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Offsets are broadly defned as ‘compensations’ demanded
by a buyer in return for outfow of resources to a seller.
In defence, these are applied to the so-called off-the-shelf
procurement of items. In a move to leverage its huge arms
imports bill (estimated USD 5-6 billion per year) towards
building its military industrial complex, India’s Ministry of Defence
(MoD) announced in 2005 a formal offset policy, as part of its Defence
Procurement Procedure (DPP). The policy, which took some concrete
shape one year later in DPP-2006, mandates a minimum 30 per cent offsets
in all capital acquisitions which are worth three billion rupees or more,
and categorized as ‘Buy (Global)’ (i.e., outright purchase from foreign/
Indian vendors) and ‘Buy and Make with Transfer of Technology’ (i.e.,
purchase from foreign vendor followed by licensed production). As per the
provisions, as detailed in DPP-2006 and its revised version of 2008, foreign
companies are free to choose their Indian offset partner for discharging their
offset obligations, which can be done by any combinations of the following
• Direct purchase of defence goods and services manufactured by Indian
defence industries - Defence Public Sector Undertakings (DPSUs),
the Ordnance Factories (OFs), and any company in the private sector
producing under an industrial licence.
• Direct foreign investment in Indian defence industries for industrial
infrastructure for services, co-development, joint ventures and co-
production of defence products.
• Direct foreign investment in Indian organisations engaged in research in
defence research and development (R&D) as certifed by Defence Offset
Facilitation Agency (DOFA), a single-window body created under the
Ministry of Defence to monitor, supervise and evaluate potential offset
transactions between Indian companies and their foreign counterparts.
STREAMLINING OFFSET POLICY
In a move to streamline offset transactions between Indian companies and
foreign vendors, the MoD has introduced several new provisions in its offset
policy. The DPP 2008 introduced a provision for offset credit banking and a
list of defence products. Further, the Amendment to DPP-2008, announced
in November 2009, an ‘Option Clause’ was added to the policy.
Under the banking provision, foreign vendors are allowed to accumulate
prior credits for discharging their future offset obligations. The provision
allows two ways for accumulation: one, through prior investment in the
Indian defence sector; and, two, by generating excess credits from the
ongoing offset projects. In other words, the banking provision allows
foreign companies prior as well as continuous opportunities in Indian
defence industry to discharge their future offset obligations.
The product list is an endeavour to remove confusion, especially among
the Indian private companies, regarding what constitutes defence products.
The list comprises of 13 categories of products - ranging from small arms
to direct energy weapon system - that are eligible for offsets. An Indian
company that produces any of the listed items is eligible to be part of
the domestic defence industry. From the Indian private companies’ point
of view, the list would help them in formulating their offset strategies,
including tie-ups with major vendors, both domestic and overseas. The
listed items would also enable the foreign vendors to identify Indian
partners for the purpose of discharging their offset obligations.
The objective behind the inclusion of an ‘Option Clause’ in the offset
policy is to allow foreign vendors to change their offset partner – though not
the offset component and value – midway through the contractual period.
However the condition for such change is allowed only in “exceptional
cases” and subject to the MoD’s approval. The requirement for change
would most likely arise when an Indian partner faults in its contractual
promises. The clause would ensure that the Indian company cannot take
it for granted once it is selected as an offset partner for a foreign vendor,
which is solely responsible for the progress of offset transactions as per the
contractual terms. The fear of being replaced by another Indian company in
case of failure would not only put a question mark on its credibility, but will
motivate it to improve its competitiveness to avoid eventual embarrassment.
From the foreign vendors’ point of view, the Clause would help to conduct
its offset transaction smoothly within the stipulated timeframe, the violation
of which warrants penalty.
THE SUCCESS SO FAR
Since the promulgation of detailed policy in 2006, India has so far (till
February 2010) signed 10 offset contracts worth Rs. 82 billion with foreign
companies. Although precise details of each of the transactions have not
been put in the public domain, 31 Indian private companies apart from the
State-owned enterprise (DPSUs and OFs) have been benefted.
LIMITATIONS OF INDIAN OFFSET POLICY
Even though India has succeed in signing a number of contracts, the
objective of enhancing domestic technological and manufacturing capability
through offsets does not seem to have progressed in a desired manner.
According to sources in the Defence Ministry, “present offset transactions
are mostly in the form of outsourcing, and sub-contracting of minor works,
which would have been taken places in the absence of a formal policy. The
offset policy has only succeeded in compelling the foreign companies to
place orders on Indian companies without any meaningful enhancement of
The biggest weaknesses of India’s offset policy are its open-ended nature,
the lack of an effective facilitating/monitoring/supervising agency, absence
of use of innovative methods prevalent in other countries.
COMPLETE FREEDOM TO FOREIGN OEMS
The policy in the present form provides complete freedom to foreign OEMs
to choose any of the three options, as mentioned earlier, for discharging
offset obligations. Given this freedom, the foreign companies are expected
REVISITING INDIA'S DEFENCE
OFFSET POLICY Laxman Kumar Behera / New Delhi
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