Indian industry wary of new defence offset policy - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Thursday 1 September 2011

Indian industry wary of new defence offset policy

A C-17 Globemaster III at the Boeing plant in Long Beach, California. The offsets that have been offered in connection with India's $4.1 billion buy of 10 Globemasters does little for Indian defence industry.

by Ajai Shukla
Business Standard, 2nd Sept 11

The ministry of defence (MoD) is finalising a revised defence offsets policy. Business Standard has learned that the new policy will dilute offset requirements substantially, bowing to sustained lobbying from foreign arms vendors and making it easier for them to discharge their offset requirements.

Meanwhile, Indian industry has protested that this would defeat the aim of offsets, which is to promote indigenisation. A Ficci delegation from Indian defence companies, which was invited to the MoD on 23rd July to discuss offsets bluntly told defence minister AK Antony that the growing number of loopholes would make defence offsets a bigger scam than the 2G-spectrum scandal. A shaken Antony assured delegation members that their concerns would be heeded.

The new policy is going ahead nonetheless. MoD sources that were involved in the drafting reveal that the policy revisions would allow technology transfer (ToT) to be counted as an offset. Also on the anvil are “multipliers”, which would give vendors extra offset credits in fields where foreign assistance is badly needed. For example, if the DRDO urgently requires metallurgical technology for building jet engine combustion chambers, the MoD could place a multiplier of, say, 5 on that technology. The new policy would give the vendor offset credits worth 5 times the cost of the technology that it transfers.

So far, the MoD has shied away from including ToT in the list of permissible offsets. The previous secretary for defence production, RK Singh (now the home secretary) admitted to Business Standard last year that it was extremely difficult to accurately value technology.

The new policy could also extend offsets to fields that are barely linked with defence, such as “project management”, a catchall phrase that would allow vendors to claim offsets for routine business expenses like travel, accommodation, and the holding of meetings and conferences.

“Offsets provide an opportunity to build a strong Indian defence industry. But if the offsets are liberalised to the level where vendors no longer need to provide benefits to Indian defence industry, we will have lost a huge opportunity,” says Puneet Kaura, Executive Director, Samtel Display Systems.

Offsets, which were introduced with the Defence Procurement Procedure of 2005 (DPP-2005), initially required vendors who executed defence contracts worth Rs 300 crores or more to source from India defence products worth 30% of the total contract value. Alternatively, offsets could also be discharged through investment into defence JVs set up in India; or through investment into Indian R&D organisations. Over time --- through DPP-2006; DPP-2008; DPP-2009; and DPP-2011 --- the offset policy has become progressively less demanding of foreign vendors, first incorporating offset banking and then (in DPP-2011) permitting vendors to discharge offsets in civil aerospace, training and internal security.

The offset policy initially followed the Kelkar Committee recommendations, which endorsed only “direct offsets”, i.e. connected directly with defence products. DPP-2011, however, opened the doors to “indirect offsets”. Now, the latest policy is set to widen that opening.

Business Standard has learned that there is a vertical split within the MoD on whether offsets should be diluted. The Acquisition Wing, which procures defence equipment for the military, and is responsible for expending the capital budget in full, views offsets as an inconvenient procedural hurdle that must be crossed before finalising a procurement contract. But the department of defence production (DDP), which is responsible for boosting India’s defence industry, regards offsets as a useful tool that can provide a growth impetus to industry.

“Unfortunately, the Acquisition Wing currently examines the offset proposals from foreign vendors. If the DDP was given the resources and the staff to do this job, the interests of Indian industry would be far better preserved,” says a MoD official who wishes to remain anonymous.

Industry sources say that after the Ficci delegation alerted Antony to the potential for scandal in offsets, the new defence secretary, Shashi Kant Sharma, who earlier headed the Acquisition Wing, has been inviting industry representatives to South Block to canvass their views.

The MoD has not responded to a request for comments on this issue.


  1. I think MoD has taken good step forward to revise the offset Terms. Why Indian industry crying instead do they want another license raj even though indirect. I think Indian defense co like L&T, Mahindra & Tata can be competitive. They should form JV with foreign companies and bid for defense contracts. Simply weaning wont help.
    Acquisition of these critical security equipments cannot be delayed. We need them so we need to be flexible. We cannot ask our soldiers to do die or loose battle because we were failed to buy them weapons courtesy our offset conditions.

    Only one thing that MoD official need to be cautioned that formula to derive value of ToT, training or supply of dual or non defense technology should be quantified and not subjective to judgment of MoD official, otherwise would see bigger bofors type scandals which can & will further delay the military modernization

  2. It's a shame there aren't more people like you, Mr. Shukla, bringing light to these issues. So I really do not understand the reason the MoD is dragging its' feet with the offset rules. The only logical conclusion I can reach from their decisions, as most others will also reach, is...corruption! YOU GOT IT!

    Naysayers may argue that Indian industry cannot absorb the skills and tools necessary to build many of the weapons the military buys, but I seriously doubt that. The time frame of three to six years (or maybe more for more complex orders) after the signing of a contract to start deliveries is more than enough time for Indian industry to train the required manpower and build the required machinery to execute the order, so those arguing Indian industry cannot do it is a moot argument.

  3. Col Shukla, In one of your future articles, Can you pls also give some examples of Successful offsets which will help the readers know more about the effectiveness of the policy??

  4. @Ajai sir

    should you feel needed , you can file a RTI application, its worth it


    Joydeep Ghosh

  5. Do we need wikileaks for a small country like singapore to tell indians are stupid? Have you ever seen a dog trying to catch its own tail,by running in circles... this is like that.. foot in mouth disease not only affects cows and affects Indian defence planners too...

  6. @Anonymous 18.05

    the correct word for what you say is 'Dantopaedology'


    Joydeep Ghosh

  7. no one will like to share its technicak knowhow.
    why one will erode its own market?
    problem is with ours MOD. its ours not theirs but why its working in their favour??

  8. Ajai Ji

    Is this news true?

  9. Ghoshji...thanks for putting the right word...its DONTOPEDALOGY,The art of putting one's foot in one's mouth!!!!

  10. Plz add Twitter, Facebook buttons to share articles. It wud be easier for us.


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