According to some estimates, India is likely to spend close to USD 100 billion on capital acquisitions during the current plan period of 2007-12. Presently, imports account for nearly 70 percent of the total requirements. Thus, the import bill will be close to USD 70 billion. With the stated policy of demanding minimum 30 percent offsets, the total inflow of offset package would be a whopping USD 21 billion. This figure could go up in case the Government raises the offset threshold. Consequently, offsets have come to acquire enormous importance in India’s defence imports.
In the post Soviet Union era, India has moved from single source procurement regime to purchasing military hardware from multiple sources after open competition. Today, sheer enormity of Indian planned procurements has attracted the attention of the world’s top defence manufacturers. They are vying hard to bag the big ticket deals.
Not all offsets are duly published. Sellers are generally reluctant to reveal the quantum of offsets they had to offer to clinch a deal. They term it as commercially sensitive information.
With the recent issue of global Requests for Proposals for the procurement of 126 Medium Multi-Role Combat aircrafts at an anticipated cost of USD 10.4 billion, India has caused immense excitement amongst all major aero-defence conglomerates in the world. The Government has raised the quantum of associated offsets to 50 percent. Of the six invitees, two are from the US, i.e. Lockheed Martin with its F-18 Super Hornet and Boeing with F-16s. India is aware of the technological superiority of the US weapon systems and wants to develop a long-lasting defence relationship with the US.
However, many Indian policy makers are not clear about the US policy with regard to offsets in defence deals, especially if sales are routed through the ‘Government to Government’ route. They are apprehensive that they may lose out on valuable offset benefits if they opt for the US equipment. Such apprehension is totally misplaced as discussed subsequently.
Despite being the oldest and the largest provider of offsets in the world, the US has no declared policy on offsets. It is generally estimated that the US defence industry has offset obligations of over USD10 billion. Nonetheless, the US feels that offsets go against its stated promotion of ‘free and fair’ trade. For the first time in 1984, the Congress addressed the subject of offsets in defence trade under Section 309. It requires the President to submit an annual report on the impact of offsets on the US defence industrial base.
As the leading exporter of arms, it considers offsets as a burden on its economy and a necessary evil. The Congress in 1999 had opined that unilateral efforts by the US to prohibit offsets may be impractical in the current era of globalisation and would severely hinder the competitiveness of the US defence industry in the global market. It accepts that offsets are a part of the current defence trade environment and cannot be wished away.
It has a very exhaustive system in place to compile data on offsets and to monitor them closely to minimise their adverse effects. The US Department of Commerce (Bureau of Industry and Security) submitted its latest report to the Congress in July 2004. The Report covered a ten-year period from 1993 to 2002. During the above period, the US companies entered into 434 offset agreements with 36 countries. In 2002, new US offset-related defence export contracts were valued at USD 7.4 billion. The value of attached offsets was USD 6.1 billion or a whopping 82.3 Percent of the total value.
Also read: Defence Procurement: Shrinking Competitor Pool
Not all offsets are duly published. Sellers are generally reluctant to reveal the quantum of offsets they had to offer to clinch a deal. They term it as commercially sensitive information. They are wary of the future clients getting wiser and upping their demands. They are also wary of adverse local opinion, which may view it as leading to job losses as many suppliers undertake to place orders for sub-assemblies on the local vendors in the importing country at the cost of the original vendors in their own country.
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