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Indian Firms Tool Up for Defense Orders on Modi’s ‘Buy Indian’ Pledge

Tommy Wilkes by Tommy Wilkes
August 21, 2014
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Indian Firms Tool Up for Defense Orders on Modi’s ‘Buy Indian’ Pledge

Indian Army’s Arjun MK-I tanks (MBTs) are driven for display during the Republic Day parade in New Delhi January 26

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NEW DELHI — Some of India’s biggest companies are pouring billions of dollars into manufacturing guns, ships and tanks for the country’s military, buoyed by the new government’s commitment to upgrade its armed forces using domestic factories.

India, the world’s largest arms importer, will spend US$250 billion in the next decade on kit, analysts estimate, to upgrade its Soviet-era military and narrow the gap with China, which spends $120 billion a year on defense.

Under the last government, procurement delays and a spate of operational accidents—especially dogging the navy—raised uncomfortable questions over whether India’s armed forces are capable of defending its sea lanes and borders.

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Even before his landslide election victory in May, Prime Minister Narendra Modi promised to assert India’s military prowess and meet the security challenge posed by a rising China and long-running tensions with Pakistan.

Within weeks of becoming prime minister, he boosted defense spending by 12 percent to around $37 billion for the current fiscal year and approved plans to allow more foreign investment into local industry to jump-start production.

Launching a new, Indian-built naval destroyer last week, Modi said: “My government has taken important steps in improving indigenous defense technology…. We can guarantee peace if our military is modernized.”

This build-up comes as Southeast Asian nations expand their own defense industries, spurred by tensions with China. India, reliant on a state defense industry that often delivers late and over budget, risks being caught flat-footed.

“The opportunity is huge,” said M.V. Kotwal, president (Heavy Engineering) at Larsen and Toubro Ltd, one of India’s biggest industrial houses.

“We really expect quicker implementation. There are signs that this government is very keen to grow indigenization,” added Kotwal, referring to increasing domestic production.

Tata Sons, a $100 billion conglomerate, said last month it will invest $35 billion in the next three years to expand into new areas with a focus on a handful of sectors including defense.

Larsen is putting $400 million into a yard to build ships for the navy, while Mumbai-based Mahindra Group is expanding a facility that makes parts for planes, including for the air force, and investing in armored vehicle and radar production.

The companies are being lured by the prospect of lucrative returns on their investments as the Modi government has pledged to make “buy Indian” the default option for future orders.

Larsen is targeting a fourfold increase in annual defense revenue to $1 billion within the next five years.

Critics of indigenization argue that producing gear—especially in the lumbering state sector—is more costly than buying from abroad. Such deals can add layers of bureaucracy, increasing risks of corrupt dealings.

Indian industry is renowned for its ability to adapt, yet questions remain whether the private sector can come up with the solutions needed to bring armed forces into the 21st century without sufficient access to world-class foreign technology.

Delays

Some companies are also skeptical of the government’s commitment to grow the private market given New Delhi’s history of delays and order cancelations, and the traditionally strong ties between the military and state-run manufacturers.

They cite the case of a $10 billion Future Infantry Combat Vehicle (FICV) program. Conceived in 2009, the defense ministry invited three private players and the Ordnance Factory Board, a state entity, to bid for the 2,600-vehicle contract but suddenly withdrew the letter of intent in 2012.

Bidders included Mahindra and Tata, which is developing a vehicle along with Lockheed Martin Corp and General Dynamics Corp that could compete for a future contract, said Rahul Gajare, an analyst at Edelweiss Securities.

A quick decision to relaunch the program would demonstrate Modi’s resolve, said S.P. Shukla, who heads Mahindra’s defense business. Past tenders have stalled amid wrangling over whether or not to allow state manufacturers to bid and under what terms.

Larsen’s Kotwal said its Kattupalli shipyard in south India has yet to receive any orders for warships or submarines despite being designed to do just that and despite past government pledges to build at least two submarines in private yards.

In the meantime, the yard has switched to constructing and repairing commercial vessels.

“The policy in India has been right since 2006. The problem has been implementation,” said Rahul Chaudhry, CEO at Tata Power SED, which makes rocket launchers, sensors and radars.

Local firms have captured a fraction of the Indian defense market since it first opened to private participation in 2001. Consecutive governments have handed orders to state factories or to foreign giants like Boeing, Lockheed and BAE Systems .

Gajare at Edelweiss estimates total India private sector revenues from defense, including overseas orders, at below $2 billion last year, less than 6 percent of the country’s defense spending.

Your Thoughts …
Tommy Wilkes

Tommy Wilkes

Reuters

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