Mumbai: Defence offset contracts are expected to surge this year, crossing the $10 billion mark for the first time since the policy was implemented eight years ago, Deloitte Touche Tohmatsu India Pvt. Ltd said in a report.
India imposes counter-trade obligations on foreign companies awarded defence contracts worth more than Rs.300 crore by way of transfer of critical technologies and production of components in India.
Indian companies have signed total offset contracts worth $4.5-5 billion with foreign firms since the policy came into effect in 2005. Last year, the government introduced new offset guidelines to further boost local manufacturing.
And with the administration expected to raise the foreign investment limit in the defence sector from 26% to 49% in 2013, India is set to see a rush of investments, Deloitte said.
“India continues to be one of the promising aerospace and defence (A&D) markets in the world due to the increasing demand in A&D equipment for the armed forces,” the firm said in its Deloitte Aerospace & Defence outlook 2013 report.
Deloitte also said that milestones in certain deals are expected to be achieved in 2013, such as those related to submarines, missiles, and the Indian Air Force’s medium multi-role combat aircraft, and that new joint ventures are likely to be signed between Indian and overseas companies.
“The global defence industry can take advantage of the promising Indian Aerospace & Defence market owing to the increasing demand of A&D equipment by the armed forces,” said Nidhi Goyal, director, Deloitte Touche Tohmatsu India.
India offers not only an attractive market but also cost advantages relating to basic design and engineering services, components, and assemblies manufacturing, Deloitte said.
“Due to the huge offset requirement and the Indian government’s objective of building up an indigenous manufacturing base, the global industry has an opportunity to integrate with the Indian industry to set up their manufacturing lines in India, which could be achieved either through joint ventures or collaborations,” Goyal added.
Last year, India allowed foreign vendors to use transfer of technology to fulfil their offset credits, easing the policy aimed at developing the indigenous manufacturing industry.
The government also increased the time for bank offset credits to seven years from two years, within which foreign vendors have to execute their offset obligations after the execution of contract obligations.
Deba R. Mohanty, senior fellow in security studies at the Observer Research Foundation, said he is a little bit sceptical about the estimates as there is no evidence from the ministry of defence. “In the past, the comptroller and auditor general had also cited glaring irregularities in implementing these offset contracts. Therefore, in the absence of authentic data, it is difficult to reach to these conclusions,” Mohanty added.
A senior executive at Larsen and Toubro, the engineering and construction firm that has exposure to offset contracts, too said there is a disconnect in the estimates and actual contracts. He requested anonymity and did not divulge details.