Defence Offsets in India: Perceptions and Reality

Over the last two decades, offsets have become a common feature of major defence acquisitions all over the world unleashed by the forces of liberalisation and globalisation. More than 100 countries have incorporated an official offset policy as a part of their foreign military procurement deals. Countries use offsets to obtain critical technology, to expand their indigenous defence industries, to attract much needed foreign investments and to support employment in their country. Generally, the offset practices of countries depend on their developmental goals with respect to holistic defence capability requirements and self-reliance. Countries use various incentives like multipliers, offset banking, credits for R&D and Transfer of Technology (ToT) etc. to attract foreign vendors. There is no particular template which suits the requirements of all countries. Every country needs to define the offset concepts to fulfill their specific aims.

India has been late in incorporating the offset policy in the Defence Procurement Procedure (DPP). Though India benefitted from bilateral defence cooperative arrangements since 1947, however the domestic defence industry did not get adequate exposure to attain self-reliance. It was only in 2005 that India realised the importance of offsets and officially introduced these in the DPP. The efforts towards the goal of self reliance have been rather slow, resulting in just 30 per cent of our defence requirements being met by Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB). According to the report published in March 2012 by the Stockholm International Peace Research Institute (SIPRI), India has become the largest importer of arms during 2007-11 and accounted for 10 per cent of global arms import. This clearly indicates that we have a long way to go in order to bolster the indigenous defence base to a level of qualitative and quantitative self sufficiency.   

Although seven years have passed since its inception, the offset policy is yet to provide the credible guarantee that it will help to create a sustainable military industrial complex. There have been apprehensions on the deliverability of offset projects and its efficacy to provide the desired results. The offset policy has been plagued by several obstacles. One of the major problems is the absence of an authentic organisation for analysing, contracting, executing, monitoring, and accounting of the offset projects. The Defence Offset Facilitation Agency (DOFA) is just an advisory body to facilitate the vendors to fulfill offset obligations. The agency is not capable of performing the role of a regulator and is too small to undertake above mentioned responsibilities. Since 2007, many offset programmes have been approved and it appears that none of them have produced satisfactory results. 

There is ambiguity as to who among the Defence Acquisitions Council (DAC) and the Department of Defence Production (DDP) is responsible for managing and delivering offset projects. This leads to lack of accountability and transparency in the offset procedure. Another problem is that the offset policy lacks focus, clarity and vision. It is well known that lack of technology is responsible for India’s dependence on foreign imports. There is a perception in certain quarters of defence industry that due to pressure from foreign OEMs, the Ministry of Defence (MoD) has diluted the policy by including sectors like civil aviation, homeland security and training as a part of offset obligations. This has caused deviation from the prime aim of developing our indigenous defence industry. The opinion is that, we are shifting our focus from indigenisation to appeasing foreign vendors.

The foreign OEMs have always resisted offsets since the time they were inducted in DPP-2005. They have been reluctant to share state of art technologies and manufacturing knowhow and hence, tend to discourage the policy. The OEMs’ concerns are that the Indian defence industry is currently incapable of manufacturing high end equipment and that the rigid offset policies would hinder India’s military modernisation programme. As a result, the MoD is in a dilemma as to what offset reforms need to be undertaken. If the MoD dilutes the policy, the Indian industry and media houses cry foul that the policy is losing focus. On the other hand, if the department further tightens the offset norms, the foreign vendors find it very difficult to discharge offset obligations. This discourages the competent foreign vendors from participating and therefore, defeating the purpose of offsets. Moreover, the military modernisation programme will get delayed, thereby adversely impacting the defence preparedness. This makes it very difficult for the MoD to frame a policy that strikes a balance and satisfies all the stakeholders.

The concerned authorities need to learn from other countries’ experiences and take appropriate steps to reform the policy in a manner that fulfils the primary goal of self reliance. We must understand that instead of attempting to create everything indigenously, we need to target specific critical areas for development. Further, foreign OEMs must be encouraged to transfer technology by promoting multipliers. It will encourage private players to venture into defence manufacturing through Joint Ventures with foreign companies. An example of JV has been that of Israel Aerospace Industries and Tata Advanced Systems who have established a company, Nova Integrated Systems Limited to develop defence and aerospace products like missiles, UAVs, radars, electronic warfare systems and home land security systems. The JV will also perform offset work of IAI in India. Similarly, the JV of Tata with Lockheed Martin and Sikorsky is expected to boost our aerospace industry. In fact, an increase in the FDI ceiling from 26 per cent to 49 per cent would ensure an accelerated rate of growth and the OEMs would find it profitable to transfer technologies.  

There is an urgent requirement to strengthen DOFA or establish a new organisation that is responsible for assisting, facilitating, evaluating, executing and monitoring the offset related aspects of procurement. A single point of accountability for the entire offset process is needed to reduce delays in procurement deals and usher greater transparency in the process. The representatives from corporate sector, research organisations and independent domain experts should be included in the policy making process so that the potential impediments can be foreseen and hence, avoided.

The MoD has been making efforts to refine the offset policy to ensure that Indian defence industry gains substantially and OEMs feel comfortable in discharging offset obligations. However, some segments of the strategic community feel that the effort lacks sincerity, dedication and transparency. The armed forces hope that the offset policy gets reformed so that the military modernisation process moves at the desired pace.

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

Views expressed are personal