Defence Offset clause to offer Rs 50,000 crore opportunity to component suppliers

With India pitted to emerge as the world’s third largest aviation market by 2020, and perhaps the largest by 2030, there is significant push from the Indian government to aerospace majors to establish their R&D, manufacturing, maintenance, warehousing and training facilities in India.

Further, the offset clause for defence purchase has offered a huge opportunity to the Indian automotive component sector. The offset policy outlined in the Defence Procurement Procedure 2005 mentions inclusion of an offset clause amounting to a minimum of 30 percent of the indicative cost in the RFP where the indicative cost of the contract is Rs 300 crore or more. 

In order to leverage this buying power of the country to achieve greater self- reliance in defence production, the Union Ministry of Defence had announced the Offset Policy as part of the DPP.

Speaking at the first ACMA-organised Aerospace & Defence Summit on ‘Harnessing India’s manufacturing capability for building the aerospace and defence supply ecosystem: opportunities and challenges’ in New Delhi today, Ajay Shankar, member secretary, National Manufacturing Competitiveness Council, said that for ACMA members this offset clause is a big development though OEMs believe it is a burden as it increases their costs.

He said the game-changer is the definition of defence that has opened up an entire range of components and parts for manufacture, moving them out of the licensing system for aerospace and defence. “This means that it is free from licensing and need for government approval. This is a real game changer.”

According to C K Vishwakarma, executive director, Hindustan Aeronautics Ltd, the Indian component industry has become mature enough in terms of technology and skills and is equally keen to diversify into aerospace. But he cautioned that manufacturing aerospace components and expertise involves challenges as they call for very strict quality control.

In addition, volumes would be very small as not more than 15 aircraft are produced in a year and each component requires separate tooling which means spiralling costs. For instance, automotive part manufacturing costs Rs 100 per part while for the aerospace sector,  component manufacturing costs amounts to $1,000 (Rs 60,000) per part due to low volumes and need to meet high quality standards.

For skill development, HAL along with the Bangalore Chamber of Commerce and Industry and the Society of Indian Aerospace Technologies and Industries, plans to float a national skill body for skilling 400,000 professionals in 90 skills to cater to the aerospace and aviation sectors over the next 10 years.

The Automotive Component Manufacturers Association of India (ACMA) has recommended to the government that a comprehensive roadmap be defined for the aerospace and defence sectors in the absence of which the Indian defence manufacturing sector is not able to cater to India’s current requirements, compelling it to look overseas to meet its requirements.