The bid for procurement of 126 Medium Multi-Role Combat Aircraft at an estimated cost of Rs. 42,000 crores ($10.2 billion) for the Indian Air Force this week has generated a lot of buzz in the international defence market. The NYT reports that-
Determined to build a domestic arms industry, India is requiring foreign suppliers to make a sizable portion of any military goods in this country. In the case of the jet fighter contract, the successful bidder must produce goods worth half the contract’s value in India.
The NYT report surmises that India will be the world’s largest defence market in another five years-
Over the next five years, military analysts expect the country to spend as much as $40 billion on weapons procurement alone, more than its entire annual armaments budget today — upgrading systems as diverse as jet fighters, artillery, submarines and tanks in its largely Soviet-era arsenal.
The NYT guesstimate is only 40% of the figure provided by Dr Kiran Chadha, head of the MoD’s Defence Offsets Facilitation Agency (DOFA). In April this year, the DOFA chief claimed [as reported by Broadsword] at a CII meeting of Indian and European defence industry that India will buy $100 billion worth of military equipment over the next five years. As per India’s defence offset policy which has been promulgated as a part of the new Defence Procurement Plan 2006, every foreign defence contract worth Rs 300 crores or more requires the foreign vendor to invest a minimum of 30% of the contract value as offsets. As has been done in the case of the fighter jets, this percentage of offset obligation can be varied by the Defence Acquisition Council. These offset obligations include-
- Direct purchase of defence products, components manufactured by Indian defence industries.
- Provision of “Services” by any Indian defence industries. “Services” will mean maintenance, overhaul, up gradation, life extension, engineering, design, testing, defence related software or quality assurance services.
- Direct foreign investment in Indian defence industries.
- Direct foreign investment in Indian organisations engaged in research in defence R&D as certified by Defence Offset Facilitation Agency.
Interestingly, the first reports of the offset tie-ups have already started trickling in. Broadsword reports-
India has just finalised it first offset agreement, worth $15 million (Rs 60 crores), with Israeli company ELTA, in a deal to supply India Medium Power Radars. ELTA’s offset partners will be private companies, L&T and Astra Microwave from Hyderabad. The offset proposals for the purchase of the navy’s newest fleet tanker involve 8-10 Indian companies.
The NYT adds -
In February, Raytheon and the electronics division of the Indian giant Tata Power signed such an agreement. The same month, Boeing signed an accord with an Indian engineering firm, Larsen & Toubro, to develop new projects. And Northrop Grumman has signed on with Bharat Electronics and Dynamatic Technologies, both of Bangalore, to investigate joint opportunities.
A quick calculation to place these figures in perspective. If we assume the total defence spending for next five years to be $60 billion and 75% of that is on foreign acquisitions, the offset benefits for Indian defence industry would be $13.5 billion (Rs 60,000 crores) over next five years.
The numbers are indeed impressive. But, there are early signs of resistance from the the foreign vendors against the offset requirements. The US government has officially declared offsets as undesirable, as it believes that they increase the cost of a deal.
Till now, the MoD has stuck to its guns. It will have to continue to resist all internal and external pressures and implement the offset policy with gusto. Even then, there will be no big ticket sales and stupefying results by the Indian defence industry in the short term. These measures and government support will only aid this sunrise sector in taking surefooted baby steps.
The fledgling Indian defence industry is ideally suited to emulate the Israeli model, which was initially based on successful tie-ups with major defence manufacturers. Notwithstanding this, the Indian domestic defence industry may still not be in the major league in next five years; but it could be a significant player in the international defence market by then.