Bangalore: Three years ago, to boost its aerospace and defence industries, India made it mandatory for foreign companies selling military or aircraft equipment to the country to buy some of the parts locally.

The measure was meant to give a boost to local parts suppliers—except that they have ended up importing a bulk of the raw materials needed to make the components.

India is the third largest importer of fighter planes and tanks. It is in the market for 126 fighter jets and at least 200 helicopters.

Ground reality: HAL has been the biggest beneficiary of a policy which mandates foreign suppliers to source some components from within India. But nearly two-thirds of materials that the local suppliers need have to be imported, which, in effect, means only a third of the value of such deals is channelled into the country. Hemant Mishra / Mint

Under the 2006 defence procurement policy, foreign companies have to source within the country components worth at least 30% of the cost of such equipment.

That clause handed several so-called offset deals to local suppliers, but nearly two-thirds of the material needed for making those parts have to be imported, industry officials said.

For instance, India has to buy from overseas a majority of the aerospace grade metals it needs, such as aluminium.

In effect, only a third of the value of such deals is channelled into the country.

“We are really talking about only 30% of that which is available for outsourcing," K.G. Subramony, general manager (overhaul division), Hindustan Aeronautics Ltd (HAL), said at an aerospace conference this month.

HAL, the country’s sole military plane maker, is the biggest beneficiary of the offset policy because of the country’s large plane and helicopter deals.

India’s imports of military hardware could reach $30 billion (Rs1.4 trillion) by 2012, according to the Associated Chambers of Commerce and Industry of India, an industry lobby.

This could translate into at least $10 billion worth of offset orders from global military equipment makers.

In July, the ministry of defence said Indian firms signed Rs7,500 crore worth of offset deals for engineering, testing and manufacturing. India’s aerospace and defence exports were less than Rs500 crore for the year to March.

Quality Engineering and Software Technologies Pvt. Ltd, or Quest, an engineering services company that has set up India’s first special economic zone for aerospace manufacturing in a 300-acre campus in Belgaum in northern Karnataka, says it imports most of the material it needs for making components.

The company is making the effort to source these materials locally “but the quantum is still very big because of what we are doing right now and what we have to do," said Bejoy George, Quest’s chief marketing officer.

US plane maker Boeing Co. has the largest commitment of $2.5 billion in offsets deals in India for the passenger planes it is selling to Air India and surveillance planes to the Indian Navy.

“Boeing has immense experience in offsets and therefore we believe that offsets is just a catalyst to the already growing aerospace industry," Dinesh Keskar, president, Boeing India, said in an email. “We are also developing and qualifying raw material suppliers in India."

S.M. Kapoor, chief executive of Taneja Aerospace and Aviation Ltd, said developing aerospace grade materials locally for a limited market such as India has so far been unviable.

“If you manufacture metals here it should be for exports. The market is just growing; it will take time for that to mature," said Kapoor.

For instance, Gujarat-based Kemrock Industries and Exports Ltd is setting up a unit in Vadodara jointly with Germany’s Saertex GmbH and Co. to make and export carbon composite aerospace parts to global aircraft makers.

Besides, local suppliers would require at least three years to match up to standards set by plane makers such as Airbus SAS before they can supply parts to them, said Kemrock’s chairman and managing director Kalpesh Patel. “In aerospace, you need to invest in building quality and capacity before you get the first order."