Lure of the defence kitty

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Over the next five years, Indian armed forces are projected to spend Rs 3,00,000 crore ($75 billion) to acquire hi-tech weaponry. Equally staggering is the offset business— Rs 40,000 crore ($10 billion)— that has brought in the excitement among the foreign arms vendors and domestic defence industry. A mad scramble has already begun among foreign arms majors to partner with Indian companies to meet the needs of the country’s armed forces.

Twenty such partnerships were signed between Indian companies and foreign firms at the recently concluded Defexpo 2008. Although these do not represent contracts or firm orders, they are strong indicators that the companies want to get together and invest. Offsets in the defence procurement procedure are aimed at encouraging indigenously produced equipment for the Indian Army, Air Force and Navy.

Tatas signed an MoU with Sikorsky to make S-92 helicopter cabins. Another MoU was inked with Israel Aerospace Industries for an unspecified number of military hardware and software projects. The Mahindras tied up with Italian firm Whitehead Alenia Sistemi Subacquei, a subsidiary of Finmeccanica, which makes maritime underwater systems. Larsen & Toubro signed an MoU with European aviation consortium EADS and another with Boeing. L&T is eyeing the Indian Army tender for 185 wheeled self-propelled artillery guns. Defence public sector Bharat Earth Movers Ltd, which makes heavy chassis for the armed forces mostly in association with Tatra, signed an MoU with Canada’s General Dynamics to make a four-wheeled armoured patrol vehicle and another with the UK’s WFEL to make dry support bridges. The message is loud and clear: foreign arms makers and domestic arms companies—public and private —are vying for the highly lucrative defence kitty.

The offsets policy, spelt out in the Defence Procurement Policy of 2006 stipulates that any defence contract worth more than Rs 300 crore will trigger a direct offset liability of 30%, making the vendor responsible for sourcing from India, defence equipment or services worth at least 30% of the contract value. Minister of state for defence production Rao Inderjit Singh says, “The offset policy will help equip the Indian armed forces with sophisticated technology and strengthen the technology base of the country’s defence industry.”

No wonder, this offsets obligation has set off a frenetic search among foreign arms makers for Indian companies they can partner. These partnerships will lead to a quantitative leap in the technological capabilities of domestic companies to feed foreign and domestic markets.