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    Equity tips:-   Indian ADRs ended with mixed sentiments in the market during the trading hours of August 18. In the IT sector, Infosys closed lower by 7.16% at USD 14.79; while Wipro closed flat at USD 5.96. In the banking sector, ICICI ...


Offset policies to help India's defence sector

  • Between 2006 and 2010, India was the largest arms importer and accounted for 9% of all international arms transfers. The country is expected to spend over $50 billion over the next five years on upgrading its armed forces. Even though over 70% of India's arms are imported, these figures still spell good news for Indian defence companies. They will benefit from India's offset policies.

    The Defence Procurement Policy (DPP) requires at least 30% of contracts with a value of over $67 million (INR 300 crores) to be spent in India for equipment, components or services. In 2011, the scope of the policy was expanded to include civil aerospace and internal security. However, the focus seems to remain on defence. The government announced that offsets from the ongoing negotiations for fighter jets worth over $10 billion will not include the newly added sectors.

    According to current estimates, about $15 billion will be pumped into the Indian defence industry over the next five years. As a result, several leading international defence companies have either already set up or are in the process of establishing joint ventures with Indian manufacturers. For example, Chemring Group and The Hinduja Group are establishing a joint venture for Indian defence and security. Both companies have stated that they will source locally. Similarly, Lockheed Martin and Tata Advanced Systems recently established Tata Lockheed Martin Aerostructures.

    The offset policies and subsequent joint ventures will significantly improve India's indigenous manufacturing capability in the sector through the creation of a larger manufacturing base and technology transfer. It will also enhance the global competency of the Indian counterpart. The lure of reduced costs and cycle times may cause most companies to source components locally. This provides excellent opportunities for Indian companies.

    The DPP lists armoured vehicles, aero engines, aircraft and related equipment modified for military use, aircraft design and engineering services as eligible offsets. Electronics like communication and navigation devices, night vision devices, surveillance equipment, sensors and software for development or evaluation of military equipment are also included. Training aids like simulators and simulation equipment also qualify for offset contracts. Raw materials, forgings, castings and other unfinished products used in military equipment or applications are amongst several other goods and services that are eligible. It is an exciting time for manufacturers and service providers in any of these sectors. Offset contracts are expected to bring in sizeable funds which will stimulate growth over the next few years.

    As India's defence spending increases and the modernisation of our armed forces continues, there is a huge opportunity for domestic manufacturers.


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