Defense Contractors Target Big Jump in India's Military Spending.
MUMBAI -- Global defense giants are lining up to capture billions of dollars in new orders in India as the country's military modernizes its forces.
A trip by Secretary of State Hillary Clinton to India beginning Friday is also raising expectations that the U.S. and India will announce completion of an "end-use monitoring" defense-procurement agreement that could streamline contracts between companies from the two countries.
Western companies could face hurdles in winning the Indian contracts, however. The Indian government earlier this month said it hopes to reduce imports to 30% from the current level of more than 70% in 10 years to foster a homegrown defense industry.
"We would like to see India become a vibrant manufacturing hub," said Sitanshu Kar, a spokesman for the Ministry of Defense.
India's capital defense expenditure is set to grow 12% in the year ending March 31 to $11.4 billion. Indian officials said they will spend an additional $565 million this year to boost border security and modernize its police force to fight terrorism.
In all, India plans to spend between $50 billion and $55 billion on military equipment over the next five years to turn its largely Soviet-era armed forces into a modern fighting machine.
Many of those planned purchases are big-ticket items, such as a $10 billion contract for 126 fighter jets being pursued by Boeing Co., Lockheed Martin Corp., BAE Systems PLC and European Aeronautic Defence & Space Co.
Under current rules, foreign companies that win import orders in excess of three billion Indian rupees, or about $62 million, must draw at least 30% of that order from domestic suppliers or make a similarly sized investment within India, in what is known as an offset.
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For example, the fighter jet contract could result in as much as $5 billion in offsets, according to PricewaterhouseCoopers. The offsets have traditionally gone to India's state-controlled defense contractors but are increasingly looked upon by a nascent private-sector industry as a source of much needed funding.
India also restricts foreign investment in the homegrown defense business to less than 26%. "This limit is strict, and it limits the development of joint ventures especially for export. But we haven't given up on convincing [the government] to relax the rule and go to a more balanced proportion," says Christian Duhain, president of EADS International, the marketing subsidiary of EADS.
Western companies are angling for better terms. EADS has been working with the Indian government on allowing Indian suppliers to its civilian business to count as part of the defense offset.
In a shift, the annual Economic Survey submitted to Parliament on July 2 recommended that the limit on foreign investment in defense industries should be increased to 49%.
The survey, which is produced by the chief economic adviser in the Ministry of Finance and represents a wish-list for corporate India, suggested foreign direct investment of up to 100% be allowed on a case-by-case basis in high technology, strategic defense goods, services and systems.
Mr. Kar, the spokesman, says the defense ministry will undertake a "serious discussion" about revising the limit.
Meanwhile, expectations are high that Mrs. Clinton will sign a monitoring deal with India in which the U.S. will track sales of defense equipment and ensure it is used for its stated intent.
"The 'end-user monitoring' agreement would make all the difference for U.S. firms competing for defense contracts," said Ratan Shrivastava, director of aerospace and defense practice at consulting firm Frost and Sullivan in New Delhi.
Currently contracts must be approved by the U.S. government on a case-by-case basis, Mr. Shrivastava said.
The agreement would "open the field" for participation by U.S. defense companies in deals involving the transfer of critical and sensitive defense equipment, he said.
India was the world's 10th-highest military spender in 2008, according to research by the Stockholm International Peace Research Institute, and foreign companies believe the market has great potential.
At home, it makes everything from small arms to land vehicles to aircraft, but it wants access to high-technology equipment.
So far, investments have been modest, and growth for both foreign firms and nascent domestic private-sector companies has been small.
Mahindra Defense Systems, a subsidiary of Indian auto maker Mahindra & Mahindra Ltd., announced a joint venture with BAE in January for the production of land-based weapon systems such as mine-protected vehicles. The initial size of the venture is $20 million.
Larsen & Toubro Ltd. an Indian engineering and construction conglomerate, and EADS Defense and Security announced a joint venture for defense electronics in India in May with an initial investment of $20 million spread over two to three years.
Meanwhile, Hindustan Aeronautics Ltd., a state-controlled defense company, is currently building the Hawk 132 Advanced Trainer Jet for the Indian Air Force under license from BAE.
Defense Contractors Target Big Jump in India's Military Spending - WSJ.com
