Ministry may dilute defence offset policy today - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 22 February 2012

Ministry may dilute defence offset policy today

By Ajai Shukla
Business Standard, 23rd Feb 12

The Defence Ministry will today finalise long-awaited amendments to the defence offset policy. The key steps that the apex Defence Acquisition Council (DAC) is likely to okay: permitting vendors to offer technology as offsets; allowing offsets to be discharged in commercial shipbuilding; and allowing “offset multipliers” in order to canalize offsets into desired fields. Crucially, the DAC is likely to mandate that the Defence Offset Facilitation Agency (DOFA) would be responsible for administering offsets, a decision that would permit the expansion and empowerment of this currently moribund department.

Offsets, which were first introduced in the Defence Procurement Policies of 2005 and 2006 (DPP-2005 and 2006), required foreign vendors who were awarded defence contracts worth Rs 300 crore or more to plough back at least 30% of the contract value into Indian defence production or R&D. But global vendors, particularly US companies, have lobbied hard to dilute this policy, insisting that the Indian defence industry does not have the capacity to absorb the Rs 40,000 to 50,000 crores worth of offsets that could arise over the next five years. The policy that is likely to be finalised today will fulfil many of the vendors’ demands.

High-level MoD sources say that the DAC could okay the following measures:

• Permitting technology transfer as an offset. This will only apply to high technology that a vendor provides with full Intellectual Property Rights (IPR), and without restrictions. The DRDO will evaluate technology that is offered as an offset, assessing whether it fits into an overall indigenization plan. For example, if a vendor offers technology for a missile seeker head, the DRDO will assess how badly that is needed; the feasibility of developing the technology within India quickly; and the cost at which it is offered.

• A system of “multipliers” will be introduced, which would give vendors enhanced credits for investing in priority fields. For example, if the MoD urgently requires metallurgical technology for building jet engines, a multiplier of, say, 3 could be placed on that technology. That would give a vendor who provides technology worth Rs 200 crore an offset credit of Rs 600 crore.

• Likely to be approved: a multiplier of 1.5 for purchase/manufacture directly related to the contract that generates the offset obligation. Also likely is a multiplier of 1.5 for investment in small and medium enterprises (SMEs). The highest multiplier of 3 is likely for the provision of high technology.

• DOFA, the lightweight section under the Department of Defence Production (DDP), could be beefed up with additional manpower and resources into a “single window agency” that can provide vendors with all reviews and approvals. Alternatively, DOFA could take the form of an entirely new agency, called “Directorate of Defence Offset Management” or “Defence Offset Management Wing.”

• Vendors could be permitted to discharge offsets through commercial shipbuilding. This non-defence field will be in addition to civil aviation and homeland security, which were permitted as offsets in DPP-2011

• The requirement of offsets may be substantially increased above 30%, since vendors would benefit from measures like multipliers (a multiplier of 3 effectively brings down a 30% liability to just 10%). It will also be compulsory for vendors to discharge at least 40% of their offset requirement through defence production (i.e. direct offsets) and no more than 60% through the non-defence categories of civil aviation, homeland security and shipbuilding.

• The eligibility period for “offset banking”, which allows vendors to accumulate offset credits towards a future contract, could be increased to 7-10 years.

DPP-2006 permitted only direct offsets, i.e. offsets in products that required a defence licence. This was diluted in DPP-2008, which allowed offsets in non-licensed defence fields. Vendors began discharging offsets through low-tech, quasi-military products like field shelters and air-conditioning. DPP-2011 diluted the requirements further, permitting vendors to discharge offsets in the non-defence fields of civil aviation and homeland security. The latest policy will represent the third wave of offset dilution.


  1. This is clear dampener for the original purpose of having defense offsets.

    We DO NOT have a local counterpart of a DARPA or advance measures like Technology Readiness Level here in India to evaluate what technologies we need and when and in what priority.

    So, in the present scenario, all these sophisticated technical work will be done as per the whims and fancies of some babus seating in MOD.

    So, now, we will see a lot of second grade old technology being dumped in India while foreign vendors use our money to advance their own R&D.

    Also, how will the MoD map how the technology which is transferred to a 3rd party is used over a long time..and the MoD keeps benefiting from it till the completion of the life-cycle of such technology

  2. if, could be, might be, may be - and not one dot of attribution.

  3. The problem lies fundamentally in not allowing foreign companies to own the subsidiaries here. Why should anyone just give away IPR to a company where they are minority owners? Create a policy that makes sense to technology owners. We need to be reasonable and realistic about how to get what we want and also ensure that we have the ability and bandwidth to absorb what we want and then put it to use.

  4. Thanks for the news, Mr. Shukla!
    But will these amendment have a retroactive effect, or not?

  5. Only the policy most practicable and profitable to India shall be allowed to sustain. System of multipliers may be justified if used sincerely and judiciously. There should be a responsible central agency to oversee the state and process of technology absorption by the due sponge and its suitable productive output in concrete terms.

  6. I think all the new points are welcome and important tweaks to the offsets policy. BTW I don't necessarily see these changes as a "dilution" at all -- these are *tweaks* to the current system to make it more relevant and workable in practice.

  7. Col - is offset defense offset policy a new wrapper to kickbacks that are usually associated with high ticket purchases.

    If so, shouldn't a group of vigilant citizens map these offset and check if any beneficiary has political lineage.

    We need laser sharp focus and hawk eyes to weed out fattening politicians and baboos enjoying a elaborate meal over grave of my brave soldiers.

  8. The Defence Ministry will today finalise long-awaited amendments to the defence offset policy

  9. First of fall i would like to like give thanks for this defense policy stuffed post by shukla.This is clear dampener for the original purpose of having defense offsets.

  10. Chinese hav... maoism... dengism... marxism... leninism... stalism... communism... all isms... minus Unionism...
    India has... Unionism... and minus... all rest of isms...

  11. gud stuff ajai.. and as rightly said, the focus has to be on strengthening the DOFA by making it the independent third cog in the MoD i.e in addn to DDP & Acqn wing, to enable effective monitoring.. the key aspect to the success of the policy.


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