Challenges of Offsets Implementation

The defence offset policy has been simplified and clarified several times after being introduced in 2005 as part of Defence Procurement Procedure (DPP). When the offset policy was conceived, it was envisaged that there would be rapid indigenisation in defence and that the Indian defence industry would reap immediate benefits. However, eight years since its inception, the policy is still evolving and the pace of indigenisation through offsets has not been up to the expectations of the stakeholders. The major impediments in offsets procedures relate to conflicting government policies, bureaucratic hassles, inefficient managing body, execution problems and vested interests of some of the stakeholders.

The policy being in a nascent stage has been modified and amended numerous times. Some stakeholders resist the changes in the policy as they feel that the policy is being diluted while others want further amendments in the policy to suit their requirements. As a result, no consensus is reached among the stakeholders for an offset policy that is acceptable to all. The participation of the domestic private industry is thwarted by many irritants such as taxes and licensing issues. The financial burden in the form of service tax, customs duty, VAT, exchange rate variations, and the delays in obtaining industrial licenses to manufacture defence related equipment are major impediments for an upcoming private defence sector. The success of IT industry can be emulated for practical and effective application of policies and procedures. The private industry is of the view that the government does not provide requisite incentives for them to venture into defence and that most of their policies are biased towards the public sector. 

Offsets is a complex subject and it takes time to understand the associated intricacies. Most of the decision makers have limited grasp of the details of offsets and do not possess relevant experience in managing offsets. In addition, the lack of accountability leads to a lackadaisical attitude on the part of the concerned government officials towards offsets. The industry experts feel that in certain cases, vested political and personal interests of officials involved create detriments for the OEMs and indigenous industry. There is lack of coordination among stakeholders because of which consensus on critical issues cannot be reached. As a consequence, different stakeholders have varied and divergent interpretations of the same clauses of offset contracts. This can be aptly discerned from the observations made by CAG in the November 2012 report, wherein it was noted that several foreign vendors misunderstood the offset guidelines and even tried to manipulate the contracts.

Another challenge that needs to be addressed during execution of offsets relates to time and cost overruns. The private industry lacks relevant experience in defence production and has limited capability of technology absorption. The qualification criteria for military grade products are very stringent and some of the private companies do not visualise such complexities during pre-contract stage. A very critical issue pertains to technology obsolescence where the technology becomes obsolete before it is inducted. For example, electronics being at the fore front of critical technology is the worst affected by obsolescence issues. The contract execution timelines are so long that most of the offset contracts become unviable during the final stages of implementation. Even, the evaluation of ToT is judgmental in nature and there doesn’t seem to be standard scientific criteria to evaluate ToT, which can lead to mismanagement of resources. Industry related issues pertain to misguidance by agents, misrepresentation of facts by industry, unethical practices by domestic companies, unrealistic expectations by the Services and frustration due to delays. Some of such issues came to light when CAG examined sixteen offset contracts signed till February 2012 and released its observations in November 2012. A few issues highlighted by CAG relate to non adherence to DPP guidelines, waivers given by Ministry to foreign vendors, use of Direct Foreign Investment (DFI) in kind to discharge offset obligations, invalid Indian Offset Partners (IOPs) and unfulfilled penalty charges.

The gaps in implementation of the offset policy need to be recognised and addressed at the earliest. It is essential to understand the formative idea of offsets and its potential to expedite industrial growth for strengthening the economic and military prowess of the nation. There is a requirement of increased interaction and cooperation among the stakeholders for mutually agreed upon offset related decisions. There needs to be a forum where all stakeholders can put forth their queries and views which are addressed in a time based manner. Investment towards R&D is one of the most important elements to enhance technology absorption and development capability. Israel and South Korea were successful in utilising offsets efficiently through a streamlined policy, clear vision and dedicated industry. In addition, they made adequate investments in R&D to enable absorption of technologies and carry out further developments. India produces the largest number of IT and engineering professionals. The capital and resources of the private industry coupled with the pool of talented professionals needs to be directed towards developmental projects in defence sector. The armed forces need to play an active role to provide necessary support and guidance during the R&D and production stages. CAG and other audit agencies could periodically examine the offset processes and contracts so that the loopholes are plugged and concerned authorities take appropriate action against the defaulters. A mechanism of probity, accountability and transparency needs to be streamlined and strengthened. The ToT mechanism needs to be properly evaluated based on set criteria without leaving any room for ambiguity. The offset policy is evolving and it is natural for the process to be faced with challenges during its initial journey. However, continuous efforts by the concerned stakeholders to synergise their actions in filling the gaps will go a long way in making offsets a success story and creating a reliable and robust defence industrial base in India.

The author is a Research Assistant at CLAWS        

Views expressed are personal