Indian offset policy overcoming challenges to achieve target worth USD15 billion in defence offset work over next decade.

The defence equipment held by Indian defence forces is 50% obsolete, the proportion of state-of-the-art equipment also needs to double from current 15% to 30%. This justifies the huge requirement of new systems. Ongoing projects include submarine building, advance early warning aircraft, Rafale fighters, missiles, missile shields, aerostat radars, all of which already signed for and delivery schedules have begun. The future requirement includes multi-role combat fighters, basic and intermediate jet trainer, attack helicopters, drones, infantry clothing and weapons, artillery guns, gun-mounted turrets for tanks, improved electronics and sat-nav equipment for all three services and a host of equipment to modernize the forces.

 

But most of its requirements are met by imports. India ranks among the top 10 countries in the world in terms of its military expenditure and import of defense equipment. It allocates about 1.8% of its GDP to defense spending, of which 36% is assigned to capital acquisitions. However, only about 35% of defense equipment is manufactured
in India. Moreover, even when defense products are manufactured domestically, there is a large import component of raw material at both the system and sub-system levels.

 

According to defence analysts, India – the world’s largest arms importer – is poised to spend $250 billion in the next decade to modernise its armed forces by acquiring more lethal weapons and combat jets.  Offsets is one of the mechanism that leverages india’s purchasing power for acquisition of denied technologies.

 

Indian MOD launched Defense offset policy  to leverage India’s huge arms import for strengthening the indigenous arms industry. Offsets was first introduced as part of Defence Procurement Procedure in 2005 and has undergone many rounds of revisions over time and its prime objective . The key objective of the Defence Offset Policy is to leverage the capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encouraging development of synergistic sectors like civil aerospace, and internal security, according to Defence Offset Guidelines.

 

Globally there is  wide acceptance of the practice of offsets can be gauged from the fact that presently around 120-130 countries have offset requirements in some form or other, compared to some 15 countries that had such a requirement in the early seventies.  The 30% is quite less than demanded by other countries internationally. This For instance, a 2007 European Defence Agency (EDA)- sponsored study found an average offset percentage of 135 among the European countries during 2000-2006. The offset percentage was also found to be much higher for countries like Finland, Greece, Poland and Spain which demanded an average of 145 per cent during the study period. However European countries, which had traditionally high offset percentage requirements, have started lowering their demands, subject to a maximum cap of 100 per cent. On the other hand countries like Brazil, Malaysia and South Korea have progressively increased the percentage of offsets. For instance, Brazil which used have a 100 per cent offset requirement, has upped the demand to 175 per cent in the acquisition of Swedish Gripen aircraft.

 

Twenty-one defence offset contracts with cumulative value of USD 5.67 billion have been sealed by the defence ministry in last three years, the government said in Nov 2019. Under India’s offset policy, foreign defence entities are mandated to spend at least 30 per cent of the total contract value in India through procurement of components or setting up of research and development facilities.

 

However as highlighted in the successive reports of the Comptroller and Auditor General of India (CAG), India’s experience of offsets has been less than satisfactory. Two weeks after the Indian Air Force (IAF) formally inducted five of the 36 Rafale jets ordered from France under a Rs 59,000-crore deal, the country’s top auditor in Sep 2020 said that the plane’s maker Dassault Aviation and weapons-supplier MBDA have not confirmed the transfer of technology (ToT) to the Defence Research and Development Organisation (DRDO), which was part of the contract. The Comptroller and Auditor General (CAG), in a detailed report tabled in Parliament, doubted if the ToT for a key engine would even take place, and pointed out that several offset contracts built into multiple defence deals have “not yielded the desired results”. The critical observations were part of CAG’s scrutiny of the status of a raft of offset contracts — including the September 2016 Rafale deal — between 2005 and 2018.

 

The Indian defense offsets clause is believed to have put off international aerospace and defense majors, leading to a poor response and absence of big names from the Aero India 2017 at Bangalore. Though India is the world’s largest importer of military hardware in the last five years, according to the Stockholm International Peace Research Institute, the 30-percent offsets rider for winning big-ticket contracts appears to have unnerved top global aerospace and defense players, barring a few from Europe.

 

The US, which is by far the largest offset provider, has always been worried about the negative impact of offsets on its economic, industrial and technological base. Officially, the US government views offsets as “economically inefficient and trade-distorting”, and prohibits its government agencies from being directly involved in offset related activities. Media reports that the US is pushing for change in India’s offset policy for defence and the changes that the US seeks are primarily two. First, that since Indian defence firms have not yet found their roots in the global supply chain, US firms should not be penalized for delays unless a ‘willful default’ is found on their part. Second, that US companies should be able to perform offsets on behalf of the company given the contract.