Indian Defence Industry and Offsets

Defence and security are vital preconditions for a nation’s well being and economic growth. It follows then that a nation’s armed forces must have the wherewithal to ensure the protection of national interests. Since independence, in furtherance of this aim, strategic defence production in India has been entrusted to the public sector. The first industrial policy outlinedin the Industry Policy Resolution of 1948 highlighted this aspect. In order to create indigenous capability, Defence Research and Development Organisation (DRDO) was formed in 1958 and some Defence Public Sector Undertakings (DPSUs) were raised in early 50s. The process of modernisation of India’s armed forces started in early 70s with acquisition of a vast quantum of military hardware from foreign countries. Capacity building continued apace but despite the fact that India now has 52 DRDO laboratories, 40 ordnance factories and 8 DPSUs, she is far from achieving the goal of self-reliance which was envisioned in early 50s.This obviously points to serious lacunae in the path tread by the country in achieving self-reliance in defence capability over the last six decades.

Though the liberalisation process commenced in India in 1991, the defence sector was insulated from the process. It was opened to private industry just a decade back with the initiation of thefirst Defence Procurement Policy (DPP) in 2002. The hope was that India’s defence industry would greatly benefit from the entry of private players. However, this hope stands belied with private industry being unable to muster the confidence to undertake defence production. There is obviously a mismatch between government intentions and the perception of government policies by Indian industry. Thereis a need to encourage the participation of private players in the defence sector and to that extent the latter must be given equal opportunities with the public sector. This would lead to augmentation of India’s indigenous defence production capability as well as creating large employment opportunities in thecountry.

Offsets are one of the means to enable both the public and private sector to absorb technologies and help enhance defence production capabilities. It is a sort of counter trade wherein a foreign supplier undertakes specified programs with a view to compensate or assist the buyer in its procurement expenditure and generate benefits for the economy of the buyer’s country in the form of technology transfers. There is no universal offset policy applicable to all countries. Depending upon their requirements, individual countries frame their respective offset policies. The objectives of the offset policy should be based on a realistic assessment of the country’s capability to absorb potential inputs. The Indian private sector has the capacity to absorb some of this technology and is keen to do so. It must be supported in this endeavour to enable Indian industry to aspire to be a part of the global supply chain.

India’s military expenditure is among the highest in the world. Every year a significant amount of the defence budget is used for acquisition of military equipment in the form of imports. Even after two decades of liberalisation, indigenous development by DRDO and emphasis on indigenous production has not yielded desired results of reducing dependence on imports. The application of offsets against acquisitions in defence is a progressive step to make India self-reliant. The offset policy was first articulated in the DPP in the year 2005 with the aim of establishing the defence industrial base in India. The first offsets contract was signed in 2007. Since the initiation of first defence offset policy, there have been suggestions from the industry for further refinements. As a result, the changes have been made in the defence offset policy on a regular basis. The latest defence offset policy of 2012 which is learnt to be under finalisation is yet to be officially declared.

In May 2012, Defence Minister A. K.Antony stated in Parliament that 17 offset contracts have been signed so far with a value of about USD 4.279 billion. However, most of these offset projects are still under implementation and the real situation will emerge later. Perhaps the time is now ripe to take an audit from the concerned industrial houses to determine if any benefits have accrued from the offset policy. If theo ffsets are utilised effectively, or in real perspective, Indian defence industry will have significant amount of business opportunities in the form of joint ventures, co-production, co-development and export of military hardware/software, thus helping the country in its quest to achieve self-reliance in defence production. However, Indian private industry is apprehensive of venturing into the defence sector because of huge risks involved. One of the options for Indian industry is to attract foreign investments. However, with a cap of 26 per cent being put on Foreign Direct Investments (FDIs) in defence industry, such investments are unlikely to meet with the requisite degree of success.  There is a possibility that the upper limit of FDI in defence sector could be raised to 49 per cent in near future.The Ministry of Defence’s policy formulations point towards strategic self-reliance as a key result area for the defence sector in the years to come. But lack of transparency and accountability, bureaucratic delays etc. will have to be overcome if self-reliance is to be realised in an appropriate time frame. The Indian private sector needs to move towards manufacturing of components, sub-assemblies, larger assemblies and integration of defence solutions. The upgrade of the existing equipment, maintenance, repair, overhaul, training and simulation are other areas where the Indian private industry can gain access quickly.

As of now, the offset policy is in the nascent stage and it may take some time to mature. There are gaps in the formulation, monitoring, accounting and execution of offset contracts. While teething problems are a part of the process, there is a need to tackle them urgently and with great seriousness. Sincere efforts are required for planning, analysing, approving and implementation of offset projects. Currently, there isa skeleton organisation which has been made responsible to take care of offset projects worth billions of dollars. This must be changed and a dedicated organisation set up to manage all issues related to offsets.  With emphasis on military modernisation, the offsets figure will zoom north with India poised to sign several mega defence deals in the coming years. Indian industry should make use of these opportunities by absorbing the critical technologies and becoming a partner in the defence production process.

Karanpreet Kaur is a Research Intern at the Centre for Land Warfare Studies (CLAWS)

Views expressed are personal