Acquisition and Offset Strategy
To expand India’s defence industrial base, India has long relied on its offset policy to engage in transactions with foreign suppliers and promote transfer of technology thereby leading to indigenous defence production. First introduced in 2005, the offset policy has gone through several revisions in the Defence Procurement Policy (DPP) that have been released over the years (the latest one came out in March 2016). The transactions with foreign suppliers are aimed at enhancing the economic, technological, and the industrial capabilities of the India. India, as it is well known, has long relied on licensed production with overseas defence contractors. And as now offset is mandatory, India is likely to benefit from transfer of technology with the rise in the number of offset-agreements as a result of India’s increasing defence acquisition budget.
…foreign companies are hesitant to invest in a defence industry without having full stakes in the defence production.
The increase in defence spending has become possible not just because as a result of the tensions in the immediate regional security environment, but also because of its rapid economic growth over the years that has given it a solid economic base. This should play a major role in increasing India’s defence offset appetite, which would give it the necessary financial resources to promote indigenous defence production.
However, India’s defence offset policy suffers from major challenges that require attention. India’s offset policy requires foreign vendors to engage with local defence companies through co-development, co-production, joint ventures, maintenance, and upgrades, but full mergers and acquisitions are not allowed. Therefore, foreign companies are hesitant to invest in a defence industry without having full stakes in the defence production.
Foreign Direct Investment (FDI) in the defence sector is capped at 49 percent, which again is a sore point for many foreign firms, as they believe that investments involve huge financial risks, and therefore, FDI cap in defence should be raised to 74 percent or even 100 percent.
Secondly, the expectation that a foreign vendor will engage in ‘complete’ transfer of technology to the Indian pattern of the system’s subsystems, modules, assemblies, and specific parts/components is too much to ask, given the commitments the offset policy of India demands.
Thirdly, India’s offset policy is based on an inflexible doctrine of indigenisation and India’s offset policy should be made compatible with the economic dynamism of the global defence industry.
India’s offset policy is based on an inflexible doctrine of indigenisation and India’s offset policy should be made compatible with the economic dynamism of the global defence industry.
And finally, other issues in the offset policy should be addressed such as the policy’s obligatory nature, objectives that need broadening, and most importantly, the inherent complexities, which need reduction.
Under the current offset policy, India under ‘Buy (Global)’ would purchase from foreign/Indian seller, and under ‘Buy and Make with Transfer of Technology’ would acquire defence hardware from foreign sellers which would be followed by co-development and joint-production. The estimated cost of acquisition proposal should be INR 300 crore or more and ‘compensation’ or offset for the cost of acquisition under the ‘Buy (Global)’ category would be 30 percent and for foreign exchange component under ‘Buy and Make with Transfer of Technology’ would be 30 percent.
Foreign firms from major defence hardware exporting countries find such conditions difficult to fulfill as there are literally no incentives, and because of lack of proper monitoring mechanism and issues related to intellectual property rights.
The Ministry of Defence (MOD) released an incomplete version of DPP 2016 on 28 March 2016, which saw the introduction of a new category titled ‘Buy (Indian Designed, Developed, and Manufactured)’ or Buy (IDDM). For the first time its inception in 2002, that means the Indian government has recognised the need for encouraging scientific talent in India and has placed importance on “indigenous design”, development, and manufacture. However, critics would argue that it is too early to judge or predict the efficacy of the document as it misses many critical issues and does little to address problems that beset decision-making in the MoD.
India needs to take urgent steps towards extensive naval modernisation so as to secure its security interests in the Indian Ocean Region and beyond.
What India Needs?
Each of the services of the Indian armed forces today needs urgent modernisation to face the complex security challenges that emanate in an increasingly unstable neighbourhood and in a complex strategic regional security environment. The Indian Army, which is one of the largest standing forces in the world, possesses weapons and equipment that are bordering on obsolescence and need to be replaced. The next step should be to acquire network-centric capabilities to optimise army’s full potential in defensive and offensive operations.
The critical capabilities that are needed to be enhanced (as Lieutenant General J.P. Singh noted in an interview with Centre for Land and Warfare Studies, New Delhi) are “battlefield transparency, battlefield management systems, night-fighting capability, enhanced firepower, including terminally guided munitions, integrated maneuver capability to include self-propelled artillery, quick reaction surface-to-air missiles, the latest assault engineer equipment, tactical control systems, integral combat aviation support, and network centricity.” Also, urgent steps should be taken to enhance the operational capabilities of army aviation, engineers, signal communications, reconnaissance, surveillance, and target acquisition branches in order to improve the army’s overall combat potential so that it can face aggression ofany magnitude.
India needs to take urgent steps towards extensive naval modernisation so as to secure its security interests in the Indian Ocean Region and beyond. India should look to augment its naval power by acquiring capabilities for maritime domain awareness in the area of responsibility, including space-based surveillance, maritime reconnaissance, airborne early warning and control (AEW&C), and unmanned aerial vehicles (UAVs).
The Indian Navy should be equipped with modern capabilities in fields of tactical aviation, anti-submarine warfare (ASW), anti-air/anti-missile, land-attack, mine counter-measures, and electronic warfare. It is equally important to make sure that Indian Navy is integrated by networking of ships, submarines, and airborne platforms via satellites. In the end, the government should commit to self-reliance and indigenisation, with the objectives of harnessing national strengths in ship-building, engineering, electronics, and information technology (IT). The Indian naval modernisation though much delayed, has begun to pick up steam as seen from the recent developments where deals worth thousands of crores have been made to expand India’s naval fleet and India’s naval dominance capabilities.
…the IAF has only 32 squadrons of fighters, the lowest in a decade, while it needs at least 42 squadrons to protect its western and northern borders from Pakistan and China.
The Indian Air Force (IAF) is a full-spectrum force equipped with very capable platforms and trained manpower, but the numbers are inadequate for intense and lengthy operations. India must take urgent steps to maintain an edge over the adversary through technology and force employment.
The IAF is at the forefront of technology, but India should push towards self-reliance, as it has to develop its own technology and defence industrial base. India’s track record in R&D however has been dismal and it is continuing to face a number of challenges in terms of meeting the quantitative requirements to defend the Indian skies. As per one of the recent reports, the IAF has only 32 squadrons of fighters, the lowest in a decade, while it needs at least 42 squadrons to protect its western and northern borders from Pakistan and China. Also, as aircrafts such as MiG-21s and MiG-27s in the IAF are old and aging (which date back to the Soviet era), India is likely to lose another 14 squadrons by 2019-2020.
Commercial negotiations with France on the deal over Rafale fighter jets are far from over and India has yet to start production of its first indigenously built aircraft Tejas (the project is more than 30 years old). India has to urgently focus on air dominance and control of the air by building capacity to indigenously produce future capabilities for design and development of aircrafts, heavy attack helicopters, and other combat and surveillance-related capabilities for further projection of air power.
From India’s point of view, the most crucial component that has to be implemented for better integration of the services of the armed forces is a robust and an efficient Command, Control, Computers, Communication, Intelligence, Surveillance, and Reconnaissance (C4ISR) system. An integrated Indian C4ISR system will be central to augmenting India’s overall defence capability.
A strong political will and an enabling framework for the involvement of players from different sectors (such as private sector or academia) for indigenous production of such capabilities would be essential…
With better integration of the services of the armed forces, it is also essential that there is integration between the armed forces, defence and intelligence agencies, and other government and private organisations as well. This would provide a joint force that would protect the country from traditional as well as asymmetric threats while providing flexibility, analysis, interpretation, and efficiency. This would also give advantages such as information assurance, controlling and disruption of information, data processing and management, quicker decision-making, and larger system integration.
A strong political will and an enabling framework for the involvement of players from different sectors (such as private sector or academia) for indigenous production of such capabilities would be essential, which is turning out to be a key national security imperative.
Threats from China and Pakistan leave India with no other option but to augment its defence capabilities to secure its national security interests. India’s pace of defence modernisation, however, has been slow because of a number of inherent holes in the system such as lack of a National Security Strategy doctrine, or a long-term strategic defence plan, which are impediments in terms of evolving a clear-cut strategy to meet the defence requirements of the armed forces by making a thorough analysis of the security challenges in the immediate regional security environment.
Moreover, India’s inability to produce advanced sophisticated weapons system and advanced defence technologies indigenously has severely affected its aspirations of becoming self-reliant in defence production, thereby remaining heavily dependent on foreign sellers for defence purchases, which in a way or other, do expose India’s vulnerabilities. Adversaries may seek advantage in case they happen to know India’s vulnerabilities, which in turn would have severe implications for India’s national security. Therefore, the policy priority for the Indian civil and defence establishment should be to take necessary decisions to ensure that India’s defence requirements are met as soon as possible through indigenous production.
…the urgent focus for the Indian government should be to encourage private individuals and entities in India that could contribute in indigenous defence production.
India’s indigenous defence production capabilities have however not grown because of a number of challenges. There is a lack of the greater political will that has severely affected decision-making in terms of acquiring weapons on time as per the needs of the armed forces. The Indian defence industry suffers because of under-utilisation of human resources that has negatively affected India’s defence R&D base. Because of unfriendly defence industrial procurement system, it has resulted in few co-development and co-production ventures with foreign firms.
The lack of conducive financial framework for the local industry to do business in the defence sector, especially for the private sector, has also negatively impacted private participation in the defence sector. Therefore, the urgent focus for the Indian government should be to encourage private individuals and entities in India that could contribute in indigenous defence production. This would mean that India would achieve its goal of self-reliance only if it allows more private players in India to participate in the defence sector, and the true potential of the Indian minds are utilised.
Also, initiating/implementing further defence reforms such as streamlining procurement and offset policy, and introducing newer positions and staffs for better policy coordination, would be essential if India wants to reduce the qualitative and quantitative gaps between its defence industrial base with that of the other major powers.
 Brig Gurmeet Kanwal (retd), “Defence Reforms and National Security: Managing Threats and Challenges to India”, Institute of Peace and Conflict Studies (New Delhi), n.172, 2011, see http://www.ipcs.org/pdf_file/issue/IB172-Gurmeet-DefenceModernisation.pdf, accessed on 6 April 2016.
 The ‘Make in India (MII)’ initiative was launched by Prime Minister Narendra Modi under which 25 sectors including defence manufacturing have been identified to revive India’s industrial growth and to promote the nation as a manufacturing hub of the world. The primary purpose of the initiative as far as defence indigenisation is concerned is to attract/invite foreign firms to establish defence manufacturing bases in India.
 RSN Singh, “Defence Preparedness Back on Track”, Indian Defence Review (online), 22 May 2015, see http://www.indiandefencereview.com/news/defence-preparedness-back-on-track/, accessed on 6 April 2016.
 Richard A. Bitzinger, “The Indian Defence Industry: Struggling With Change”, in Rajesh Basrur, Ajaya Kumar Das, and Manjeet S. Pardesi (eds.),India’s Military Modernization: Challenges and Prospects (Oxford University Press: New Delhi, 2014), p. 117; India imports almost 80 percent of its defence hardware requirements from foreign firms in major weapons-exporting countries such as the US, Russia, France, and Israel.
 N. Neihsial, “What is Wrong with India’s Defence Industrial Policy?”, Institute for Defence Studies and Analyses(New Delhi), 22 August 2008, see http://idsa.in/idsastrategiccomments/WhatiswrongwithIndiasDefenceIndustrialPolicy_NNeihsial_220808, accessed on 7 April 2016.
 Laxman Kumar Behera, “Indian Defence Industry: Issues of Self-Reliance”,Institute for Defence and Studies Analyses (New Delhi), n.21, 2013, see http://www.idsa.in/system/files/monograph21.pdf, accessed on 7 April 2016.
 India is likely to spend INR 250 Billion in the next 7-8 years on India’s defence modernisation. See “Defence Manufacturing”, Make In India (Official Website), see http://www.makeinindia.com/sector/defence-manufacturing, accessed on 7 April 2016.
 Gurmeet Kanwal, “Defence Technology Indigenisation: Need to go Beyond Lip Service”, Institute for Defence Studies and Analyses(New Delhi), 19 September 2013, see http://www.idsa.in/issuebrief/DefenceTechnologyIndigenisation_gkanwal_190913, accessed on 7 April 2016; India usually meets the requirements of the armed forces by making weapons under licenced production in collaboration with other countries or by direct purchase of advanced weapons system from foreign firms or the major weapons-exporting countries.
 Defence planning comes under the domain of National Security Council (NSC).
 Gurmeet Kanwal, “National Security Decision Making: Overhaul Needed”, Institute for Defence Studies and Analyses(New Delhi), 26 August 2014, see http://www.idsa.in/idsacomments/NationalSecurityDecisionMaking_gkanwal_260814, accessed on 8 April 2016.
 The budget of Ministry of Defence (MoD) under a restructured format for the fiscal year 2016-2017 is approximately INR 3,40,000 crore (USD 52.2 Billion). See Laxman K. Behera, “All about Pay and Perks: India’s defence budget 2016-17”, Institute for Defence Studies and Analyses(New Delhi), 3 March 2016, see http://www.idsa.in/issuebrief/pay-and-perks-india-defence-budget-2016-17_lkbehera_030315, accessed on 8 April 2016.
 Ron Matthews and Alma Lozano, “India’s Defence Acquistion and Offset Strategy” in Rajesh Basrur, Ajaya Kumar Das, and Manjeet S. Pardesi (eds.),India’s Military Modernization: Challenges and Prospects (Oxford University Press: New Delhi, 2014), p. 158.
 Ibid, p. 164; The talks between India and France over 126 Rafale Medium Multi-Role Combat Aircraft (MMRCA) fighter jets have seen little progress because of differences on transfer of technology under India’s offset policy. India had to purchase 36 Rafale jets on a ‘direct purchase’ basis (during Prime Minster Modi’s visit to France in 2015) to meet its immediate requirements of the Indian Air Force (IAF).
 Dr. Rajiv Nayan, “India’s Defence Offset Policy”, Defence and Security Alert(New Delhi), see http://www.dsalert.org/indias-defence-industry-challenges/779-india-defence-offset-policy, accessed on 8 April 2016.
 Ashok Atluri, “India’s New Defence Procurement Procedure: Why it is Revolutionary”, The Indian Express (Mumbai), 9 February 2016, see http://indianexpress.com/article/blogs/indias-new-defence-procurement-procedure-why-it-is-revolutionary/, accessed on 8 April 2016.
 The DPP has been revised several times i.e. in 2003, 2005, 2006, 2008, 2011, 2013, and the latest one was released in March 2016.
 Colonel KV Kuber (retd), “DPP 2016: ‘Make in India’ Paradigm, a New Era Dawns”, The Economic Times (Mumbai), 30 March 2016, see http://blogs.economictimes.indiatimes.com/et-commentary/dpp-2016-make-in-india-paradigm-a-new-era-dawns/, accessed on 8 April 2016;The category IDDM refers that Indian vendors and their products should have 40 percent indigenous content. If the product is not designed and developed indigenously, it has to have 60 percent indigenous content.
 Amit Cowshish, “Defence Procurement Procedure 2016: Rebooting Defence Prodcution and Procurement”, Institute of Defence Studies and Analyses(New Delhi), 30 March 2016, see http://www.idsa.in/idsacomments/defence-procurement-procedure-2016_acowshish_300316, accessed on 8 April 2016.
 The Defence Acquisition Council approved the Long Term Integrated Perspective Plan (LTIPP) for 2012-2027 in 2012. The LTIPP consists of several plans and recommendations that set out a comprehensive task for the modernisation of the armed forces. Though it was considered a positive step towards modernisation of armed forces, interestingly, several crucial projects have got delayed.
 Interview with Lt. Gen. J.P. Singh with Centre for Land and Warfare Studies (CLAWS), New Delhi, in 2010, see http://www.claws.in/images/journals_doc/826070326_JPSinghCJWinter2010.pdf, accessed on 8 April 2016.
 Gurmeet Kanwal, “India’s Military Modernization: Plans and Strategic Underpinnings”, The National Bureau of Asian Research(Washington D.C.), 24 September 2012, see http://www.nbr.org/research/activity.aspx?id=275#footnote6, accessed on 8 April 2016.
 Sudhi Ranjan Sen, “Indian Air Force has only 32 Squadrons – Lowest in a Decade”, The Indian Express (Mumbai), 26 February 2016, see http://www.ndtv.com/india-news/indian-air-force-has-only-32-squadrons-lowest-in-a-decade-1281558, accessed on 8 April 2016.
 Davinder Kumar, “An Indian C4SIR System By 2020”, Defence and Security of India(New Delhi), 2 February 2014, see http://defencesecurityindia.com/indian-c4isr-system-2020-strategic-imperative/, accessed on 8 April 2016.