Defexpo 2008: no announcements on offsets - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Monday 11 February 2008

Defexpo 2008: no announcements on offsets

Business Standard
12th February 08

Foreign arms majors who will be coming to Delhi for India’s major biennial defence exhibition --- Defexpo India 2008 --- are in for a disappointment. Business Standard has learned that Defence Minister AK Antony will not be availing of this international platform to announce widely expected changes to the defence offsets policy.

The changes to the current policy, spelt out in the Defence Procurement Policy of 2006 (DPP-2006), are instead likely to be spelt out on or after 1st April 2008, say senior MoD sources. Over the last six months, the MoD has verbally indicated, on several occasions, that it will include “offsets banking” and “technology transfer” in a new policy, which would be announced by the end of the financial year. With several major arms contracts in the pipeline, international vendors have been requesting for an official announcement of the new policy at the earliest.

Offsets banking will allow foreign vendors to finalise partnerships with Indian companies, and to start production, with the assurance that the business generated would be credited as offsets against future defence contracts. Allowing technology transfers would allow foreign vendors to fulfil a part of their offsets obligations by providing intellectual property to the Indian defence industry.

International arms companies say they are disappointed at the delay. Six global aerospace majors must submit, by 9th June 2008, Rs 21,000 crores worth of offsets proposals in the contract for supplying 126 Medium Multi-role Combat Aircraft (MMRCA). Lockheed Martin must also tie up offsets arrangements worth Rs 1,300 crores for the sale of six C-130J Super Hercules aircraft to India. These companies were hoping that the new policy framework would be available during Defexpo 2008, so that tie-ups could be finalised with their Indian offsets partner companies.

The MoD has also encountered a speed-bump in setting up its internal structures for handling offsets. Currently a small, inadequately manned section, the Defence Offsets Facilitation Agency (DOFA), handles issues relating to offsets. The previous Secretary of Defence Production, KP Singh, had indicated (Business Standard, 28th Dec 2007) that a new, expanded offsets agency would be set up by the end of Jan 2008. This would include departments equipped to evaluate vendors’ offsets proposals, keep a running account of banked offsets, and interpret and clarify offsets policy.

But now, senior MoD sources indicate, there is a lack of conviction in the ministry that offsets are here to stay. A number of senior officers believe that offsets will result in vendors jacking up their prices, and that the MoD may eventually backtrack on the offsets policy. These officers are arguing against setting up an expanded, high-power DOFA, with a large, multi-agency staff.

The alternatives now being considered by the MoD include placing DOFA, in a slightly augmented form, under the Director General (Acquisitions), a senior MoD officer who oversees defence procurement. Another alternative being considered is for DOFA to continue in its present form; when its workload becomes unmanageable, the structure could be reconsidered.

The MoD’s official position remains that changes in the offsets policy will be announced, in a consolidated form, as soon as decisions are finalised.


  1. Ajai: Dont you get a feeling that the MOD is just making it up as it goes along? In the finest traditions of whistle away, while the city burns?

    What stops them from judging other nations processes which have implemented offsets successfully and repeating the same here?

    There behaviour and delay is inexcusable. I am hoping now for this deal averse UPA Govt to get kicked out and a BJP NDA Govt to come in, irrespective of scams or what not, atleast the files will move and decisions will be taken?!

  2. Mr. Shukla, we may assume an analogous example that a caterer may sell food items, but not the recipes to the hotels or lodges that it supplies. Similarly, the "cardinal principle" amongst arms manufacturers is to sell weaponry only, and not technology. I may reiterate that technology is not a commodity unlike steel or cars, but it is the "edge" or "secret" that gives one firm or one nation an "edge" over competitors.

    To circumvent the offsets policy by the govt., foreign manufacturers will not transfer their core competitive technologies, but instead only purchase abundant, non-critical cheap components from Indian manufacturers. The "dilemma" before the foreign firms is how to avoid purchasing $3 billion worth of "nuts and bolts"; it may be th reason why they are lobbying to reduce the percentage of offsets, or change the agreement.

    Licence production is only being marketed with a new form. It is only that now private firms will do what state-owned firms did during the soviet-era. As an example, during the licence production of MiG fighters, Jaguars and Flycatcher radars in India, the state-owned firms were given the manufacturing lines, designs, sub-assemblies etc. Instead, now this exercise will be repeated with private firms.

    Thank you.


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