Why the Defense Offset Policy?
According to a report by the Confederation of Indian Industry (CII), India’s private sector gets just 14% of the defense business while the foreign military equipment manufacturers gain ~70% of the Indian Ministry of Defense (MoD) contracts in value terms. The rest is supplied by the MoD’s businesses that consist of eight defense public sector undertakings (DPSUs) and 40 ordnance factories (OFs).
Any medium to large scale development project in aerospace sector demands enormous economic capability and therefore this industry depends on the government for research and development, infrastructure, etc. Such heavy government expenditure is further subject to political interests and protocols. The government wants to transform this constraint into a benefit via the offset clause, mentioned in the Defense Procurement Procedure (DPP) through private sector involvement.
The Indian defense offset policy or DPP-2008 states that any defense contract worth above US$65 million that MoD enters into with a foreign vendor shall make it mandatory for the vendor to source its equipment or services of a minimum of 30% from any public or private Indian partner. This means huge potential for Indian engineering manufacturers/service providers. The Indian defense expenditure for fiscal 2010-11 is around US$32 billion out of which 40% or US$12.8 billion is allocated for new acquisitions. Industry experts estimate that the defense expenditure is expected to be ~US$100 billion spread over next 5-10 years, which means direct benefit of an offset value of US$30 billion apart from direct contracts that defense ministry might offer to Indian players. With the implementation of the civil offset policy the potential will be much more.
Pouring Investments in Indian Aerospace & Defense Sector
Based on the advice of the Kelkar Committee, Indian government opened up the aerospace industry to the private sector. Following which, private players are partnering with State governments and foreign partners to set up aerospace special economic zones (SEZs) with a view to establish Aerospace ecosystems within India.
Prime Aerospace SEZ Participants within India (Operational and Planned)
Based on the advice of the Kelkar Committee, Indian government opened up the aerospace industry to the private sector. Following which, private players are partnering with State governments and foreign partners to set up aerospace special economic zones (SEZs) with a view to establish Aerospace ecosystems within India.
Prime Aerospace SEZ Participants within India (Operational and Planned)
Indian Aerospace Projects
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While companies are making significant investments, we will see the benefits for the industry over the next decade. Local companies will form joint-ventures with foreign companies and derive benefits of technology transfer, shift from licensed production to joint design, development and manufacture. These industry movements indicate that Indian A&D industry is geared up to capitalize on the offset policy benefits and so are the engineering service providers (ESPs) who have graduated from mere service providers to partners in manufacturing.
In conclusion
Indian aerospace and defense industry is at a very nascent stage with only one indigenous helicopter, a two-seater passenger aircraft and a fighter jet and a trainer to its credit. The defense offset policy will foster foreign partnerships with Indian engineering service providers and manufacturers and open up an opportunity for learning from processes, best-practices and technology transfer. From the sheer amount of interest and investment by the public-private partnerships in India to set up aerospace ecosystems and SEZs within India, the industry is certainly poised to grow. While large engineering service providers have already made the move to gain from defense offset policy, mid-size firms will follow suit. If India manages to emulate the success story of Brazil based Embraer Corporation which graduated from gaining through defense offset deals and successfully absorbed foreign aeronautic technologies to becoming world top-10 aerospace company, it will surely produce a couple of world-class aerospace manufacturing companies from India in next few decades. This will in turn open opportunities for companies present in the entire aerospace engineering value-chain.
(Note: The above material has been sourced from http://www.sourcingnotes.com)
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