“We are in one of the world's most dangerous regions, with two nuclear-armed neighbors,” the Indian defense ministry official says. “The rising military might of China and threats from Pakistan, along with an underdeveloped aerospace industry, have by default made us the world's leading weapons importer.”
Meanwhile, a report by Deloitte Aerospace & Defense on the 2013 outlook says India is poised to become a favorite destination for global defense sector players with total offset opportunity for the commercial segment in the country set to cross the $10 billion mark this year. According to the report, while the global defense industry is expected to shrink, India continues to be one of the promising A&D markets in the world, due to its armed forces' increasing demand for A&D equipment.
“Due to the huge offset requirement and the Indian government's objective of building up an indigenous manufacturing base, the global industry has an opportunity to integrate with the Indian industry to set up their manufacturing lines in India,” says Nidhi Goyal, director at Deloitte India. “This could be achieved either through joint ventures or collaborations.”
While the Indian defense market is providing new opportunities for foreign defense companies, the government is well aware of the importance of building up its internal industrial defense base. As a result, it has introduced stringent offset requirements and insists on transfers of technology under the Defense Procurement Procedures. It recently announced a new strategy, “Buy Indian, Make Indian,” in an effort to keep production local.
Offset contracts valued at more than $4.5-5 billion have been signed by Indian and foreign companies since the offset policy came into effect in 2005. However, with the new 2012 guidelines and the assumption of a formal civil policy, the total offset opportunity for the commercial segment is estimated at $10-15 billion.
Current procurement rules require any foreign vendor receiving an Indian defense deal worth more than 3 billion rupees to reinvest 30% of the value into the country's industry. In 2012, the rules were revised to put a 20% cap on the penalty for foreign companies that fail to fulfill their defense offset requirements within the set time frame.
Indian companies will likely succeed with the help of foreign companies, benefitting both. Once indigenous manufacturing takes root, research and development for the Indian military and civil aircraft sectors is likely to be the government's next focus area.
The Indian defense ministry official points out that there is “a lot of scope for both public and private sector” players to participate in the air force's upgrade plans. “The Indian aerospace industry will have to focus on developing in-house infrastructure, training and R&D capabilities to energize this sector,” he says.