any other outcome.

That’s why we often hear the following scenarios in negotiations:

  • Us Vs them
  • Friends Vs enemies
  • Our Side Vs the other side
  • Good guys Vs bad guys
  • On Similar lines, ‘U camp Vs ‘R’ camp (De Bono didn’t illustrate this, we are just extending the crux of his argument to make it relevant in the present context.)

At present, India’s foreign policy has come under heavy criticism over its ‘neutral’ stance on the Ukraine-Russia conflict. India’s western allies are using a carrot-and-stick approach to persuade the world’s largest democracy to ‘label’ its camp—again the ‘either/or’ choice.

So far, India has remained steadfast in its approach and has set its priorities. It has overtly shown its readiness to play the role of a catalyst in forging a mutually-agreeable peace deal between Ukraine and Russia. India has also appealed to Russia to stop violence and has maintained dialogue with both the countries.

But why should investors bother about these geopolitical events? We’ll come to that as soon as we’ve set the backdrop.

India is a member of Quad where the US, Australia and Japan are the other three partners. All of them have taken a clear anti-Russia position.

The US is already India’s largest trading partner.

And recently, Australia and India entered a bi-lateral Economic Cooperation and Trade Agreement (ECTA), taking their business relationship to the next level. As a result, India’s bilateral trade with Australia is expected to double to USD 50 billion in the next five years.

Amidst this, India acquiring Russian S-400 missile system is inviting displeasure from the US. While experts believe this deal may not attract sanctions from the US, there’s still no consensus on it.

Although when it comes to partnerships in defence, the Russia-India relationship has been unique; India doesn’t hold deep ties with Russia in areas of trade and commerce. Russia accounts for just 0.8% of India’s merchandise exports and its contribution in the import tally is only 1.5%.

On the other hand, India’s tryst with the west in areas other than defence, i.e., in trade and cultural exchange amongst others has been consistent and unambiguous.

Some experts have called India a ‘dependent partner’ pointing at its dependency on Russia for defence supplies while others are warning India against the fallout effects, which may weaken its position against China, if the western allies pull out the rug from under its feet.

Now the question is why is India risking its relationship with the west?

Well, the history has some clues to offer.

India was probably the first non-communist country to get sophisticated Russian arms and that too at a cost nobody else would offer. Even today, more than 60% of India’s weapons are either Russian made or licensed by Russia.

India has clarified why it prefers Russian weaponry—affordability and readiness of Russian companies to form joint ventures with Indian counterparts. So far, American companies haven’t been keen to make similar offers to India.

India might have more reasons to draw comfort in signing defence deals with Russia.

Perhaps the west has turned its blind eye to Pakistan using American F-16 against India in 2019 despite giving repeated assurances to Uncle Sam for not deploying it against India. Similar instances have been countless.

Now let’s get back to why investors should bother about these geopolitical events. It’s because they can spook the markets and also offer great investment opportunities.

Unfortunately, the collective memory of investors is short. India found itself in a tight spot after carrying out successful nuclear tests on May 11, 1998.  It attracted condemnation from the developed-world.

The US had imposed sanctions on India, cutting off its assistance, except for support on humanitarian grounds. Curbs on US exports of select defence and technology material to India also followed.

Seemingly, such instances have nudged India to attain self-sufficiency in defence—which, are still a distant dream. Nonetheless, India has been taking big strides towards this goal.  Post the recent border stand-offs with China, India’s efforts to accelerate its defence preparedness through indigenization got a further boost.

India’s domestic defence manufacturing policy has a twin objective—to cut back import reliance and promote defence exports to smaller, friendly nations in future.

On this backdrop, India recently issued its third positive indigenisation list of defence equipment. The recent import embargo list includes sensors, anti-ship missiles, patrol vessels, anti-radiation missiles and naval utility helicopters amongst others.

As a result, defence stocks such as Bharat Dynamics, BEL, and Hindustan Aeronautics have been in focus. Could markets be missing something?

Perhaps, the vast scope for indigenization of naval defence.

That may be why there’s still no buzz around companies such as Cochin Shipyard, Garden Reach Shipbuilders & Engineers (GRSE) and Mazagon Dock, to name a few.

As per the estimation of our research analyst, around 94 ships and submarines are at various stages of development—24 are under construction and 70 are in the planning phase. This is likely to open up Rs 5 lakh crore worth of defence capex opportunities.

End note

The future of Indo-Russian and Indo-US defence ties appears to depend on who’s more flexible to accommodate India’s concerns. Russia-India relations have passed the test of time. Will it be different in future if Russia grows closer to China?

Or for a change, will India have its cake and eat it too? Only time can tell.

Nonetheless, it can be said with a lot of certainty that India is ready to expand its defence manufacturing capabilities. That should put the Defence sector on every investor’s radar for now. What do you think?

You may also like to read: On the back of the Ukraine Russia war this company is making explosive moves

 

Disclaimer

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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