India’s industrial giants set sights on defense sector

Nikkei Asian Review

April 9, 2016 TAKAFUMI HOTTA, Nikkei staff writer

Larsen & Toubro’s display at Defexpo India 2016.

MUMBAI — Major Indian conglomerates are teaming with overseas arms makers and defense companies to produce next-generation military technology at home, pulled by the country’s industrial deregulation efforts and soaring defense budget.

Growing interest

This year’s Defexpo India, a four-day defense exhibition that ran through March 31 in the southern state of Goa, was the largest yet, Defense Minister Manohar Parrikar said proudly. The event drew more than 1,000 companies from India and abroad — 60% more than in 2014, when the expo was last held.

Private-sector Indian companies, which doubled their number to more than 500, were this year’s standouts. Reliance group member Reliance ADA Group announced it would form a joint venture with an Israeli arms maker to produce missiles and other weapons in India. The enterprise is seen generating around 3,000 jobs, and will involve an initial investment of more than 13 billion rupees ($195 million).

India’s government unveiled at the expo its new defense procurement policy prioritizing equipment designed and produced domestically. “These steps are going to help Indian industry build the much-needed defense and aerospace industrial base,” said Jayant Patil, head of defense and aerospace for engineering company Larsen & Toubro. The company is considering new joint ventures with foreign enterprises as it targets defense orders worth $7 billion three years from now. That figure is more than twice the level forecast for fiscal 2016.

A member of the Tata group, India’s largest conglomerate, is set to produce equipment such as military helicopter fuselages through a joint venture with U.S. aerospace giant Boeing.

The defense sector was the first of India’s core manufacturing fields to experience widespread deregulation under the “Make in India” initiative pushed by the government of Prime Minister Narendra Modi. New Delhi is actively issuing licenses to private companies for the manufacture of defense equipment, and in August 2014 lifted the cap on foreign investment in defense companies from 26% to 49%.

Seeking new faces

A handful of state-owned enterprises currently control 90% of military equipment production in India. But their ability to develop innovative weaponry incorporating new technologies is limited, Sameer Patil of international-relations think tank Gateway House noted.

India therefore relies on imports for 60% of its arms — a key factor in the country’s chronic trade deficit. The government is working to change that by putting development of the defense industry, with the help of foreign technology, in the hands of deep-pocketed companies. China’s increasing naval activity in the Indian Ocean is also pushing India to strengthen its defense capacity.

Overseas defense companies view India as a promising market. The country was the world’s seventh-highest military spender as of 2014. Fiscal 2016 outlays are expected to hit around 2.5 trillion rupees, twice the fiscal 2008 level. An executive at Russia’s state-run arms exporter noted that the market is attractive not only as a buyer of weaponry but also as a base for exports.

Yet hurdles to outsiders remain. The 49% cap on foreign interest in defense companies could deter enterprises from bringing cutting-edge technology and large product lines to India, President Pierre de Bausset of Airbus Group India said. “We need to have levels of control that are appropriate for the risk we are taking,” he said. Gaurav Mehndiratta, an analyst at accounting giant KPMG, called the investment limit clearly insufficient.

A framework to prevent leakage of valuable technology is a must for foreign companies deeply involved in the Indian market. Yet the defense sector is also tightly linked to national security, making it tough for the government to trim regulations too far.

New Delhi has hatched a measure to allow foreign companies bringing state-of-the-art technology into India to invest up to 100% in a company there. But that framework remains unused. The tug-of-war between Indian government and industry on one hand and foreign players on the other may grow only more intense as the defense market expands.


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