To Be Aatmanirbhar In Defence, India Has To Cash In On Offsets

India has the fourth-largest army in the world, and is one of the world's biggest arms importers. With a growing military threat and global geopolitical uncertainty, this puts an inordinate burden on India's budget.

That's where a defence offset policy comes into play. The idea is to indigenise production via purchase agreements with supplier countries that insist on the production of the goods — from fighter aircraft to field guns — being gradually relocated to India through technology transfer and investment in India's domestic defence industry.

India's Defence Offset Policy

However, going by the last report on the topic by the Comptroller and Auditor General (CAG), which was published in 2020, this has had little impact so far.

The late President Pranab Mukherjee, when he was the Defence Minister in the UPA 1 government, had, for the first time in 2004, initiated a consolidated procurement policy with some novel ideas to reduce imports and boost indigenisation of spares.

The need for an offset clause in defence procurement was promulgated, so that it could be developed into a significant domestic business. The policy received a boost during Mukherjee’s tenure, and helped improve India's sluggish defence procurement, while reducing India's foreign dependency roadblock. 

In the global arms trade, ‘offset’ refers to a two-way process for both the purchaser and the supplier. In such an arrangement, the purchasing country can use the volume of its purchase as leverage to develop its industrial base, with adequate R&D and technology transfer from the manufacturing country, supported by an open-ended counter-trade, involving either reverse purchase or executing export orders.

In all contractual purchases, especially involving large defence deals, reciprocity conditions or offsets play a pivotal role. These are contractual obligations typically regulated by the defence ministries or government partners. 

Despite India having an offset policy in place for over two decades, it still imports around 70 per cent of its arms requirements and ranks among the top importers of defence equipment.

As per reports of the Department of Industrial Policy & Promotion (DIPP), foreign firms invested a total of US$ 676 million in India, against the mandated US$ 1.3 billion, during 2008-14. Foreign direct investment (FDI) of only US$ 5 million entered India's defence sector during this period — a minuscule amount compared to the total FDI received in India.

Aatmanirbhar Push To Offsets & Rising Scope

Although the indigenisation policy did not pick up in India, countries like the US, South Korea, Turkey, Israel, and even Malaysia have intelligently utilised the mechanism to boost and promote their domestic industry capabilities.

Since assuming charge in 2014, the NDA government undertook a review of the offset policy. A host of mid-course corrective measures were implemented, with special emphasis on self-reliance and indigenisation under Aatmanirbhar Bharat, which opened up many possibilities for indigenous manufacturers.

Now, almost 30 per cent of all capital defence procurements have to be ploughed back in the form of offsets, which, importantly, also generate employment opportunities, besides the technology transfer. 

It is time that Indian companies take advantage of the offset policy by successfully implementing it, incorporating international best practices. For India to become truly self-reliant, existing target gaps must be reduced.

PM Modi has been focusing on the Aatmanirbhar Bharat plank to boost indigenisation of defence inventory, starting with items called ‘Class C’ spares in the inventory management system. We need to keep the indigenous defence manufacturing ball rolling, as there is a huge scope, within which the offset policy is a win-win.