The search for offsets gains momentum - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 31 October 2007

The search for offsets gains momentum

by Ajai Shukla
Business Standard, 23rd Oct 07

With just eight months to go for six global defence giants to submit their proposals for offsets in India’s Rs 42,000 crore contract to buy 126 medium multi-role combat aircraft (MMRCA), three senior executives from Northrop Grumman have landed in India this week to firm up partnerships with prospective Indian partners. The tender document places on vendors a 50% offsets liability; that means that each of the six aerospace consortia hoping for the MMRCA contract will need to tie up, before the submission date of 9th June 2008, arrangements to source Indian defence goods or services worth at least Rs 21,000 crores. 

The foreign vendors are complaining bitterly. While none of them are willing to come on record for fear of damaging their chances of winning the contract, they point out that India’s domestic defence industry lacks the capacity to absorb so much investment. With foreign companies holdings in Indian defence production units restricted to 26%, each rupee invested by the foreign vendor will require the domestic partner to put in three times that amount. 

But with the deadline looming, the Northrop Grumman team will be signing Memoranda of Understanding (MoUs) with a raft of major Indian defence manufacturers. On Tuesday, the Northrop Grumman team will meet with the Tata Group in Delhi, which has set up a special projects division to absorb defence offsets. Ms Uma Pillai, who previously held the secretary level job of financial advisor to the MoD, heads the Tata team. 

On Wednesday and Thursday, the Northrop Grumman team will ink defence production MoUs in Mumbai, with Hindalco, L&T, and the Kirloskar and Tata groups. On Friday, they will head to Bangalore, where a MoU will be signed with Hindustan Aeronautics Limited (HAL), India’s major aeronautics manufacturer. 

Other MMRCA contenders are signing similar MoUs with Indian defence manufacturers. On Thursday and Friday, the CII is organising an exhibition on offsets in New Delhi. US companies Boeing, Lockheed Martin and Raytheon, Sweden’s Saab International and European giant EADS will be looking to firm up their offsets liabilities. But while MoUs are being signed by each of the vendors with a plethora of Indian suppliers, only those of the winner of the MMRCA supply order will be translated into actual contracts. 

Foreign corporations also complain about foot dragging by the government hindering their search for Indian partners. The RBI has taken a year to grant Northrop Grumman a licence to set up a liaison office in Delhi, which started functioning only last month. Several other companies are conducting from overseas their search for offset partners. 

While the Northrop Grumman team is focusing on manufacturing tie-ups during this visit, it is in information technology (IT) that foreign vendors say the future of offsets in India lies. During the Aero India 2007 show in Bangalore in February 2007, several foreign aerospace vendors got a head start on offsets for the MMRCA contract, tying up partnerships with Indian IT corporations like TCS, HCL and Satyam, which have built cutting edge expertise in aerospace design. A recent report by Research & Consultancy Outsourcing Services (RNCOS) predicts that the Indian aerospace technology outsourcing market, which is currently at Rs 620 crores, will rise to Rs 4000 crores by 2009. Booz Hamilton projects that by 2020, India’s offshore engineering services market could go up to Rs 12,000 crores. 

With defence procurements projected to generate offsets business worth between Rs 50,000 - 90,000 crores over the next five years, the search for Indian partners is gathering momentum.

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