Defence Notes

New Delhi, 15 March 2008

Defence Deals

LURE FOR INDIAN MARKET

By Radhakrishna Rao

In keeping with the growing strategic importance of India in the contemporary geo-political environment, the budgetary allocation for the country’s defence sector over the years has been witnessing a steady growth. Not surprisingly then, the  budgetary defence spending for the first time is set to cross Rs.1,00,0000-million mark As it is, India’s national budget for 2008-09 allocates  Rs.1,056,000-million for the defence sector as against Rs.96,0000-million  outlay for 2007-08.

As expected the Indian Air Force (IAF), which has drawn up a massive up-gradation plan with a focus on supporting the net centric warfare and the creation of a tri-service aerospace command, has walked away with the highest share of the budgetary allocation for the acquisition of a range of state-of-the-art equipment. During the current year, IAF stands to get Rs.19,0000-million in contrast to its spending of Rs.14,0000-million last fiscal On the other hand, the Army will have a proposed allocation in excess of Rs.12,0000-million against its spending of Rs.11,0000-million. The Navy stands to get Rs.11,0000-million as against its spending of Rs.80,000-million.

Meanwhile, a study by the Associated Chamber of Commerce and  Industry states that the country’s military equipment imports are expected to go up by 12-fold to US$30-billion by 2012. This fact-filled study  also drives home the point that  India has drawn up a concrete plan to purchase a range of high profile defence hardware including multi-role combat aircraft,1.55-mm howitzers, helicopters, military transport aircraft as well as  long range  maritime surveillance  aircraft. According to consulting firm Ernst and Young Global Ltd, right now, India is the second largest buyer of conventional weapons systems.

New Delhi-based strategic analysts are of the view that India is now boosting its defence spending as China is developing into own state-of-the-art combat aircraft and Pakistan is in the process of getting F-16 aircraft from the US. Significantly, sometime back Defence Minister A.K. Antony had stated that the government plans to acquire military aircraft and helicopters valued at US$ two billion from the global defence vendors.

The offset policy forming part of India’s defence hardware procurement programme aims at to encourage the development of home grown defence systems for the use of the three Services, he added. On the other hand, Minister of State for Defence Production Rao Inderjit Singh, observes, “The offset policy will help equip the armed forces with sophisticated technology as well as strengthening of the technology base of the country’s defence industry”.

As it is, the offset policy spelt out in the 2006 Defence Procurement Policy makes it abundantly cleat that any defence contract worth over Rs.3,000-million that we will enter into with a  foreign defence vendor  will have a direct offset liability to the extent of  30 per cent. This puts the onus on the vendor to source from India equipment or services worth at least 30 per cent of the contract value.

In fact, the massive Indian offset business worth Rs.40,000-million that the defence market presents is highly alluring to global defence contractors. As pointed out by a top ranking functionary of the Confederation of Indian Industry: “In the new scenario, each foreign vendor will need multiple Indian partners to meet offset obligations. This could also help Indian public-private sector firms improve their technology skills”.

India’s state-owned Defence Research and Development Organisation (DRDO), which has covered much ground in indigenously developing and deploying a range of missiles, is now focusing on involving both the Indian and foreign high-tech companies as part of its long-term goal of developing indigenously a wide spectrum of defence hardware including long range missiles. On its part, the government has made it clear that defence deals far from being a buyer-seller relationship should involve sharing of the know-how and transfer of technology to enable India to take up the indigenous production of the equipment it is initially sourcing from a foreign vendor.

Recognizing India’s growing strength in defence technology, Charles Edelstenne, Chief Executive Officer of French defence and aeronautical outfit Dassault, which is one of the six competitors in the race to give India’s high ticket defence order for 126 multi-role combat aircraft said, “We are used to transfer of technology and foreign companies taking over production”. In the similar vein, Jean Marie Carnet, CEO of GICAN, an umbrella organization of 129 French outfits engaged in the design and development of naval ships and armaments remarked, “France is ready for complete transfer of technology”.

However, India’s offset clause in respect of the contract for 126 multi-role aircraft stipulates that 50 per cent of the contract value should be invested by the supplier in India. As the value of this contract is expected to run into more than Rs.40,0000-million, the Indian companies hope to get business worth more than Rs.20,0000-million. Under the contract 18 aircraft will be delivered in flyway condition and the rest will be produced by the Hindustan Aeronautics Ltd. The competitors for this mega Indian defence deal are Rafale of France, RSK Mig-35 of  Russia, Saab Gripen of Sweden, F-16 of Lockheed Martin, F/A-18E/F- Super Hornet of  Boeing and Euro-fighter Typhoon.

Meanwhile, Lockheed Martin which has bagged an Indian order for six C-130 J military transport aircraft is optimistic about India converting option for six more aircraft into a firm order as soon the first batch is delivered. Indeed, Rick Kirkland, its President of S.Asia has stated that India is potentially the biggest growth market in Asia Pacific region for Lockheed Martin and its competitors. He also drove home the point that India is likely to buy US$4-billion worth of defence communications system and spend as much as US$5-billion to expand its naval ships and submarine programme. Incidentally, Lockheed Martin has bagged a contract worth US$498-million from Pakistan for the supply of F-16 fighters. As such F-16 fighters – of course with many superior features—offered by Lockheed Martin to India is not likely to find favour with the defense establishment.

The increasing lure of the Indian defence market for foreign vendors was clearly mirrored in a number of partnership ventures that foreign defence companies signed with the   industrial majors at the Defence Expo 2008 held in the Capital last month. Bangalore-based Bharat Electronics (BEL), a major player in the national electronics sector, entered into agreements with three Israel-based defence companies .Mumbai-based Tata Industry not only joined hands with Sikorsky to make S-92 helicopter cabins but also singed an agreement with Israel Aerospace Industries (IAI) for an unspecified number of military hardware and software projects. At the same time, auto major Mahindra and Mahindra  joined hands with Whitehead Alenia Sistemi Subacquei, a subsidiary of the Italian firm Finmecanica for developing underwater systems. Further, heavy engineering giant Larsen and Toubro (L&T), signed an MOU with EADS and another with Boeing.

Thus, as things stand today, sky seems to be the limit for both the Indian companies and their foreign partners, competing for the highly lucrative Indian defence market. –INFA

 (Copyright, India News and Feature Alliance)