Offsetting Defence Offsets

The Economic Times

Sept. 20, 2018

Defence offsets are in bad odour today, due essentially to ignorance. In reality, the policy can help liberate our military-industrial complex stuck in perpetual infancy. The policy on offsets was first formulated and incorporated in the Defence Procurement Procedure (DPP) in 2005, drawing on the more efficient offset policies among those of 130 nations.

The team that undertook the study comprised senior officers of the ministry and the armed forces when the former President, Pranab Mukherjee, was the defence minister. Offsets are compensations that a seller gives the buyer for the order it places on the former. They include outsourcing of items from the buyer nations and focused investments. It is trade-distorting and comes at an economic cost of an estimated one quarter of the procurement price. Yet, it was adopted as it would aid the indigenous military-industrial complex through transfer of technology (ToT), etc.

The policy is nearly a decade and a half old, but the concept remains ill-understood mainly on account of its complexity, taking advantage of which, foreign vendors even escaped offset obligations by claiming credit for air conditioners terming them as ‘troop comfort equipment’. As a result, in the initial stages, the offset policy met very little success. To plug the loopholes, successive governments accepted many policy recommendations of the Institute for Defence Studies and Analyses (use of multipliers, for instance), industry associations, etc, and streamlined the procedure. The extant defence offset policy is contained in DPP (2016). In general, it mandates from the foreign vendor 30% offsets (in value) when the procurement cost is Rs 2,000 crore or above under ‘Buy (Global)’ and ‘Buy and Make’ categories. They can, under clause 4 of the Defence Offset Guidelines, choose to collaborate with Indian Offset Partners (IOPs) of their choice to fulfil offset obligations. The government cannot decide on behalf of the contracting firm, nor mandate which IOP it should collaborate with.

That should not, however, dissuade government from extending various concessions to the Indian private companies, at least until the indigenous defence industry comes of age. Perhaps, we would do well to learn from the Chinese government that supports ‘entrepreneurial spirit’ of even private companies. The hullabaloo about the possibility of an indigenous company signing a large defence offset agreement in the Rafale aircraft contract is, to say the least, baffling.

There would be numerous auxiliary and ancillary industries that would gain through ToT and know-how that would make them credible building blocks of a robust indigenous defence industry. It would also enable them to plug into the global supply chain. Do we need a better example than the success of ancillary companies in the Indian automobile sector that have very effectively penetrated the world supply chain, to understand the opportunities that defence sector could similarly offer? The government has taken some measures to encourage the private sector to play a larger role in building a robust military-industrial base. Some groups have heeded the call of the Prime Minister to promote ‘Make in India’ in the defence sector and made substantial investments. Unfortunately, they are yet to receive any large order, pushing them into a debt trap.

India cannot afford to lure private companies into investing in the defence sector, only to leave them in the lurch. We are in any case notorious for delaying the approval of even critically needed defence platforms, starving companies of orders to stay afloat. The delay in large naval projects, when the Chinese Navy is expanding its blue water capability at a dizzying pace, is too glaring to go unnoticed. India is, however, content discussing, without deadlines, important projects. The starkest instances are that of the two large naval proposals: Project 75 and the landing platform dock (LPD). The former is critically required to augment the submarine fleet, and the latter is sorely needed if India has to have the capability to land troops and support equipment by sea in a situation like the coup in Maldives in the late 1980s.

It is embarrassing that these projects were given shape nearly a decade ago and we are still tinkering with them. Faced with little governmental empathy when large orders are being delayed and the Indian private defence companies are gasping for breath and sliding into crippling debt, targeting them when they competitively win a contract to be an offset partner, is a double whammy. Let us not at least offset the offset policy.

The writer was additional secretary to
former President Pranab Mukherjee, and
was a part of the group that formulated
the offset policy in 2005