Indian Defence Review

LCA Tejas

India today has the distinction of being the world’s biggest arms importer buying 12 per cent of the global total as per Stockholm International Peace Research Institute (SIPRI). India’s national aim has been to promote growth of Indian defence industry, introduction of new technologies through direct transfers, promote indigenisation and to achieve the same, had put in place a robust offsets mechanism. The ‘Offsets’ policy is to ensure that for every dollar that goes to a foreign arms supplier, 30 to 50 per cent of the same will be re-invested in India for a defence related investment or activity.

The aggressively nationalist government headed by Narendra Modi has been driving the need to promote indigenisation from the very first day in power. ‘Make in India’ is now a national slogan. The message from Prime Minister Modi to the world community is “No more Red Tape, Only Red Carpet”. China had taken a similar route nearly two decades ago. The Indian government has finally realised that a high degree of self-reliance in the production of defence equipment is a key result area for a nation to attain the status of a super power.

The Defence Acquisition Council (DAC) headed by Arun Jaitley, the then Raksha Mantri, had directed that instead of procurement from a foreign source, the Light Utility Helicopter (LUH) to replace the fleet of Chetak/Cheetah helicopters would be ‘Made in India’ albeit with foreign collaboration. The tender for the long delayed acquisition of the 197 LUH for the Indian Army and Indian Air Force (IAF) from abroad valued at $1 billion has finally been scrapped. As the nation moves toward ‘Make in India’, it will have an interim step of ‘Someone help us Make in India’. With 49 per cent FDI cleared in defence production, a figure that is likely to be increased further, those who see promise in India’s global story will surely join the race.

Global Defence Offsets

The policy of Defence Offsets has been in place for nearly a decade but without any substantial success till date because some of the big ticket purchases like the Boeing C-17 Globemaster III Heavy Lift aircraft and Lockheed Martin C-130J-30 Super Hercules tactical transport aircraft, both for the IAF, were procured through the Foreign Military Sales (FMS) programme of the US government. The Dassault Rafale Medium Multi-Role Aircraft (MMRCA) would be the first real test of an Offset contract whenever it is awarded. With Offset obligation pitched at 50 per cent for this particular contract, the foreign vendor would be required to invest over $10 billion in the Indian aerospace industry.

India today has the distinction of being the world’s biggest arms importer buying 12 per cent of the global total as per Stockholm International Peace Research Institute (SIPRI). India’s national aim has been to promote growth of Indian defence industry, introduction of new technologies through direct transfers, promote indigenisation and to achieve the same, had put in place a robust offsets mechanism. The ‘Offsets’ policy is to ensure that for every dollar that goes to a foreign arms supplier, 30 to 50 per cent of the same will be re-invested in India for a defence related investment or activity.

The Indian armed forces have a long shopping list. If all goes well, the IAF itself is going to procure equipment and platforms worth $150 billion in next fifteen years. The key objective of the Ministry of Defence (MoD) as stipulated in the Defence Offset Guidelines was to leverage capital acquisitions to develop the Indian defence industry, improve defence research and encourage development of synergistic sectors like civil aerospace and internal security.

The US introduced defence offsets as a marketing tool in the form of inducement to sell arms to under-developed friendly countries and in return, either purchase goods or make local investments. Many countries around the world followed. Some form of barter system had existed for centuries. India used to buy aircraft and naval vessels from the Soviet Union in the 1960s in exchange of shoes, hosiery and bananas. Meanwhile, most countries of the world chose to introduce high percentages of defence offsets regulations. Currently, Austria, Belgium, Brazil, Czech Republic, Denmark, Finland, Greece, the Netherlands, Switzerland, Spain, Sweden, Poland, Portugal and Norway have 100 per cent offsets requirement. Brazil insists on full Transfer of Technology (ToT) and co-production. Offset requirements of some other countries are Israel – 35 per cent, Romania – 80 per cent, Saudi Arabia – 35 per cent, South Korea – 30 per cent and Turkey – 50 per cent.

China has no formal Offsets policy. Australia does not accept indirect (civilian) offsets, unless they bring some specific benefits to their defence industry. Recently, the European Union has introduced a Code of Conduct for its members on Offsets. Indian Offset obligations are applicable to all contracts valued at Rs 300 crore ($60 million) or more. The 30 per cent Offsets in most categories could be discharged through direct purchase, FDI in joint ventures and investment in kind in ToT to an Indian manufacturer. Products and services have to be for defence, inland and coastal security or for civil aerospace only.

Offsets guidelines allow subcontract in outsourced services such as engineering, design, and defence software. All countries are very sensitive to defence offsets and in fact, India’s policy is docile by international standards. Defence offsets have yet to find substantial success as major Western countries have started labeling offsets regulations as protectionist.

Complexity of Transfer of Technology

No nation would like to part with painfully hard earned technology even at substantial cost. To evolve a defence Offset contract is a complex exercise. It involves local partner identification, offset certificates, penalties and confidentiality clauses. Nearly 122 open defence offset contracts signed around the world between 1997 and 2010 have only partially been executed due to various imponderables. Sometimes, there are conflicting views on levels of transfers of sensitive technologies. The US, being one of the largest exporters of high technology weapons, has been most vocally moderating the Offset policies around the world.

The Brazilian Minister for Strategic Affairs said in 2008, “We will not simply be buyers or clients but partners.” Major defence contractors are conscious of the psychological power of offsets in democracies. The physical valuation and specific areas of Offsets is complex. The value of parts locally sourced could be straight forward but cost of ToT is usually vague. Co-production and subcontracts are the best form of direct offsets. Technology transfer, military training, licensed productions are also often counted as sort of direct offsets.

Through a US Presidential Decree of 1990, no Offset clause can be applied to a FMS agreement. The US government considers Offsets to be “market distorting and inefficient”. It has been made clear that “the decision whether to engage in offsets resides with the companies involved” and that “no agency of the US government shall encourage, enter directly into or commit US firms to any offset arrangement in connection with the sale of defence goods or services for foreign governments”, effectively sounding a death knell for the instrument of Offsets.