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Defence offsets and their contents

Varun Ramachandra 

and (editors)
Sage India

268 pages; Rs 895

India is one of the world's biggest arms importers. Its consistent need to import arms, thanks to the not-so-friendly and complicated security environment, is exacerbated by the failure of domestic defence industrial policy. Although economic liberalisation reached Indian shores in 1991, defence sector liberalisation reached India only in 2001. This allowed the entry of private players and foreign investors (through foreign direct investment or FDI) in the defence sector. Consequently, the Indian domestic industry is yet to match its global peers and India continues to have an excessive reliance on imports to meet domestic defence demands.

This book sets out with the objective of compiling different perspectives of the primary stakeholders in this space: the Indian government, global original equipment manufacturers (OEM), and Indian industrialists.

Through these perspectives, the book aims to understand the evolution, and trace the possible future trajectories, of defence procurement and offset policies in India. The volume opens with a bird's-eye-view of these perspectives, followed by three sections containing chapters by individual stakeholders, and concludes with a section emphasising the importance of Indian manufacturing.

Offsets are defined as trade arrangements in which a buyer is partially compensated by the seller, by way of investing a portion of the seller's earnings back as investments, for the purchase of goods and services. Naturally, offsets exist because the defence market is a buyers' market with only a handful of customers, primarily comprising governments from across the world.

The authors contend that offsets are frowned upon by economists for their inefficiencies, but are held in high regard by government officials and analysts. The latter believe that offsets offer an opportunity for developing countries to counter the oligopolistic nature of defence markets where prices don't adjust in accordance with market changes.

Defence offsets come in two forms, direct and indirect. Direct offsets are transactions directly related to the imported defence goods or services, whereas indirect offsets are not related to defence goods or services. In the Indian context, there are fewer provisions for indirect offsets, since direct offsets are expected to enhance domestic defence production capabilities.

The real success of an offset policy in the long run will be if India reaches a stage where it achieves self-reliance, exports arms, and enters into offset agreements as a seller with other buying countries. This would entail the Indian manufacturer producing technologically advanced equipment of a very high quality from scratch.

The second part of the book examines the views of the Indian government and analysts. This section forms the largest part of the book and covers multiple viewpoints. The Indian government's stand appears very clear: offsets are a means to develop domestic defence industrial base and a consequent march towards self-reliance.

Of particular note is the chapter by Mrinal Suman, a retired major general, that succinctly explains the complete offset process; lists the available routes for fulfilling offset obligations; makes a case for FDI limits being based on the type of proposal, as opposed to a single limit across the board; and deals with the complicated issue of pricing technology transfers - the most common type of direct offset.

The third and the fourth parts provide perspectives from the global OEMs and domestic industry respectively, and it is through these chapters that the complex nature of offset policies is unravelled. While the OEMs want increased FDI limits which ensure higher stakes and incentives for them in the domestic defence sector, the Indian private sector suffers from a lack of incentives to increase their R&D budgets - while the labour unions of various public sector undertakings perceive a threat to their existence from foreign players.

Some of the striking chapters are the ones by R S Bhatia, a retired colonel who is the CEO of Bharat Forge Defence and Aerospace, and by Arvind Lakshmikumar, the CEO of Serial Innovations. Col Bhatia contends that offsets are not a tool for general economic development and that they must be directed towards development of the defence industrial base. Mr Lakshmikumar argues that the Indian offset policy is putting the cart (offsets) before the horse (technological innovation) and therefore calls upon policymakers and industrialists to emphasise on building base technology to attain technological maturity that will help Indian firms climb up the global value chain.

The book succeeds in providing a comprehensive overview of India's complex offset policies in language that is simple and easy to understand. That said, it appears to focus heavily on government's perspective - perhaps a consequence of clubbing chapters by analysts and government personnel in the same section. A broader range of industry opinions, and points of view from economists, would have enhanced the scope of the book.

The reviewer is a policy analyst at Takshashila Institution, a Bengaluru-based independent think tank and school of public policy
Twitter: @quale

First Published: Thu, July 23 2015. 21:25 IST