Defence Offset Policy of India

According to the Defence offset policy, a foreign company which invests more than Rs. 300 Crore in India, has to buy at least 30 per cent of the total value of the supplies locally. Such offset policies are followed only in a few sectors in India such as Defence, Railways and Aviation. Initially, the offsets were for the defence sector, but in 2009, the policy was diluted to permit offsets to civil aviation and internal and coastal security sectors too.

The basic objective of such offset policy is to improve the domestic Defence manufacturing sector and also improve a domestic R&D base in Defence. Further, it could help in acquiring some new technologies, domestic job creation,  skill enhancement of work force, saving of currency, encourage flow of capital investments etc.

But there were several problems with the Defence Offset Policy. Firstly, there was no effective monitoring mechanism as pointed out by a 2012 CAG report. There were no clear cut definition and role of various stakeholders. Secondly,  CAG also pointed out that this policy was only a paper exercise as there was on visible impact either on Defence production or on domestic manufacturing sector. Thirdly, the domestic contractors and manufacturers (called Indian Offset Partners) were chosen by the foreign investors / vendors in arbitrary manner and in some cases the IOP was a 100% owned subsidiary of the foreign vendor.

Due to the above anomalies, the offset policy was revised several times. The government established a new organization called Defence Offset Facilitation Agency (DOFA) also. However, these changes have not been proved to be effective in expanding India’s Defence sector. Again major changes were introduced in 2012 and then in 2013 with the aim of revitalizing the sector and make it more attractive to the foreign vendors. But still there are many challenges.

Why it has failed to achieve any significant results?

There are several problem. We note that India procures the equipments from abroad in two categories viz. “Buy” and “Buy & Make”. Buy category does not involve transfer of technology and the technology transfer under buy and make suffer from its own limitations. Due to this, Defence Offset Policy has not been able to bring in sharing of technology. This is core issue. The small private entities as well as public sector do not have the requisite experience nor the capacity to absorb the technology. Consequently, the foreign companies could not find suitable partners to execute the project leading to delay in finalizing the contracts.

Further, since the offset policy still gives flexibility to the foreign vendors to discharge their obligations in the area in which they want; it has resulted in unregulated flow of investments killing the very objective of the policy. This is because often there is a mismatch between the demand of Indian defence industry and the area in which foreign entities set off their obligations. Until and unless there are concrete guidelines wherein the offsets are directed according to the need of the industry, the objectives envisaged for Defence Offset cannot be achieved.


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