Offsetting the Defence Offset Clause

Offsets and Transfer of Technology (ToT), when included in the Defence Procurement Procedures-2005 (DPP) were mooted to be tools that couldboth increase the indigenous content in the procurement basket of the Indian military and also turbo-change the indigenisation of design, development and manufacturing of defence related equipments and platforms. However for the past few years, one has not seen significant traction on neither the offsetnor the ToTfront. This article will elucidate theroadblocks that exist in the current setup and will also scout for probable policy alteratives within the existing structure. 

The Veracity of Offsets

At the outset neither ToT nor offsets are novel Indian ideas. This path has been walked by many others and that too successfully. An example of this kind of engagement with a foreign original equipment manufacturer (OEM), though in the civilian sphere would be the case of the high speed rails (HSR) of China. China initiallydepended on foreign OEMs to supply it with HSR. However joint ventures for domestic manufacturing of HSR trains followed by ToT resulted in China not only learning the science of HSR but also mastering the same. China,which  initially depended on imported trains, is now a big-player in the HSR market. China has not only managed to challenge the dominance of international majors like Siemens, Kawasaki and Alstom but is also able to challenge the very same companies that help Beijing  build its HSR base. 

Given the HSR experience with China it would be safe to conclude that OEMs will seldom part with technology. OEMs may part with know-how butto part with know-why is an unpleasant proposition. In the defence and defence-related sector, OEMs will play hard ball when it come to ToT, for this sector is technology-driven and not scale (cost). The thrust on technology, the cutting edge variant is not only the heart but also the future of the defence sector. Thus to expect OEMs to part with know-why of top-end equipments and platforms will be a futile proposition. Along with commercial imperatives, political and security considerations will also impose restrictions on ToT and offsets. Apart from these constraints, to understand and to absorb know-why is not asimple proposition. Given the complexities that are involved, more often than not the Indian capability to absorb niche technology seems to be inadequate. This limitation is used as baitby OEMs to shirk from their ToT and offset commitments.

India’s recent procurement plans have not been successful for various reasons and in select cases it is the ToT and offset clause that is a stumbling block.The case of the 126 Medium Multi –Role Combat Aircraft (MMRCA) deal failed to see the light of day through the DPP route. And to circumvent this road block, the Indian Air Force is slated to acquire MMRC aircraft through a direct government-to-government route. Irrespective of the traction on this acquisition programme, the MMRCA highlights the limitations of ToT and offsets.

Diversifying Offsets: Direct or Indirect

Working on the premise of India’s limited capacity to absorb ToT and offsets in toto need not be an invalid argument. However to state that India does not have any defence manufacturing base too is an incorrect premise. The real challenge in India’s defence manufacturing sector is in churning out equipments and platforms that meet the requirements of the services. Indian-made equipments and platforms do face considerable degree of shortfalls; however, these shortfallsusually pertain to specific systems/sub-systems, and not to the entire equipment/platform.

Another example of the Indian Air Force (IAF) would be the case of the LCA Tejas. Notwithstanding the IAF’s specifications and the never-ending design and development of this aircraft, the IAF’s reservation with respect to accepting this aircraft is specific. Some of the issues raised by the IAF have been addressed and some have not. The LCA project could have been fast-tracked to the satisfaction of the concerned service by taking an innovative approach towards offsets and ToT.  However, it is quite necessary to understand that the current approach towards both offsets and ToT.

At outset the DPP in its current avatar sticks to direct offsets and ToT. That is to say the OEM would have to part with the know-how and know-why of the platform/equipment that is contracted. Whereas, an indirect approach the OEM could fulfil the offset/ToT commitments that go beyond the said contract platform/equipment. However for India, which incidentally is again on  cross-roads, and is expected to revise/revisit the DPP, a semi-direct approach towards offsets and ToT can be scouted.

Coming back to the IAF, the LCATejas is in fact a degree lower that the MMRCA aircraft. The Tejas falls under the category of forth generation whereas the MMRCA was expected to fit into the 4.5 generation category of combat aircraft. Given this difference the MMRCA deal could have been concluded to the satisfaction of all parties if the offset and the ToT was not the new aircraft that was to be procured but honoured by addressing the limitations of the Tejas. To address the limitations would have been a favourable proposition for the OEM, since they at best would have had to part with dated technology. As has been brought out earlier, OEMs will be hard pressed to part with their cutting edge technology, while at the same time the OEMs would not necessary resist parting with dated technology

To deal with dated know-why would sound sacrilegious but would have been a preferred route for the following reasons. First and foremost, dated technology would have been accepted whole-heartedly by the Indian defence and scientific establishment. For India, dated technology would be necessary to fill the gaps in projects like the LCA that have yet to meet the stringent requirements of the services. The shortfalls, as they may be, are not on the whole platform per sebut specific performance parameters that are identifiable to specific system/sub-system.

External assistance in form of strategic partnership or through offset/ToT would go a long way in operationalising indigenous R&D projects. The thrust for indigenisation is not only a strategic requirement and a political rhetoric of the short term but will have profound long-term implications. Secondly, India’s current R&D efforts, irrespective of their success would be a stepping stone in designing, development and finally manufacturing the future requirements of the India armed forces.

Thirdly, the definition of “indigenous” in the current guidelines sets a minimum threshold of 40 per cent of the equipment/platform’s content  to be of Indian in nature. Given this approach to indigenisation, the DPP is not averse to external participating in defence R&D which are otherwise “indigenous”. And as such foreign OEMs are significant partners in most India defence R&D projects. To that extent their participation will not be an issue.

Additionally expecting OEMs to honour their ToT and offsets commitments in India’s ongoing or even proposed projects of the future would not derail the Make in India objectives. To develop and to nurture an indigenous defence manufacturing sector, it is paramount to focus on India’s strengths. Absorbing know-why and know-how of foreign equipments that are still in the pipeline would bring with it a set of challenges. The most obvious would be a logistics nightmare since India would be operating a plethora of equipments and ToT/Offsets of the same would result in the scientific and the R&D establishment too having to bury itself with a vast array of know-whys and know-how’s. This would naturally result in the nation absorbing a spectrum of technology (hopefully) with limited wherewithal to translating this knowledge bank in anything meaningful.

At the same time the case of indirect/semi-direct offsets would be a win-win proposition for the OEM, the services and the nascent Indian defence industry, since the services would get the what they want, the OEMs would not be bogged down by the complexities of honouring offsets and ToT obligations and the Indian industry could  optimally utilisethe ToT/Offsets, since they would be dealing with what they are good/comfortable at and not venture into operations that are beyond them.

Finally, the Indigenously Designed, Developed and Manufactured (IDDM) as a new procurement category being introduced to the DPP, along with direct R&D funding by the Ministry of Defence to both private and public entities, the nation has injected a new thrust towards self reliance in matters of defences equipments/platform manufacturing. In this context, revisiting the approach towards offset and ToT will go a long way in realising the governments stated objective of weaning itself of import dependency.

Author is former Associate Fellow at CLAWS. Views expressed here, by the author are personal.