Defence Industry

Offsets: an Indian perspective
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Issue Vol. 23.4 Oct-Dec2008 | Date : 23 Feb , 2011

A success story of the Indian defense industry is the very large number of small and medium enterprises in Pune, Hyderabad and Bangluru and other Indian cities, having DRDO labs or other defense industries. These units, which started out as a supportive system for DRDO projects or suppliers of simple components, some with only hand tools and minimal infrastructure, are today having global majors on their customer list. They manufacture and supply quality products to OEMs across the globe and are eagerly waiting the implementation of the offset policy to expand the scope of their business.

Also read: Changing face of terror

Two more aspects about the Indian defense industry, which merit special mention are:-

  • Availability of Skilled Manpower. It is a universally accepted fact that India has a vast pool of skilled manpower in all disciplines of sophisticated designing, testing, developing and manufacturing. We also have a very large pool of defense scientists who can help in absorbing the advanced technologies in any field.
  • Testing Facilities. Besides the testing facilities available with various manufacturing units we have world-class testing facilities available with the DRDO laboratories along with the trained staff to test any indigenously manufactured products to world class testing standards. Besides, we also have the DGQA, a body of trained personnel with equipment, systems and procedures, to test and evaluate any military equipment. A very encouraging development in this field is the infusion of private capital in establishing a private, globally accredited, testing facilities in the country.

In view of the foregoing it needs to be stated emphatically the Indian defense industry has the capability to absorb any quantum of offsets.

Introduction of Indirect Offsets. Indirect offsets in the simplest form are a system of counter-trade wherein the seller is obliged to buy and import something from the buyers’ country. Thus,putting it in simple terms -a seller of weapons, in an indirect offset regime, can buy and import fruit juices equal to the desired value of the offset to discharge his obligation. The Indian offset policy has the express stated purpose of obtaining critical technologies, exporting Indian manufactured defence products and invite investments in the defence industrial infrastructure/ R & D. Such an offset policy, for the present, rightly has no place for indirect offsets.

The existing practice of acquiring technologies as part of the “˜buy and make projects has best resulted in some of the build-to-print projects in which the know-how and know-why was never shared with the production agencies. This kind of technology transfer does not result in any substantial advantage

Offset Banking. Banking of offsets is a system of creating credits wherein a seller can seek credit for additional offsets on a given deal to meet the offset obligation in any other deal. It is hoped that the inherent contradiction in stated inability of the Indian defense industry to absorb even the minimum offsets vis-à-vis the possibility of creating enough additional offsets for future use will not be lost to the readers! Some of the issues that merit attention are:-

  • Financial mechanisms Need for examining the possibility of service- wise banking of offsets for a focused advantage of technology insertion and other benefits and requirement for a fairly large and a well equipped establishment merely to keep count of offset credits and their utilization.
  • Transfer of Technology. As stated earlier, one of the basic reasons for introduction of offsets in the acquisition process is obtaining cutting edge technologies for the armament industry. The existing practice of acquiring technologies as part of the ‘buy and make’ projects has best resulted in some of the build-to-print projects in which the know-how and know-why was never shared with the production agencies. This kind of technology transfer does not result in any substantial advantage to the beneficiary establishment. For our industry to really benefit from a certain technology, and using that knowledge as a base for further research and development, there is a need for transfer of the entire intellectual property of a given project so that our scientists and engineers can develop, modify and improve the product as well as use the technology in other projects. There should be no hesitation in admitting that obtaining cutting edge technologies is actually the cornerstone of our offset policy. We should do every possible thing to include this in the policy. However, there are some concerns, which are preventing the demand of the technology majors from being included in the policy. Two of the issues, which are possibly preventing the introduction of transfer of technology as a pay-off for offset are :-
  1. Government Controls. It is a well known fact that even when the global technology majors give assurances about sharing the technology, in their product selection, the actual transfer of technology is a rather complex phenomenon. Cutting edge technologies are treated as a national intellectual property and their transfer is subjected to the government controls. Similarly dual use technologies are subjected to stringent government controls. Even when an agreement is finally reached, about transferring the technology, it is unlikely that the latest technology would be on offer as offset or it may come with a number of preconditions preventing its’ exploitation.
  2. Cost of Technology. Cost of technology, as part of the offset commercial offer, is possibly the most contentious issue, which needs quick resolution. While the owners of the technology always feel that the cost quoted by them reflects the true value of their product and the buyer is bound to contest the same. Absence of universally acceptable norms and methodology for costing the technologies and a well established notion amongst the buyers that the cost of technologies is higher than the actual cost is bound to delay this highly desirable facet of the offset policy.
  • There is a need for the policy makers to urgently take all steps to establish an acceptable methodology so that technology can be accepted as an offset.

Conclusion

Thus from an Indian perspective we can summarize: the Indian defense industry has the ability to absorb any quantum of offsets; we must not include indirect offsets in our offset policy; we should examine the possibility of service-wise banking of offsets; and we should urgently evolve procedures to accept offers of complete technology as offset.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Anil Kumar Mehra

Maj Gen Anil Kumar Mehra

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