Moment of truth for defence offsets - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Monday 13 December 2010

Moment of truth for defence offsets

By Ajai Shukla
Business Standard, 14th Dec 10

Tomorrow the MoD’s apex procurement body, the Defence Acquisition Council, will consider and possibly dilute India’s defence offset policy. The proposed changes --- especially the “liberalization” of defence offsets into fields like civil aviation and homeland security --- would nullify the very rationale of a defence offset policy, which is to direct foreign money and know-how into India’s nascent defence industry by leveraging our position as a major buyer in the global arms bazaar.

Global arms corporations quite predictably resist investing in another countries’ defence industries: this builds up potential competitors; involves the painstaking and commercially risky task of identifying local partners; it transfers jobs overseas; defence remains a highly regulated field; and there are obvious strategic reasons as well. And so global arms corporations have a persuasive counter-argument that portrays offsets as unscrupulous commercial arm-twisting, which is counterproductive since it yields jobs only in the short term, with the costs borne by the buyer since the vendors load them onto the basic contract.

Foreign vendors selling weaponry to India have constructed an even more pernicious argument: that our defence industry is incapable of absorbing the vast offsets that will arise from arms purchases over the next five years. With a CII-Deloitte report in June projecting that the MoD will spend Rs 3,60,000 crore (US$ 80 billion) on the capital purchase of weaponry by 2015, India’s defence industry would be required to absorb at least Rs 108,000 crore (US$ 24 billion) worth of offsets. Therefore, suggest these vendors helpfully, the buyer should “liberalise” the policy by permitting offsets in easy fields like infrastructure, homeland security, healthcare, etc, where investment is attractive.

These self-serving arguments are, worryingly, being swallowed by the MoD, which is forgetting that it fire-walled the defence offset policy from the national offsets policy (which covers non-military procurements like civil airliners, nuclear plants, etc) expressly to jump-start Indian defence industry. To now allow vendors to discharge offset liabilities in non-defence spheres would be a turnaround that reeks of capitulation before foreign pressure groups.

Instead, the MoD must remind global arms vendors that, by participating in Indian defence tenders, they have explicitly accepted the obligation to meet our defence offset requirements. This places on vendors the responsibility to build the capacities of their local offset partners, if necessary by transferring the technology needed to develop Indian suppliers into viable links in their global supply chain.

Any difficulty that foreign vendors are encountering in finding Indian partners stems from a lazy reluctance to reach above the low-hanging fruit --- defence PSUs like Hindustan Aeronautics Ltd; Bharat Electronics; and large private corporates like L&T, and the Tata Group, which are already flush with offset offers --- and instead identify partners from amongst the many small and medium scale industries that have emerged over the last decade. The Indian defence landscape has an entire ecosystem of defence firms with impressive technological skills and entrepreneurial talent, many of them concentrated around hubs like Hyderabad, Bangalore, Pune, Chennai and Delhi. So far largely untapped, these provide partnership opportunities to global defence corporations that will endure long after their offset requirements are met.

Much of the government’s muddle-headedness on these issues stems from the absence of a clearly articulated aim for the defence offset policy. Consequently, Indian pressure groups lobby self-servingly: the DRDO pushes offsets for obtaining the 18 technologies that it has listed as key priorities; the IT industry as an opportunity to develop defence software; and low-tech manufacturing companies as an easy source of massive orders for low-end, labour-intensive, repeat manufacture.

To direct offsets into IT or repeat manufacture is wasteful, since these sectors will anyway attract foreign investment based on commercial logic. Nor should offsets be wasted on high technology, which is best prised out of vendors by leveraging the power of major contracts in competitive tendering. India’s US $10 billion multi-role fighter tender, in which the MoD has stipulated --- and vendors have accepted --- the transfer of heavily guarded AESA radar technology, provides the ideal model for obtaining technology.

Instead, offsets must have the clearly stated aim of furthering the defence minister’s oft-enunciated objective of indigenising at least 70% of our defence equipment needs. The MoD must abandon its timid, hands-off approach towards offsets and direct vendors towards carefully identified Indian companies with demonstrated technological skills in key areas. Offset partnerships with global giants would allow such companies to bridge technology gaps and --- by becoming a part of the vendor’s global supply chain --- scale up and generate the financial muscle needed for serious R&D.

For this, the MoD must empower and staff its Defence Offsets Facilitation Agency (DOFA), so that it can map Indian defence industry, creating a capability and technology matrix that can be matched with prospective platform development requirements. Offsets could then be directed to fill the gaps. This would involve an enormous MoD mind shift from its current approach towards offsets where a man-and-a-dog DOFA plays passing-the-offsets-parcel with an equally reluctant Acquisitions Wing, both hoping that when the music stops the other will be left holding the responsibility for offsets.

The need for an activist and empowered DOFA has been understood by industry, if not by the MoD. The CII and FICCI had earlier pledged Rs 25 lakhs each to set up a DOFA secretariat at Pragati Maidan, which could monitor and account for the tens of thousands of crores worth of offsets that lay ahead. But, with trust in short supply, the MoD felt that the companies that would benefit from offsets should not have any role in accounting for them; and the corporates felt, “why should we do the babus’ job for them?” It is time to come together to galvanise India’s defence industry.


  1. The clarity in your articles is a welcome relief. Especially so with regard to MOD's shameless diluting of the end goal. I wonder which side they are on.

  2. what is the main purpose of the defence offsets?
    Whatever the decision of the committee it should not defeat the main purpose of having the defence offset clause - to develop India's capability in designing and building defence equipment.

  3. I hope we can improve the accounting practices. So far every country and arm dealer is making fool of India and GoI. I wish people with power has a vision and given a free hand to take right or wrong decisions but they must take a decision. By taking no decision we are giving our right to others.

  4. Though you have a strong point, I cannot agree. In the past when some foriegn investors wanted to set up a low end company, our enlightened folk coined the phrase no potato chips, yes micro chips. Today China makes them both. We cannot and should not be selective. Because being selective is a subjective trait and will breed corruption and lobbies. If these companies bring in FDI how does it matter where it is invested. This goes into creating more weath, a larger GDP and by that measure more funding for defense. When our defense industry reaches critical mass these companies will invest directly on their own. Till that time we will have to bottle feed our DPSUs and use the time to bring more professionalism/talent into them. There is no reason why this cannot be the next big thing for India like IT, but for now our offset policy is not yet a silver bullet.

  5. "Foreign vendors selling weaponry to India have constructed an even more pernicious argument: that our defence industry is incapable of absorbing the vast offsets that will arise from arms purchases over the next five years."
    Since when does stating the truth become pernicious? Just look at the performance of the DPSUs that have effectively lied to the Indian taxpayer by claiming to have indigenised various types of military hardware when till this day all they do is licence-assemble products of foreign origin!!! The likes of BEML have till this day been unable to even produce a right-hand drive version of the TATRA family of heavy vehicles, isn't that pernicious?
    The problem has always been the non-existence of a national industrial offsets policy as a result of which the procurement of military hardware has always been regarded as a sales-and-purchase agreement as part of no-plan expenditure. As opposed to this, countries like South Korea, Taiwan, Turkey and Singapore have always treated such procurements as military-industrial programmes for which financial sums as a fixed percentage of the GDP have always been committed on a long-term basis.
    Should anyone even bother to do a case study of how exactly a defence-related but all-encompassing industrial offsets policy ought to be drafted, then do pay a visit to Nova Integrated Systems Pvt Ltd in Hyderabad and talk to the decision-makers of this TATA-IAI JV. What this JV is doing is exactly what others need to replicate.

  6. "For this, the MoD must empower and staff its Defence Offsets Facilitation Agency (DOFA)..."
    I'm afraid even with such empowerment, the DOFA officials, whose loyalty is solely to the MoD for obvious reasons, will continue to prefer the DPSUs over the private sector, and will sabotage any attempt made to nurture joint sector synergies. It's the overall mindset that needs to change within the Union Cabinet and the Defence Minister's office in order to arrive at an enlightened realisation of the type the South Koreans and Singaporeans arrived at in the late 1970s. At the same time, care has to be taken to discourage high-ranking MoD officials from developing mutually beneficial financial linkages of a personal nature with the emerging private sector defence equipment manufactrurers (so as to prevent fiascos of the thype witnessed between Boeing and the USAF's Aerial Refuelling Tanker project office a few years ago). Speaking of which, has anyone investigated why exactly has Rao Inderjit (the former Minister of State for Defence Production) totally disappeared, literally? Was he financially connected in any way to the former DG of OFB who is now under arrest? Hmmm...another scam that's waiting to be unearthed.

  7. The series on Offset has given an excellent account. The future course of action by MOD the will decide sucess or failure of the initiative.

  8. Well, MoD has to be make up its mind first - does it want to serve nationalist paranoia or national progress. Any kind of offset policy will remain infructuous till the MoD remains obsessed with ownership of the Indian defence companies. Technology transfer is an intellectual phenomenon and it will be best achieved when Indians get to work inside the foreign vendors' operations in India. It is a fool's hope to get the core technology through a 30-50 per cent offset condition. In any case, India's bargaining power is rather low as its purchases do not make or break any of the big vendors.

  9. I hope some one from the MoD thinks or atleast reads what you have been writing here. And as usual good article from you. We have on one hand a country like china even after being so big economically does not even allow foreign films(restricted numbers) or foreign cartoons (during prime time) to protect their own industry and on the other hand we have countries like ours who dont even care about building self-reliance on critical sectors like defence... God save us :( I hope some day we get out of this ineffective, vote bank politics and highly corrupt democratic political system and go more towards something like the chinese... !

  10. Off-sets = protectionism. I don't like the off-sets. Trade should be on equal footing, off-set requirements are just wrong, they probably cost more in the end and they bring nothing more than a few new sets of screw drives. If making things locally would bring skills, China would have been leading the world in inventing, but they don't. All they can do is make cheap goods, and that too of lower quality and only after manipulating their currency. Only folks who gain from off-sets are the babus; there is a reason why babu's networth goes us by an average of 300 to 500% every election cycle (as reported on news just before the last parliamentry elections). All this looks good on paper. Just do away with off-sets and demand the best price and best delivery schedule. The get stuff to our defenders as soon as possible, they need it, and they need it now.

  11. "For this, the MoD must empower and staff its Defence Offsets Facilitation Agency (DOFA), so that it can map Indian defence industry, creating a capability and technology matrix that can be matched with prospective platform development requirements. Offsets could then be directed to fill the gaps."

    If done sincerely it can bring miraculous results.

  12. Sir,
    In the Past all those at the helm of affairs in Arms purchases used to look forward to max personal gains directly or indirectly. But now the thresh-hold has been raised many fold to fill the party coffers as well. Nobody is least bothered for defense preparedness or national interests.
    Only god can save this country from scoundrels. May GOD BLESS US ALL. JAY HIND. ID

  13. The argument that our industry is incapable of absorbing offsets is indeed pernicious when one looks at the broader industrial base. Even if one ignores the 'low hanging fruit' like L&T, Walchand or TAM, there are several smaller players who - given the assurance of support and business - will and can rise to the occasion. What NPCIL did (till we ran into Indo-US 123) can be done by others but with the knowledge that if the smaller players are not sustained they will die. And for sustenance no artificial orders are needed...just don't squeeze them too much and don't play politics with them.

    To that extent, Ajai's statement is indeed closer to the ground than Prasun who chooses to wear coloured lenses limiting his view to DPSUs.

    - Manne

  14. Obligors may like capability mapping of offset partners themselves in partnership with some private high-tech company that may be up-to-date in defence technologies and local capabilities. It is a commercial take after all. DAC/DOFA/Other stakeholders could intervene at the offset proposal acceptance stage in case the offset project does not build capability of the Indian Defence Industry in line with its aim.

    Obligor-Foreign Patent Holder- Foreign TT Partner- DAC/DOFA- Local Partner have to work in very close co-operation for a successful offset project, of course within the Defence Offset Policy.

  15. Re Ajai

    Glad to see you fighting for India (again) :-)


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