Indian Defence Review

It, therefore, becomes essential to draw maximum economic benefits by prudent selection of offsets. It is commonly believed that it is not the size of offsets but their economic/technological relevance to the recipient company that should guide the selection. If that be so, it has to be a prerogative of the buyer nation to identify offset programmes.Strangely, India has abrogated that right in favour of vendors, rendering India’s needs inconsequential. A vendor can discharge his offset obligations simply by purchasing mundane items or sourcing defence related software from India, despite the fact that direct purchase of goods/services is generally considered to be the least beneficial form of offsets. Benefits accruing from it are temporary and limited to the duration of the contract.

Technology Transfer

Offsets have come to be regarded as an extremely potent tool to acquire technology that may not be available otherwise. Every country that strives to develop indigenous industry seeks technology to bridge the gap and use acquired technology as a take off platform for indigenous development of more advanced technologies.

That is the reason why technology transfer is considered to be the most common and best form of direct offsets.

Selection and negotiation of technology transfer requires considerable expertise as regards the level of technology on offer, its economic viability, latent cost penalty and risk of overcapacity. Additionally, technology sought should have wider application and be such that the recipient can exploit it fully by developing its other applications as well. This will provide the necessary economies of scale. The buyer nation should also match the technology sought with its capability for its smooth absorption.

India has been repeatedly declaring that it wants to develop its defence industry to reduce imports from the present level of 70 percent to 30 percent by 2010. This can be achieved only through receipt of technology to strengthen its defence industrial base and promote technology upgradation. Strangely, India has totally neglected this significant aspect and does not accept technology transfer under offset programmes. Most knowledgeable experts feel that India should have made transfer of technology to be the only acceptable form of offsets as the current Indian policy will provide only temporary and notional gains.

Fulfillment of Obligations

As per the Indian policy, offset obligation can be discharged through any of the following routes:-

As regards FDI in Indian defence industry, the Government permitted a maximum of 26 per cent FDI component in May 2001. As per the Indian policy, a foreign investor is expected to invest his resources in a venture where he has no significant control, strict capacity/product constraints, no purchase guarantee, no open access to other markets (including exports) and an unfair advantage to the local public sector. No wonder there has been a total lack of enthusiasm on the part of foreign investors to invest in the Indian defence sector. Unless India makes major changes and liberalises the policy, there is hardly any hope of attracting FDI as an offset.

India has been repeatedly declaring that it wants to develop its defence industry to reduce imports from the present level of 70 percent to 30 percent.

Coming to FDI in defence R&D, the only organisation engaged in defence R&D at present is the Government’s Defence Research and Development Organisation (DRDO). There is no entity in the Indian public or private sector which has any worthwhile defence R&D programme. Hence, the question of FDI in defence R&D does not arise, at least not in the near future.

It, therefore, emerges that the only viable route available for the fulfillment of offsets is export of goods and services from the Indian defence industry. Given the burgeoning Indian exports, seeking offsets by way of counter-purchase of goods and services does not appear prudent. India is a powerhouse as regards export of IT services. Almost all corporate giants are sourcing them from India. Given the option, they would all like to defray their offset obligations by counting IT services against it. Such offsets provide deceptive benefits as they contribute little to the generation of economic activities.