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India’s Defence Offset Policy by Dr Rajiv Nayan

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Author: Dr Rajiv Nayan
Undoubtedly, all the stakeholders need to have a coordinated approach to optimally use the offset policy and contract. The ultimate objective should be to strengthen futuristic combat capability requirements and the defence industrial base of the country.


Even the contemporary world lives under the shadow of the use of force. A nation develops or purchases arms in order to counter or mitigate the use of force against it.  As arms trade involves transfer of huge money outside the purchaser country, very often it raises the issue of outflow of resources and the need for indigenous development of domestic defence industry so that the  large scale drain of wealth is prevented. Gradually, offset has become part of global arms trade as more than 130 countries receive offset. Offset as the word suggests is considered a kind of compensation extended by the supplier to the recipient. Though the term is contested, yet defence offset suggests or refers to direct and indirect collaborations between the supplier and recipient resulting in engagement of activities such as   joint production / licensed production and transfer of technology. Some talk of quasi-offset as well, which somewhat resembles indirect offset.

 

Offsets As Steppingstones

India, predominantly an arms importer country, has evolved its offset policy over the years. One of the defence ministers stated: “the Defence Offset Policy will enable creation of local employment, upgradation of technology levels while ensuring substantial increase in both domestic production and export capability. Offset also provides leverage to the domestic industry specifically the SMEs [Small and Medium Enterprises] to enter the sophisticated markets of defence products.”

A list with technology areas, in which offset will be  received,  has already been released by the government. Though activities resembling offset may have existed for long, yet for the first time, in 2005, the government announced an Indian offset policy. Ever since then it has revised  it  a few times. But the 2005 policy yielded results only in 2007 when a defence contract was signed. In August 2012, the government introduced major offset policy reforms. In the current DPP it has been listed in the body text. The 2013 DPP explicitly lays down the objectives of the offset policy as follows:

“The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encouraging development of synergistic sectors like civil aerospace and internal security.”

Yet, taking into account the dynamism of the technological world, it is advisable to keep reviewing the list of items for the offset. Indian private defence industry needs to be strengthened so that the criticism that it cannot absorb technology, especially futuristic high-tech is addressed

The policy categorises Capital Acquisitions as ‘Buy (Global)’ means total purchase from foreign or / and Indian seller, and ‘Buy and Make with Transfer of Technology’ means acquisition from foreign seller  followed by Licensed Production. In both the cases, the estimated cost of the acquisition proposal needs to be Rs 300 crore or more. The ‘compensation’ or offset has to be 30 per cent of the estimated cost of the acquisition in ’Buy (Global)’ category and 30 per cent of the foreign exchange component in ‘Buy and Make with ToT’. For  shipbuilding,  the total cost has to take into  account the basic cost of the vessel, cost of base and depot  spares and the modification cost.

DOMW As Node

Under the Indian policy, the Indian Offset Partner (IOP) may be any Indian enterprise, institution and establishment, which can produce ‘eligible products and / or provision of eligible services’. The Defence Research and Development Organisation (DRDO) is also eligible for offset benefits. Though the principal supplier or vendor is responsible for implementation of offset obligations, Defence Offsets Management Wing (DOMW) is the nodal institutional framework for operationalising offset operations in India. It operates under the Department of Defence Production. The DOMW prepares Defence Offset Guidelines and is basically responsible for post contract management activities. The post contract activities consist of monitoring of offset obligations, technical and commercial evaluation, implementation of Offset banking guidelines, imposing penalties, facilitating Indian industry-suppliers interface among other activities.

Exceptions

However, offset may differ in certain acquisitions of strategic significance or after the realisation that Indian industry may not absorb offset. The prescribed offset may have more flexibility depending on other factors as well. The indigenous content of 50 per cent and more in a joint venture leads to exemption is an example in this regard. The Defence Acquisition Council takes the decision on changing the percentage of offset after following the proper procedures. The concerned parties have to fulfil the offset obligations within prescribed or agreed period; otherwise, penalty may be imposed on the defaulter. The policy, at the same time, provides incentives to the suppliers through offset banking credits. If a supplier facilitates offset more than the requirements, the accruing credits may be carried forward for seven years from the approved date.

 

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