Page last updated at 22:50 GMT, Wednesday, 1 October 2008 23:50 UK

India targets defence industry

By Shilpa Kannan
India Business Report, BBC World

Mahindra factory
Indian defence firms are building new plants and factories

On the outskirts of Delhi, construction is in full swing at the Mahindra Defence Systems (MDS) manufacturing plant.

The tall glass and steel structure will soon produce armoured vehicles for the country's defence forces, making it India's first private sector plant dedicated to making military vehicles.

MDS, a division of tractor and utility firm Mahindra & Mahindra, is one of a number of local and foreign firms that hope to benefit as India takes steps to develop its fledgling defence industry.

Currently the bulk of Indian military hardware is sourced from overseas and a handful of state firms, but by 2020 the Ministry of Defence hopes to acquire 70% of defence equipment from indigenous sources.

The drive comes as India is increasing its defence budget to modernise its armed forces. Defence spending totalled $19bn (10.6bn) in the last financial year and is expected to exceed $30bn by 2012.

Attracting investors

India began opening up its defence industry in 2001 when the government first allowed private sector participation and some foreign investment.

India's defence minister MM Pallam Raju
Indian companies really have to pull their socks up
MM Pallam Raju, India's defence minister

But private firms largely stayed away, with the exception of a few companies like L&T, Kirloskar and MDS.

In October, laws came into effect which will make it easier for Indian and foreign companies to invest in the country's defence industry

The 2008 Defence Procurement Act aims to make the industry more transparent and means companies will no longer need a license from the government to manufacture defence-related goods.

Overseas interest

Overseas companies are keen to invest in the sector even though current rules state they cannot take more than a 26% stake in an Indian defence firm.

India has an army of 1.1 million, a navy of 47,000 and the world's fourth largest air force of 120,000.

BAE Systems, the UK's largest defence firm, has applied to India's Foreign Investment Promotion Board for permission to set up a joint venture with MDS to produce vehicles and artillery equipment.

MDS would have a controlling 51% stake, with BAE holding the remainder.

Brigadier Khutub Hai, of the Mahindra group that controls MDS, says that the joint venture would allow it to bid for major multi-billion dollar defence projects, which would then be built in Mahindra facilities in India.

The plant currently being built by the firm could also become part of BAE's global supply chain, he adds.

Buyer to maker

India's Minister of State for Defence MM Pallam Raju says that India is in the process of switching from being almost exclusively a buyer of military equipment to becoming a manufacturer in its own right.

He adds that Indian defence firms should benefit from a new "offset" policy that requires foreign suppliers of defence equipment to source components and other goods from Indian companies.

However, he said that the 26% ceiling on foreign direct investment will likely remain in place.

"Indian companies really have to pull their socks up, pick up on their capabilities and get their partnerships together," he said.

New business

InfoTech Enterprises, which provides engineering design, is another company that hopes to benefit as India opens up its defence industry.

About 97% of the firm's revenues come from orders from big aerospace firms like Boeing, Dassault, Pratt & Whitney and Bombardier.

BVR Mohan Reddy of Infotech Enterprises
Infotech hopes the new law will bring in more business from overseas clients

Existing clients have promised the firm more work once they start to fulfil the offset policy requirements and must source more components in India, says BVR Mohan Reddy, chairman and managing director of InfoTech.

The company, which has nearly 8000 employees, is opening two more facilities outside Delhi as they expect their business to boom.

With the modernisation of India's armed forces expected to present defence companies with opportunities exceeding $100bn in the coming decades, it's clear that Indian firms are preparing to claim their fair share.

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