The Indian defense scene has witnessed tremendous growth over time and India has emerged as one of the major destinations for global defense companies. India has become an integral part of the global supply chain of some of the biggest defense component manufacturers in the world. The strengths of the Indian defense sector include a wide supplier base, infrastructure development focus, low cost manufacturing solutions, and a skilled labor pool.

India is expected to spend 100 billion USD over the next decade to modernize its armed forces, particularly on capital procurement of new weapons and other systems.  The defense budget has been increasing over the years and for FY 2013-14 it has been hiked to 37 billion USD, this amounts to an increase of 5.3 percent from the previous year. Armed forces modernization takes up a big share of the defense budget together with research and development. Defense deals by the Indian government over the last three financial years, starting from 2009-10, have seen nearly 40 billion USD being spent. These deals include several big ticket items such as the 126 medium multi role combat aircraft, 197 light utility helicopters for the Army and the Air Force, and several artillery guns worth 4 billion USD for the Army.  One recent event which highlighted the growth of the Indian defense sector was Aero India 2013 which was touted as the biggest in Asia with 607 defense companies and 78 overseas delegations in attendance.

Indian Defense Budget

*Source: frost.com

India is the third largest arms importer in the world. To curb its dependence on foreign imports and to promote the development of the local defense industries, the Ministry of Defense, Government of India has announced the Offset Policy as part of the Defense Procurement Procedure (DPP). The Offset Policy mandates foreign companies selling products to the Indian Government to reinvest a portion from such earning in the country. Foreign companies can make such investments either on their own or through joint investments with Indian companies. The latest defense offset policy amendment in 2012 stipulates that any deal for defense equipment to be supplied by a foreign company, worth over 55 million USD, would attract the offset clause under which 30 to 50 percent of the contract costs would have to be ploughed back into India. This amendment aims to promote and develop local defense sourcing; translating into a total offset opportunity for the native commercial segment valued at 10 to15 billion USD. Offset contracts valued at more than 4.5 to 5 billion USD have been signed between Indian companies and foreign partners since 2005. An example of this is US aerospace major Boeing, which estimates to strike deals of approximately 20 billion USD in India; this in-turn can benefit defense component manufacturers as a local sourcing requirement is mandated.

According to a new defense industry report, some of the leading defense companies have already started setting up shop in India to manufacture products, not only to supply the domestic demands, but also as a base for global clients. To promote investments in the Indian defense industry and collaborations with Indian companies, the defense offset Policy permits up to 49% foreign direct investment (FDI) by foreign defense companies. This FDI requires approval by the Foreign Investment Promotion Board (FIPB) and is conditioned on the Indian partner receiving an industrial license from the Department of Industrial Policy and Promotion (DIIP).  FDI has led to the development of a 10 billion USD native defense industry with product and as well as component manufacturing capabilities. There have been more than 40 noteworthy joint ventures and partnerships between international firms and major Indian defense players such as Tata, Mahindra & Mahindra and L&T. Technology collaborations in Indian defense are also on the rise.

Although the hike in the defense budget has been moderate for the FY 2013-14, there is enough evidence to suggest that there is bound to be substantial growth on account of the Defense Offset Policy and the increase in FDI. As foreign defense majors look to capture a piece of the Indian defense market, the benefits will also flow to Indian partners and SME component suppliers.

Brickwork Sourcing provides end-to-end procurement research and consulting services to clients from all major continents. It specializes in assisting clients with low cost country sourcing as well as Indian market entry assessments.