Indian industry wary of new defence offset policy

New policy likely to dilute offset requirements, bowing to sustained lobbying from foreign vendors.

The Ministry of Defence (MoD) is finalising a revised defence offset policy. Business Standard has learnt the new policy would dilute offset requirements substantially, bowing to sustained lobbying from foreign arms vendors and making it easier for them to discharge their offset requirements.

Indian industry has protested that this would defeat the aim of offsets, which was to promote indigenisation. A Ficci delegation from Indian defence companies, invited to the MoD on July 23 to discuss offsets told Defence Minister A K Antony that the growing number of loopholes would make defence offsets a bigger scam than the 2G-spectrum scandal. A shaken Antony assured delegation members their concerns would be heeded.

The new policy is going ahead, nonetheless. MoD sources involved in the drafting reveal the policy revisions would allow transfer of technology (ToT) to be counted as an offset. Also on the anvil are “multipliers”, which would give vendors extra offset credits in fields where foreign assistance is badly needed. For example, if the Defence Research and Development Organisation (DRDO) urgently requires metallurgical technology for building jet engine combustion chambers, the MoD could place a multiplier of, say, five on that technology. The new policy would give the vendor offset credits worth five times the cost of the technology that it transfers.

So far, the MoD has shied away from including ToT in the list of permissible offsets. The previous secretary for defence production, R K Singh (now the home secretary) admitted to this newspaper last year that it was extremely difficult to accurately value technology.

The new policy could also extend offsets to fields barely linked with defence, such as “project management”, a catch-all phrase that would allow vendors to claim offsets for routine business expenses like travel, accommodation, and the holding of meetings and conferences.

“Offsets provide an opportunity to build a strong Indian defence industry. But if the offsets are liberalised to the level where vendors no longer need to provide benefits to the Indian defence industry, we will have lost a huge opportunity,” says Puneet Kaura, executive director, Samtel Display Systems.

Offsets were introduced with the Defence Procurement Procedure of 2005 (DPP-2005). It initially required vendors who executed defence contracts worth Rs 300 crore or more to source from India defence products worth 30 per cent of the total contract value. Alternatively, offsets could also be discharged through investment into defence JVs set up in India; or through investment into Indian R&D organisations. Over time — through DPP-2006; DPP-2008; DPP-2009; and DPP-2011 — the offset policy has become progressively less demanding of foreign vendors, first incorporating offset banking and then (in DPP-2011) permitting vendors to discharge offsets in civil aerospace, training and internal security.

The offset policy initially followed the Kelkar Committee recommendations, which endorsed only “direct offsets”, i.e. connected directly with defence products. DPP-2011, however, opened the doors to “indirect offsets”. Now, the latest policy is set to widen that opening.

Business Standard has learnt that there is a vertical split within the MoD on whether offsets should be diluted. The Acquisition Wing, which procures defence equipment for the military and is responsible for expending the capital budget in full, views offsets as an inconvenient procedural hurdle that must be crossed before finalising a procurement contract. But the department of defence production (DDP), responsible for boosting India’s defence industry, regards offsets as a useful tool that can provide a growth impetus to industry.

“Unfortunately, the Acquisition Wing currently examines the offset proposals from foreign vendors. If the DDP was given the resources and the staff to do this job, the interests of Indian industry would be far better preserved,” says an MoD official, who wishes to remain anonymous.

Industry sources say after the Ficci delegation alerted Antony to the potential for scandal in offsets, the new defence secretary, Shashi Kant Sharma, who earlier headed the Acquisition Wing, has been inviting industry representatives to South Block to canvass their views.

The MoD has not responded to a request for comments on this issue.