India is now one of the biggest markets for defence equipment manufacturers and is likely to remain so for many more years. The country will spend tens of billions of dollars over the next decade to upgrade defence capabilities and equipment, including the high profile $10 billion acquisition of advanced fighter aircraft. While defence procurement will always be highly politicised and hence controversial, there are many positive potential spin-offs for Indian businesses.
One of the conditions in large defence deals of Rs300 crore and above is that the supplier should offset at least 30% of the contract value through direct investments or purchase of components from the country. Similar terms are included in contracts for aircraft purchases by Air India.
Until recently, not many foreign suppliers would have been keen to set up manufacturing units in the country as our manufacturing credentials were not quite established. But, that is now changing rapidly if we look at the number of such deals signed recently.
The Tata group is leading this new wave of Indian businesses forging alliances with international players for aerospace and defence equipment. The group signed two deals with Boeing, one for supplying floor beams for the new 787 Dreamliner and another $500 million deal for supplying components. Tata Industries has also finalised deals with American manufacturer Sikorsky to supply helicopter cabins and with an Israeli company to manufacture unmanned aerial vehicles or drones, missiles and electronic equipment. The Tata group’s $1 billion tie-up with European major EADS, parent company of Airbus, to develop tactical communication equipment for the Army is the biggest such deal by an Indian business group in the defence sector.
The Mahindras are also moving aggressively to expand their business in defence equipment, mostly in transport equipment. Other players like L&T, which has significant manufacturing capabilities in diverse segments, are also scaling up their defence-related business.
If successful, and there is no reason why they should not be, these initiatives will open up huge opportunities for Indian manufacturers in the defence and aerospace sectors. Domestic markets for western manufacturers in these sectors are stagnating and their only potential window of growth is emerging buyers like India. Hence, they have no choice but to form manufacturing alliances with domestic manufacturers to satisfy the set-off requirements.
Once these alliances establish themselves, they can be highly beneficial for western manufacturers too by offering significant cost savings. Yes, shifting manufacturing to countries like India is politically sensitive and there will be resistance. But, eventually, that is bound to happen.
Gradually, some of the larger Indian manufacturers are likely become established manufacturers and innovators on their own right. Possibly, they will turn out highly cost-efficient, but capable, equipment and will compete with global players. Who knows, we may see a ‘Nano commercial jet’ or an ‘Ace main battle tank’ in the not too distant future!