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<html><body><div><p><em>Henny Sender is a financial journalist.</em></p><p>Last year, India spent $86 billion on arms purchases, with only the U.S., Russia, China and Germany spending more. Meanwhile, Pakistan, its neighbor to the west, spent just over $10 billion. Yet when the two nuclear powers engaged in a series of skirmishes in early May after a terrorist attack killed 26 people in India-controlled Kashmir, the outcome was hardly an overwhelming Indian victory -- despite the disproportionate size of India's arsenal.</p><p>Pakistan claimed to have downed five of its enemy's fighters, while India said it had attacked nine terrorist sites across its western border. As with the conflict between Ukraine and Russia, the skirmish reflects a new asymmetry in contemporary warfare and weaponry as cheap unmanned $3,000 drones can change the odds of decisive victory against a far stronger military force by taking out fighter jets costing tens of millions of dollars.</p><p>The most expensive traditional weapons systems matter far less today than in the past. In a world where every technology is dual-use, with both military and civilian applications, the private sector is often better than traditional military contractors; software is often more critical than hardware in determining outcomes. Defense spending has been a theme in the markets for several years, but the beneficiaries will be the companies that reflect this shift.</p><p>"India's recent military operation against Pakistan has failed to achieve its strategic objectives while exposing critical vulnerabilities," noted The Wire, a respected Indian digital news app. "The Indian air force has not learned the urgent need to improve electronic warfare. ... The Indian military is more vulnerable as its limitations in conducting campaigns across multiple war domains have been exposed."</p><p>"The Indian military did not expect this, we were not well prepared," adds the publisher of a major Indian newspaper chain. "Pakistan surprised us; it fought back strongly."</p>        
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                        Water is sprayed on a French-made Rafale fighter jet during its induction ceremony at the Indian Air Force Station in Ambala, India, on Sept.10, 2020.



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<p>In recent years, India's military has undergone significant changes as Prime Minister Narendra Modi reduced spending on Russian military equipment (which used to account for about 80% of India's weaponry). Instead, Modi now prefers to rely on a mix of imports from a wider group of suppliers, including the French (fighter jets), the Israelis (drones) and the Americans (jet engines). His ultimate goal is to develop local capabilities, especially at state-owned firms, according to a report from Morgan Stanley. "Domestic defence production and export trends have improved," noted Citigroup analysts in a recent report.</p><p>Defense spending is already having an impact on the stock market, affecting the shares of companies with defense operations.</p><p>For example, "The recent conflict between India and Pakistan underlined the skills and capabilities of Bharat Electronics (BEL)," noted Sanjay Mookim, head of equity strategy for JP Morgan in Mumbai. "We believe that this was a pivotal moment for widespread recognition of BEL's capabilities in the field of air defense systems, integrated command and control systems, surface to air missiles, and various types of radars and surveillance systems. The stock is up nearly 32% (this calendar year), outperforming the NIFTY50, which is up 4%." Tata Electronics is up by an even greater margin. Yet, if there is a clear victor in the messy fighting in South Asia, it is Pakistan's ally, China.</p><p>The fighting between the South Asian neighbors was the first real test of Chinese weaponry on an actual battlefield. The equipment the Chinese provided to their ally included Chinese fighters and air-to-air missiles, and reportedly brought down four Indian fighter jets, (the Indians blamed the downing of a fifth on pilot error).</p><p>"By providing cutting edge platforms to its closest ally, Pakistan, China will have its equipment operationally validated, improving prospects for global arms sales," the Wire added. "If anything, this operation has enhanced China's global profile as a reliable friend, capable of walking the talk."</p><p>This is because Pakistan holds a potential danger for its huge neighbor. If Pakistan becomes a failed state or harbors more extreme Islamic terrorists, China's Muslim majority region of Xinjiang would become more unstable. To minimize that possibility, Pakistan has been among the biggest beneficiaries of Chinese aid. Moreover, under CPEC, the Chinese Pakistan Economic Corridor, Beijing is extending over $60 billion to its troubled neighbor, building ports and railways, and even garbage collection infrastructure in Karachi.</p><p>The ongoing fighting between Ukraine and Russia was the first real demonstration of the changing nature of warfare. It is also evident in Israel's recent attack on Iran. The most disturbing thing about this new asymmetry, though, is the real possibility that it makes resorting to conflict easier and more widespread.</p>
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