Defence Offsets Are A Stepping Stone To The Big League. Here's How India Can Take Advantage

For Western countries where the weapons manufacturers are based, offsets were seen as an unavoidable burden to increase international sales and find new markets. 

So what are offsets? These are clauses inserted into defence purchase agreements with supplier countries to insist on the gradual relocation of the production of the military goods — from fighter aircraft to field guns — into the buyer country, through technology transfer and investment there.

Of late, that scenario has undergone an inversion, at least in the case of some countries. The biggest recipients of offsets at one time are today among the most advanced, sophisticated weapons manufacturing countries, like the UK, Finland, Israel, Switzerland, and the Netherlands.

Typically, offset policy operates within the prism of defence procurement only, ie., it does not apply to the non-defence sectors. However, some countries have been able to intelligently utilise their offset policies in both defence and civil procurement, to invigorate high-tech domestic production and manufacturing. 

In India, the scope for the effective utilisation of offsets is enormous. What's needed is to address the issue efficiently. However, in several reports, the Comptroller and Auditor General (CAG) has repeatedly observed that offsets in many defence contracts have not resulted in any value addition in India.

Rather, foreign supplier companies had a free run in selecting ineligible Indian offset partners, just to discharge their contractual obligations, as they found that India's monitoring mechanism for the implementation of offset contracts was weak.

Notwithstanding, there has been some improvement over the past few years, with due push from the Modi government. A lot still needs to be done, though, as India modernises its inventories of all three defence wings.

There are several high-ticket purchases that run into billions of dollars in the works. Effective application, formulation, and development of policy-bound yardsticks for obtaining 30 per cent of the value of the contracts in direct offsets, along with transfer of technology, will open up huge scope in India's private defence industry.

If the foreign manufacturer sets up a large base in the country, it can make India a major manufacturing hub with lots of jobs, besides bringing in FDI. The Indian government's focus has to be on the following parameters:

1. Fostering the development of internationally competitive domestic defence manufacturers
2. Augmenting capacity for research, design, and development related to defence products and services
3. Encouraging the development of synergistic sectors like civil aerospace, internal security, etc
4. Analysing offset policies of countries like Israel, South Korea, Spain, Japan, Brazil, etc. that helped them scale up their indigenous defence industries 

Defence and security programmes require large capital investments by governments, besides heavy follow-on costs, and considerable financial support to sustain such programmes over time.

Hence, such investments should be optimally used to establish and strengthen local capabilities towards developing the country's military and security systems. Large capital investments also warrant some form of work that should directly flow back into the system, as well as a minimum threshold of the contracts (30 per cent on average in India), which are called offsets.

The forms of offset contracts, like purchases, buybacks or counter purchases, license production, or technology transfer, etc. — vis-a-vis the demanding offsets — may vary, depending on priorities.

As of now, around 130 countries have offset requirements in some form or other, compared to only about 20 countries in the 1970s, mainly as a counter-trade obligation.

An offset programme can boost the domestic economy by channelling activity to local companies through co-production agreements, subcontracting or direct purchases. It does help enhance skill and technology know-how through the transfer of advanced and sophisticated technology to local companies, besides the training of an in-house workforce.

Sustainable business partnership, self-sufficiency or atmanirbharta can only increase with the implementation and adoption of an effective offset policy.