Indian companies will benefit from defence offsets policy (Comment)

India’s rising economic capacity has enabled the funding of its defence modernisation capabilities over the past two decades and as one of the largest global military spenders, the country has the third-largest defence procurement budget in Asia.

The Indian aerospace industry is one of the fastest-growing aerospace markets in the world and the rapid growth of this industry has attracted global aerospace majors to India. The country’s rapid economic growth has been catalysed by the move towards an open-market economy, reduced controls on foreign trade and investment, privatisation of government-owned companies, and significant expansion in manufacturing, engineering and ICT industries.

As one of the fastest growing emerging markets, India has enjoyed gross domestic product (GDP) growth of over eight percent each year on an average since 1995. The International Monetary Fund (IMF) projects India’s GDP to grow by more than 7.5 percent on an average from 2010 to 2014.

In the Union Budget 2010-11, expenditure of about $32 billion was earmarked for national defence, an increase from $29 billion in the previous year. Indian defence procurement spending is expected to increase considerably over the next 10 years, making it one of the most attractive defence markets in the world.

India’s acquisition plans include a substantial procurement programme for the army, navy and air force with the government seeking to develop a flexible, mobile and networked defence force with substantial power projection capabilities. Many of the assets India is acquiring are at the leading edge of technology, including 126 medium multi-role combat aircraft, Sukhoi Su-30MKI aircraft, Scorpne class submarines, advanced Russian T-90 main battle tanks and state-of-the art information and communication systems.

The challenge for India in meeting its policy objectives will be expanding its indigenous production capabilities at the same time as meeting its acquisition objectives. Currently, 70 percent of India’s procurement needs are met by foreign sources with domestic companies supplying only around 30 percent of indigenous items to state-owned companies.

With each procurement that is made from foreign sources, Indian industry stands to benefit through offset requirements that plough some of those expenditures back into India - thus giving a boost to indigenous industry.

Over the past decade the Ministry of Defence has implemented a series of reforms to its procurement policy framework with the aim of reversing this historical spending pattern, including through the introduction of offsets requirements for designated equipment.

The defence procurement procedure has an evolving national offsets policy designed to bring real benefits to India. Revisions so far have made real improvements, benefiting from past procurement experience and from well-meaning guidance from industry.

This is a positive step for India. The recent release by the Ministry of Defence of the new defence procurement procedures for 2011 is a very progressive step. The new revisions on broadening the aperture of offset credit to include civil aerospace and internal security are welcome.

India’s offsets policy and the associated infrastructure will serve to enhance its position in the global aerospace domain. Current offset guidelines are structured to promote India’s national industrial objectives of the sustainment and creation of aerospace and defence jobs, acceleration in the maturity of the defence technology base, increase indigenous capability to build and support defence platforms and enhance global competitiveness of public and private sector firms.

The offsets programme serves as a vehicle for original equipment manufacture (OEM) to partner with their government customers to support and achieve these objectives. The OEMs can attain productivity gains such as cost reduction, cycle time reduction and access to market-leading technologies. The offsets partners can expand their portfolio of export orders, infuse needed technology, and meet growth objectives. This dynamic creates a win-win scenario for all the three major stakeholders in the offsets programme - the government, the OEM and local industry.

With the offsets policy, the sheer volume of planned expenditure will create new opportunities for Indian firms, enabling them to have broader market access and platform and systems development that can be met by foreign firms. Indian companies across the board are gearing up to take advantage of this and to give a boost to the indigenisation effort.

(23-01-2011- Vivek Lall is vice president in India for Boeing Defense, Space and Security. He can be reached at vivek.lall@boeing .com)