Indian airline operators are expected to spend $130 billion on commercial jetliner purchases over the next 20 years, making India the fifth largest aviation market.  India is also aggressively upgrading its military apparatus. This financial year, New Delhi plans to spend $37.7 billion on defence.  By 2017, India is projected to become the fifth largest military spender in the world. 
As is customary in the Aerospace and Defence (A&D) business for a country involved in massive military imports, India has put in place industrial compensation practices as a condition of purchase in commercial direct sales and government-to-government sales of defence hardware and services. This industrial compensation is called “offsets.” Offsets are a powerful mechanism to ensure that large purchases from abroad are matched by large spends domestically.
Offset obligations can be met in different ways. “Direct Offsets,” for example, are contractual arrangements for defence articles and services referenced in the sales agreement for military exports. “Indirect Offsets” involve goods and services unrelated to the military exports. “Co-production” is overseas production based on government-to-government agreements that permit a foreign government or producer to acquire the technical information to manufacture all or part of a foreign-origin defence article. “Foreign Investment” arising from an offset agreement could take the form of capital invested to establish or expand a subsidiary or joint venture in India.
In the Indian context, it is mandatory for the winning contractor to invest nearly 30% of the contract value (in some cases, up to 50%) in India – leading to partnerships, technology-sharing, setting up of new manufacturing facilities, co-investments, and collaborative R&D.
If used wisely, offsets can help build capabilities that will become building blocks for long-term productivity. However, offsets should be seen as enablers, and not as an end in itself. In fact, as some industry-specialists have cautioned, the offset policy could blunt India’s competitive edge, because guaranteed business can lead to an illusory complacency.
Most private players in the Indian A&D sector today operate at a tier-3 level, making individual parts and small components. Most of them are focussed on the domestic market and do not export their products into the global A&D supply chain. By global standards the Indian A&D sector remains puny in terms of scope, scale, and ambition.
Given the fledgling nature of the Indian A&D industrial base, the number of vendors who can service the Original Equipment Manufacturers (OEMs) and their tier partners to meet offset obligations, is limited. When these vendors sign up with a few global OEMs to meet their offset obligations, their ability to service additional customers becomes constrained.
Besides, offsets take a long time to materialise, given the bureaucratic nature of defence contracting cycles. If Indian companies continue to focus primarily on defence offsets and ignore the opportunities from other A&D sectors, instead of a couple of decades, it might take India half a century to have global OEMs.
Most Indian companies interested in A&D are consumed by the pursuit of defence offsets. Although some of are now taking an interest in commercial aviation products, they are yet to wake up to the multi-billion dollar global space economy.
India has an accomplished government space programme, but no real space industry. Although the Indian Space Research Organisation (ISRO) claims that more than 400 companies, big and small, manufacture and supply parts for their satellite and rocket programmes, no Indian companies can compete in the international space marketplace. This is a real gap for a country that ranks in the top dozen space-faring nations, along with the U.S, Russia, China, France, and Japan.
At the inception of the space programme in India in the late 1960s, the focus on technology independence was essential. More than four decades later, it is now time to look outwards. The industry revenue and growth figures for 2012 should be a wake-up call for India’s policy-makers.
In 2012, the global space industry revenues totalled nearly $304 billion, overall telecommunications industry revenues were around $4.9 trillion, while the worldwide satellite industry were around $190 billion. The growth in telecommunications revenue was 14%, space revenues grew by 5% and satellite industry revenues grew by 7% in 2012. 
Each of these outpaced both the worldwide economic growth rate of 3.1% and the U.S. growth rate of 2.2%, not to mention India’s growth rate of barely 5% for 2012-13.  As in previous years, the vast majority of this growth was in the commercial sector, which now constitutes nearly three-quarters of the space economy, with government spending making up the rest.
The global satellite industry is a subset of both the global telecommunications and space industries. In 2012, satellite industry revenues were 62% of space revenues (the remainder of primarily governmental budgets) and 4% of telecommunications revenues. According to the 2013 State of the Satellite Industry Report  published by the Satellite Industry Association (SIA):
- Satellite Services revenues increased by 5% globally from 2011 to 2012, reaching $113.5 billion, powered by continued growth in consumer satellite television services.
- Satellite Manufacturing revenues, reflecting in-year satellites launched, grew by 23% worldwide to $14.6 billion.
- Satellite Launch Industry revenues, reflecting in-year launches, increased by 35% globally, with U.S. revenues increasing from $1.4 billion to $2.2 billion.
- Satellite Ground Equipment revenues continued to increase, growing 4% over 2011 to reach $54.8 billion. Consumer ground equipment, including satellite TV, satellite broadband, mobile satellite terminals, and GPS devices, constitute the bulk of the revenues for satellite ground equipment.
Commercial space products and services such as broadcasting, communications, and Earth observation made up the largest portion of the space economy, growing by 6.5% in 2012. Commercial infrastructure and support industries, which constitute a slightly smaller proportion of the total, grew at a faster rate of 11% during the year. 
The first Indian company that attempted to enter the lucrative satellite services market – Devas Multimedia – is now embroiled in court battles.  This setback will certainly delay if not deter future ventures. Devas could well have been India’s first company to join the league of international satellite operators, a tremendously lucrative area given the explosive growth of consumer satellite services and mobile broadband.
Satellite manufacturing is a highly specialised area that Indian companies should consider as well, especially large communication satellites (comsats). It is dominated by U.S. companies that, the SIA report says, made $8.2 billion of the global total of $14.6 billion in 2012.
According to the Tauri Group, an analytical consulting company in the U.S. that authored the report, at the end of 2012 there were more than a thousand operational satellites.  More than half are communication satellites and more than one-third are commercial satellites.
As most satellite components are manufactured in the U.S., Europe, and Japan, Indian companies might have to consider acquiring some of those first, or even acquire one of seven major companies (there each are located in the U.S and Europe, and one is in Russia) that build these megaton comsats.  These acquisitions will be far from easy. Space is a highly regulated sector, with governments heavily subsidising their private A&D companies through multi-billion dollar contracts.
As for the launch industry, India stands a good chance with its smaller rocket, the Polar Satellite Launch Vehicle (PSLV), but has yet to cash in. A Gateway House article in February 2011 discussed this opportunity in depth. 
India is sitting on a space gold mine. Indian companies can leverage the impressive portfolio of space products and services that ISRO has developed over four decades to serve ISRO’s expanding needs, exploit the satellite services market, and become competitive in the global marketplace. This requires New Delhi to overhaul its space policy. It also requires ISRO to amend its policy on contracts, Indian industry to share risk and investment, and the two to co-develop and co-innovate.
Susmita Mohanty is the founder and CEO of Earth2Orbit, India’s first private space start-up.
This article was written exclusively for Gateway House: Indian Council on Global Relations. You can find more exclusive features here.
For interview requests with the author, or for permission to republish, please contact Rajeshwari Krishnamurthy at firstname.lastname@example.org or 022 22023371.
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