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Fri, Feb 20 2015. 01 18 AM IST

Governments Make in India plan and growth scope offered by offsets are attracting private conglomerates
Bengaluru: The governments Make in India programme, the belief it
will spend far more aggressively than its predecessors on upgrading
the countrys armed forces in terms of equipment, and growing
opportunities presented by offsets are encouraging well-heeled
conglomerates to venture into the defence equipment business.
On Wednesday, at the Aero India 2015 exhibition and conference in
Bengaluru, Bharat Forge Ltd and Anil Ambanis Reliance
Group detailed their foray in the defence equipment manufacturing
space, joining the Tata Group, Reliance Industries Ltd (RIL),
Larsen and Toubro Ltd (L&T ), the Godrej group and the Mahindra
Group that have been in the business for some time.

According to KPMG India, the defence ministry expects the

defence budget to grow at a compounded annual growth rate
of 8% to touch $64 billion in the financial year 2020. Photo:
Hindustan Times

For over 15 years, India has tried to interest its private sector in the
business and while it has succeeded in doing so to some extent,
domestic defence manufacturing is dominated by defence publicsector undertakings (DPSU) and the Ordnance Factories Board
(OFB), which together have an 80-90% share.
Such efforts are finally coming to fruition now because of three
reasons.

The first is the pressing need to modernize Indias armed forces. A vast percentage of our equipment is of the 1970s and 80s vintage and have
reached their end of life status, said Amber Dubey, partner and India head of aerospace and defence at consultancy firm KPMG . Our
technology gap with China is increasing by the day and needs to be arrested and reversed as a national priority.
According to KPMG India, the defence ministry expects the defence budget to grow at a compounded annual growth rate of 8% to touch $64
billion in the financial year 2020. The growth will primarily be driven by capital expenditurethe component of the defence budget used for
creation of assets and expenditure on procurement of new equipment.
India will see a total defence budget allocation of $620 billion between financial year 2014 and 2022 of which 50% will be on capital
expenditure, according to a report released by the industry lobby the Federation of Indian Chambers of Commerce and Industry (Ficci) and
financial services company Centrum Capital Ltd this month. The annual opportunity for Indian companiesboth state-owned and privateis
expected to reach $41 billion by financial year 2022 and $168 billion cumulatively, it said.
The second is the governments ambitious Make in India campaign aimed at attracting foreign companies to invest in Indias manufacturing
sector.
The local manufacture of defence equipment is at the heart of the Make In India programme, Prime Minister Narendra Modi said at the
inauguration of Aero India 2015 on Wednesday. Thecountry imports nearly 60% of its defence equipment, spending tens of billions of dollars,
he added.
There are studies that show that even a 20 to 25% reduction in imports could directly create an additional 100,000 to 120,000 highly skilled
jobs in India. If we could raise the percentage of domestic procurement from 40% to 70% in the next five years, we would double the output in
our defence industry, Modi said.
He said it will be no longer enough to buy equipment and simply assemble in India.
Indias frugal but sophisticated manufacturing and engineering services sectors can help reduce costs. India can also be a base for export to
third countries,especially because of Indias growing defence partnerships in Asia and beyond, Modi added.
The third reason is offsetsa policy that requires any foreign arms manufacturer securing an order worth more than `300 crore from India to
source components worth 30% of the value of the order from India.
The offsets opportunity is expected to be worth $15 billion within the next 10-15 years, assuming that several proposed purchases are
completed on time, according to KPMG.

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It could be worth much more. The minimum opportunity for domestic entities is $75 billion, given the 30% offset requirement, Edelweiss

Securities Ltd said in a July 2014 report.

On Wednesday, Modi said that the government is reforming defence procurement policies and procedures. There will be a clear preference for
equipment manufactured in India. Our procurement procedures will ensure simplicity, accountability and speedy decision-making, he said.
The government has raised the permitted level of foreign direct investment in the defence sector to 49%.
This can go higher, if the project brings state-of-the-art technology. We have permitted investments up to 24% by foreign institutional
investments. And there is no longer a need to have a single Indian investor with at least a 51% stake, Modi said.
Industrial licensing requirements have been eliminated for a number of items. Where it is needed, the process has been simplified, he said.
The results can already be seen, said one executive.

Srinivasan Dwarakanath, chief executive officer of Airbus India, said a clutch of private companies, including conglomerates, are entering
the aerospace and defence sector.
Five years ago, there were only defence PSUs but now there are many private companies. This is mainly because there are several defence
and aerospace development programmes dedicated to India. For that, you need private companies with deep pockets, Dwarakanath said.
On Wednesday, Anil Ambanis Reliance Infrastructure Ltd said it has formed three wholly owned subsidiariesReliance Defence
Systems Pvt. Ltd, Reliance Defence Technologies Pvt. Ltd and Reliance Defence and Aerospace Pvt. Ltdto pursue growth
opportunities in the defence sector. The companies plan to start by manufacturing naval utility and army utility helicopters.
So why are these private companies entering aerospace and defence?
Reliance Industries Ltd (RIL), controlled by Mukesh Ambani, set up two defence subsidiariesReliance Aerospace Technologies Pvt.
Ltd and Reliance Security Solutions Ltdin 2011.
The company will enter the defence space by investing and signing new deals with global original equipment manufacturers (OEMs) primarily
towards offset arrangement of defence equipment, the Edelweiss report said.
RIL recently signed an agreement with French defence firm Dassault Aviation SA. The company has also signed agreements with
Raytheon Co. and The Boeing Co. of the US and Siemens AG of Germany for homeland security systems.
Mahindra Group launched Mahindra Defense Systems division in 2000 and spun this off as a separate company in July 2012. The company
makes artillery systems and armoured vehicles and hopes to increase revenue to $430 million by FY16E from the current $51 million.
The Tata Group expects revenue of around `2,500 crore, or more than $400 million, from its defence and aerospace business in the year to 31
March.

Tata Sons Ltd said the current order book size of Tata Group in the sector is more than `10,000 crore.
Mukund Rajan, a member of the group executive council and brand custodian of Tata Sons, said that in financial year 2014, the group
invested more than `320 crore in the defence and aerospace sector.
Bharat Forge, a part of the Kalyani Group, is looking at setting up manufacturing plants for artillery guns, anti-tank missiles, armoured
vehicles and aerospace components and Larsen and Toubro Ltd (L&T) is aiming to build submarines.
Bharat Forge chairman and managing director Baba Kalyani said the company will set up four manufacturing plants in India this year. Its
time now for action, Kalyani said on Wednesday.
The Godrej Group plans to focus on developing niche manufacturing capabilities in building engines, providing maintenance, repair and
overhaul services, and supplying replaceable components known as line-replaceable units.
Kalyani Group will form a joint venture with Israels Rafael Advanced Defence Systems Ltd to develop and manufacture high-technology
systems for the defence sector.
Their joint venture company will include a wide range of technologies and systems, like missile technology, remote weapon systems and
advanced armour solutions.
Kalyani will hold 51% of the stake in the company while Rafael will hold 49%.
We believe in the vision of Make in India and our proposed joint venture with Rafael is a step in this direction, Kalyani said in a statement on
Thursday.

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As part of our global strategy, we form alliances to develop military applications based on our proprietary technologies and in Kalyani Group
we see a lot of synergy and opportunities for growth in new markets and especially in India which is strategic market for us, said Brigadier
General (Retires ), Itzhak Gat, chairman, Rafael.
Dubey of KPMG said companies will need to choose the technology, scale, alliances and business model with care, or risk a sour experience.
Defence manufacturing is a long gestation but profitable business, provided one can be humble and patient, he added.
Tarun Shukla contributed to this story.

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