Post Kargil, Indian defence imports had been ranging between three to six billion dollars annually whereas defence exports had been stagnating at meagre 50 million dollars an year. Despite India’s best efforts very little headway was being made on the export front. As a last resort, a proposal was mooted in 2004 to coerce foreign sellers to compulsorily buy Indian defence goods in exchange. While the proposal was being debated, an article titled “Offsets in Arms Trade: Need for a National Policy” appeared in Indian Defence Review (Oct–Dec 2004). It had suggested that India should have a national offset policy and all major defence deals must carry mandatory offset obligations. Defence Public Sector Undertakings (DPSU) and the Ordnance Factory Board (OFB) were quick to grasp the significance of offsets and modified their proposal from one of counter-trade to that of offsets.
India may be the only country whose defence offset policy has no stated objectives. MoD has not considered it necessary to explain as to what it intends to achieve through offsets”¦
As India has no national offset policy, Ministry of Defence (MoD) took the initiative to evolve its own defence offset policy. Initially announced in early 2005, the policy was made a part of Defence Procurement Procedure – 2005. As the primary aim of the policy was to boost exports from the public sector, it allowed discharge of offsets either through FDI in Indian public sector undertaking for defence industrial infrastructure or direct purchase of products/components/services from DPSU/OFB/other industry identified by MoD. Interestingly, the task of monitoring implementation of every offset contract was to be assigned to a DPSU or OFB.
The above policy was subjective in intent. The private sector protested strongly against the unfair treatment meted out to it, forcing MoD to revise the policy in 2006. Scope for direct purchase of defence goods and services was enlarged to include the whole Indian defence industry. It also allowed FDI in Indian defence industry and defence R&D. Further, it defined Indian defence industry to include DPSU, OFB and any private defence industry manufacturing defence products under an industrial licence granted for such manufacture. As no major manufacturing activity was taking place in private sector under licence, the policy continued to favour the public sector.
As was expected, industry associations were not satisfied and appealed to MoD for a level playing field. Bowing to pressure, MoD removed the mandatory requirement of an industrial licence for private companies in 2008. Now, the only stipulation to being an offset partner is that the Indian company should not have more than 26 percent foreign holding.
Before examining the effect of offsets on the services, it is essential to understand three aspects that have a profound bearing on the modernisation plans of the armed forces, i.e. objective of seeking offsets, receipt of technology against offsets and cost of demanding offsets.
Objective of Seeking Offsets
Offsets are universally accepted as a powerful leverage to obtain compensatory benefits by asking the seller to undertake well-designated activities to satisfy vital economic necessity or fill critical technological void. Therefore, before embarking on offsets every country identifies and spells out objectives that are proposed to be achieved through offsets. Thus, the objectives are always nation-specific and in consonance with national aspirations and long-term vision. In the absence of well evolved objectives, offsets lose focus and prove highly wasteful. An aimless offset policy can neither contribute to the growth of indigenous industry nor provide long term economic benefits.
More than 35 percent of all offsets worldwide relate to technology transfer. Transfer of Technology (ToT) is rightly called as the engine that drives offsets.
India may be the only country whose defence offset policy has no stated objectives. MoD has not considered it necessary to explain as to what it intends to achieve through offsets and the roadmap for the same. However, as offset policy is a part of Defence Procurement Procedure – 2008 (DPP-2008), it can be reasonably inferred that its objective would be in line with the objective spelt out in DPP-2008, i.e. achieving self-reliance in defence equipment. Additionally, India has been reiterating its resolve to reduce the current proportion of imports from 70 percent to 30 percent. If that be so, primary thrust of the Indian policy should be to seek infusion of technology to strengthen its indigenous defence industrial base.
However, contrary to all rationale, the Indian offset policy has been formulated to continue dependence on imports. India has not considered it necessary to direct offsets to pre-designated areas of its choice. It has abrogated the right to select methodology, areas and offset programmes in favour of the vendors, thereby rendering India’s needs inconsequential. It is natural for every foreign vendor to opt for programmes that cost the least and are easy to fulfill – Indian needs do not count at all.
Infusion of Technology Against Offsets
Every country that strives to develop indigenous industry seeks technology through offsets to bridge the gap and use acquired technology as a take off platform for indigenous development of more advanced technologies. More than 35 percent of all offsets worldwide relate to technology transfer. Transfer of Technology (ToT) is rightly called as the engine that drives offsets.
For technology transfer, all countries adopt a two-step approach, as given below:-
Identification of Critical Technologies. These are technologies that are considered essential for stimulating and expediting the growth of indigenous industrial competence. For economies of scale, sought technologies should not be product-specific but have much wider application across a large range of systems. Ability to absorb identified technology and monitor its transfer is another major consideration.