India Inc awaits $6bn offset from jet deal

As India crawls closer to purchasing 126 combat jets worth $11 billion to modernise its aeging fleet, several Indian companies are waiting in the wings to reap windfall gains, with state-owned Hindustan Aeronautical Ltd (HAL) expected to get the lion’s share — worth at least $5 billion.

Indian defence procurement regulations, commonly referred to as ‘offset clause’, stipulates that products/ components/ services worth at least 50% of the value of the contract should be procured from Indian companies.

Nidhi Goyal, director, Deloitte Touche Tohmatsu India, said that HAL stands to get a least half of the revenues expected to be accrued to Indian players.

“108 of these jets would be assembled at the HAL facility,” Goyal said. “So the company should get at least 50% of the total offset benefits.”

HAL could not be reached for a comment.

To comply with offset clause requirements, the European firms have already either set up joint ventures with Indian companies or entered into memorandum of understanding with firms they hope to work with once the contract is awarded, which is expected to be towards the end of the current fiscal.

Ministry of defence spokesperson Sitanshu Kar confirmed that while 18 of the 126 multi-role jet fighters would be delivered by the winner within 36 months of contract signing, the remaining 108 jets would be assembled in the HAL’s facility in Bangalore.

Tata Technologies, a subsidiary of Tata Motors, has already signed an agreement with Dassault where the Indian company will help the French defence manufacturer. Hyderabad-based Infotech Enterprises, a software services firm that offers engineering services solutions to aerospace companies has a memorandum of understanding with Dassault for offset related work.

 “Our understanding is that in the next 3-4 months the shortlisted bidders will be required to submit a separate proposal on their plans to comply with offset requirements,” said BVR Mohan Reddy, chief executive offficer of Infotech Enterprises.

According to Reddy’s estimate, engineering services would constitute at least 10% of the offset work. Infotech Enterprises is looking at work worth at least $600 million.

Infosys Technologies, Mahindra Satyam and Bangalore-based Quest Global, which offer engineering services, are other potential firms  that may gain from offset related work.

India’s defence sector is set to gain even more prominence in the years ahead as country imports most of the defence requirements.

Stockholm International Peace Research Institute , a Sweeden-based think-tank that monitors global weapons trade India has overtaken China as the world’s largest importer of arms as it accounts for 9% of the global arms transfer and imports about 70% of the arms it needs.

The defence budget totalled $30 billion last year and with the planned acquisition budget for 2011-12 forecast to jump 15.3% for this year. Industry observers forecast major gains for Indian and foreign defence suppliers.