Will the Revised Defence Offset Policy work?

Several amendments have been made in the existing policy with an objective to make the entire procedure more transparent and effective. According to the new guidelines, the responsibility of defence offsets is divided between two organisations: the Defence Acquisition Council (DAC) will evaluate the offset proposals and finalise the contracts whereas the Department of Defence Production (DDP) will be responsible for implementation of offset contracts including monitoring of progress. A new organisation, Defence Offset Management Wing (DOMW) has been established under the DDP, which has been assigned the responsibility of offset contract management. A similar organisation, Defence Offset Facilitation Agency (DOFA) was established in 2006, however it was never able to perform the basic duties assigned to it. DOMW will have to carefully chalk out a clear charter of responsibilities as any ambiguity will lead to underperformance and red tapism in the process. The MoD officials opine that the new organisation will function through a fully automated system that will monitor, account for and audit offsets in real time. If web based monitoring is implemented, it would be very beneficial to the government and the industry. However, the past experience of some online applications introduced by the government hasn’t been up to the expectations of the stakeholders. Therefore, it will need dedicated and sincere efforts by the officials of DOMW to fast track the execution process.

 

The scope of discharge of offset obligations has been widened to include Transfer of Technology (ToT). The provision of ToT is expected to benefit the Indian Defence Industry to a great extent. However, it is to be seen if ToT can actually help the defence industry grow and realise its dream of self reliance, envisaged more than a decade ago by the Kelkar Committee. The provisions for ToT existed in earlier defence procurement programmes, however the implementation did not take place on expected lines. The experiences of our indigenous industry in absorbing and ultising the technology received from foreign OEMs, have been inadequate. One of the examples is the BEML-Tatra deal which was signed in 1986. It is learnt that despite ToT agreement with Tatra, the indigenisation of the vehicles remained far below satisfactory levels. Another such example is the Bofors artillery deal which was made two and a half decades ago. Till date, the Ordnance Factory Board (OFB) has not been able to develop the homegrown version of Bofors guns. Lack of accountability and monitoring has been the main reason for non/under utilisation of ToT provisions. The OEMs believe that India is not yet capable of absorbing the heavy flow of offsets through the ToT mode. Though the ToT provision seems promising, there is no guarantee that India will be able to make full use of it, considering its inability to do so in the past. 

 

Another change has been the assignment of multiplier values wherein a multiplier value of 1.5 is permitted where Micro, Small and Medium Enterprises (MSMEs) are Indian Offset Partners (IOPs), multiplier of 2 when technology is offered to Indian Armed Forces, 2.5 when technology offered is for both military and civil applications and 3 when technology is offered without any restrictions to export. A list of 15 specific high end technologies for acquisition by DRDO through offsets has been prepared. However, all these technologies have been placed at par and there is no further grading with respect to their multiplier value. The current definition of multipliers may not help India in gaining critical technologies. The foreign companies which invest considerably in R&D may not be comfortable in sharing them with India at a multiplier value of as low as 2. There is no specific incentive to share such high-end technologies as foreign OEMs can get the benefit of multipliers by sharing comparatively non-critical technologies. We need to provide higher multiplier values to extremely critical technologies required by DRDO in order to attract the foreign vendors. It may be helpful if MoD assigns multiplier values on a case to case basis based on criticality, importance, requirement and urgency. With the current policy, certain OEMs might try to offer obsolete technologies which may have little relevance for the defence forces.

 

The Defence Minister and the MoD have always been emphasising on the need of transparency and probity in defence procurement procedures. However, after signing 19 offset deals so far, the status of most of the contracts is still not known. It is difficult to understand the logic behind hiding the details and progress of offset contracts. In fact, the defence industry and OEMs should be made aware of the outcome of each project so that they can learn from the problems of previous projects and take appropriate measures. This would also help the industry to understand the trends in offset projects and prepare accordingly.

 

Other significant modifications in the revised offset policy like increasing the time for bank offset credits to seven years, extending the time duration for offsets’ discharge by two years, investment in ‘kind’, and limiting some penalties on vendors who fail to discharge offset obligations have been welcomed by the industry. 

 

The revised offset policy has received a positive response from the industry, specially the OEMs. The long standing demands of the foreign arms vendors have been incorporated in the policy, while simultaneously protecting the interests of the indigenous industry. However, some segments of domestic industry have been apprehensive of the dilution of offset objectives and feel that widening the scope of offsets may lead to digression from the original aim of self reliance in defence. Since the scope of offsets has been widened to include inland/coastal security, civil aerospace products and services etc some analysts believe that even non-defence products and services would qualify for offset obligations. Therefore, the foreign OEMs will try to find the easiest way out to discharge offset obligations, which will be tangential to achieving the ultimate goal of establishment of a home-grown defence industrial base. 

 

Although the revised offset policy has incorporated a wide array of reforms addressing the concerns of the largest set of stakeholders, but with new changes arise new challenges. The MoD should keep the communication channels with the industry open to receive their feedback and recommendations periodically and to derive optimum gains from the offset projects. This may also help the MoD to address the relevant issues and revise the policy accordingly in future, to garner the benefits of offsets and ultimately achieve the objective of self reliance and military modernisation in time based manner.      

 

 

Views expressed are personal