‘Global defence market focus is on affordability’

Tom Captain, Vice-Chairman, Deloitte LLP Global and US National Aerospace & Defence Sector Leader, and Alaric Diniz, Director, Deloitte Touche Tohmatsu India LLP, share their views with BusinessLine on how the Indian defence market is panning out, especially after the increase in foreign direct investment and new defence procurement policy 2016. Excerpts:

How does the world view India’s defence policy, especially the offset clauses?

It is much improved at the 49 per cent level, especially if on a case-by-case basis, it is allowed to rise to 100 per cent. Foreign companies are loath to becoming minority joint venture partners when in reality they will be held responsible for the outcome. The Indian government has also updated its offset policy, raising the offset threshold to $305 million from $46 million earlier.

Additionally, the amended offset policy includes a new category of IDDM, addresses key industry concerns such as inclusion of services as a method of discharging offsets and updating Indian Offset Partner to enable complete discharge of obligations.

Do you think the ‘Make in India’ initiative goes well with the global defence business?

The attractiveness of the fast-growing Indian defence market, plus the increase in foreign direct investment (FDI) limit from 26 to 49 per cent and up to 100 per cent with approval for ‘modern technology or any other reason that may be recorded’, makes the policy workable for the majority of global defence primes.

The global defence market is focussing on affordability, where the primes and tier I players will look for better cost efficiencies across their supply chains, which will result in movement of work to countries like India, if they are ready and able to take up the work.

How are the big and small companies gearing to meet the Make in India programme?

The new DPP 2016 has a special focus on the MSME sector. SMEs are searching for team mates and joint venture partners to work with that have the ability to invest, have the requisite skills and technical capabilities. They will play an increasingly important role as the amount of work increases over time.

An important aspect for the defence primes and tier I players is to develop their vendor base through training and skill transfer as their biggest challenge will be to develop the capability of making parts and delivering on time, with 100 per cent quality at increasingly lower costs.

What, according to you, are the main takeaways for a foreign defence company if it wants to set up a plant here?

Educated engineering work force, low cost of labour, a highly attractive and growing defence market, and willingness of the government to work with western primes and suppliers. India’s defence expenditure grew at a CAGR of 11.7 per cent over the last 10 years, making it the fourth largest defence spending nation globally in 2016 (up from sixth position in 2015). By 2018, the country is likely to be the third largest defence spender. At the same time, the government has increased industry interaction and consultation on policy and plans that the government has and is actively trying to remedy the difficulties of the industry, both for global and Indian players.

A nine-member panel was formed in 2016 to re-evaluate structure of defence acquisition wing, the latest DPP 2016 and other measures are initiatives in that direction.

What is the level of India’s indigenous capabilities?

Very good in some cases and still a work in progress in other cases. Over the next 10 years (2017-27), electronics, missiles, aero-structures, guns and ammunition are expected to be major contributors amongst defence sub-systems.

Does the current vendor base suit well for India’s Defence Procurement Policy?

Some suppliers need help from American and European defence contractors that have the investment capabilities, efficient programme execution capabilities, supplier management and risk management. However, there is so much work that has to be accomplished over the next several years; there may be a risk that the work force in the supplier base is not yet able to address the upcoming volume of work.