Business Today

On a wing and a prayer

The defence sector banks on a Rs 42,000-crore tender.

By Tejeesh N.S. Behl        Print Edition: Sept 23, 2007

After much dithering the Indian Air Force (IAF) has finally got a nod for 126 multi-role combat aircraft. Last fortnight, the ministry of defence issued India's largest tender worth Rs 42,000 crore for such aircraft. If the country's defence equipment manufacturers are quietly licking their chops, it's because the selected party will have to undertake a 50 per cent offset obligation-which means that it will have to invest an amount half the contract's value in India's defence manufacturing industry. "Sure, it does represent a huge opportunity but then Indian companies have to be prepared to take in this kind of money," observes Brigadier (retd) Khutub Hai, CEO, Mahindra Defence Systems. Hai feels it's too soon to even enumerate the benefits, given that the selection process itself will take a few years. The final bids are expected by March 2008 after which the trials could take another 1-2 years.

The private sector players, who got the nod from the government in 2001 to enter defence production, have so far made little headway in becoming serious players in a country counted among the top 12 military spenders in the world. This is primarily because of a lack of clarity in policy changes and infantile R&D expertise.

Still, players like Larsen & Toubro (L&T) are hopeful. "The huge business opportunity will also open up some level of defence exports for Indian players and there is always a possibility of the winning bidder continuing the relationship with its Indian supplier even after the contract ends," says M.V. Kotwal, Senior Executive Vice President and member of board, L&T. Of course, the offsets obligation is not the only business opportunity staring in the face of Indian defence players. Of the 126 aircraft, 108 are required to be manufactured under transfer of technology agreements. This gives the private sector players a shot at garnering some muscle in a market estimated to be worth $20 billion by 2008.

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