Critical Analysis of India’s Defence Offset Policy: A Comparative Perspective

Critical Analysis of India’s Defence Offset Policy: A Comparative Perspective

India’s defence offset policy, introduced in 2005 and formalized in 2006 under the Defence Procurement Procedure (DPP), mandates foreign vendors to reinvest at least 30% of contracts valued over ₹300 crore into India’s defence sector. Aimed at fostering self-reliance, technological advancement, and economic growth, the policy sought to reduce India’s 70% reliance on imported defence equipment (circa 2008). Nearly two decades later, its effectiveness remains debated. This analysis critically evaluates the policy’s outcomes, compares it with offset policies in Israel, Australia, Brazil, and South Korea, and offers reform recommendations, drawing on expert insights and data.

Objectives of India’s Defence Offset Policy

The Ministry of Defence (MoD) articulated the policy’s goals in a 2012 press release: “to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for research, design, and development related to defence products and services, and (iii) encouraging development of synergistic sectors like civil aerospace and internal security.” The policy was a cornerstone of India’s pursuit of ‘Atma Nirbhar Bharat’ (self-reliant India).

Achievements: Industrial Growth and Flexibility

The policy has spurred industrial growth, notably in Bengaluru’s aerospace cluster. “The 2005 policy helped promote a vibrant aerospace cluster, mostly MSMEs around Bengaluru,” notes a 2020 Drishti IAS analysis. Smaller firms have benefited from outsourcing by Indian Offset Partners (IOPs). “While the direct benefit may have accrued to only a handful of big Indian companies, it is evident that downstream smaller companies have also benefited from the policy because of outsourcing,” observes a former MoD Financial Advisor (Acquisition).

Global firms like Boeing have leveraged their expertise, with a representative stating, “Boeing has successfully implemented offset programmes in over 35 countries… we have some relevant experience in this area.” The policy’s flexibility, allowing offsets via direct purchases, joint ventures, or technology transfers, has attracted such firms. “India now allows technology transfers as a legitimate way to discharge offset obligations,” says S. Amer Latif of the Center for Strategic and International Studies. The establishment of the Defence Offset Management Wing (DOMW) in 2012 enhanced oversight. “It has recently established the DOMW… to more effectively monitor the implementation of offsets,” Latif adds. Expanding offsets to civil aviation, training, and homeland security has broadened its scope, as Latif notes: “It has opened the number of areas allowable for executing offsets to the fields of civil aviation, training, and homeland security.”

Shortcomings: Bureaucracy and Limited Technology Transfer

Despite these gains, the policy has failed to deliver on key objectives, particularly technology transfer. A 2020 Comptroller and Auditor General (CAG) report found “not a single case where the foreign vendor had transferred high technology to the Indian industry.” Bureaucratic complexity has been a major hurdle. “The terms and conditions and the procedure that governs conclusion and execution of the offset contracts… are too convoluted,” critiques the former MoD Financial Advisor. By 2022, 15 companies missed offset deadlines, as noted by Minister Ajay Bhatt in a Lok Sabha response: “As many as 15 companies ‘have missed the first deadline set for implementation of their defence offset commitment’.”

Vendors often prioritize direct purchases over technology transfer, limiting innovation. “More than 90% of offset obligation was discharged by the vendors through direct purchase of products and services,” an IDSA study revealed. The 2020 dilution, exempting bilateral and single-vendor deals, further weakened the policy. “As most defence deals are bilateral, or a single supplier deal… this would virtually mean the scrapping of the defence offset policy,” warns Drishti IAS. Misalignment with Foreign Direct Investment (FDI) policies restricts investment. “India’s FDI policy ‘defies logic’ as no foreign investor will be interested in an Indian JV where it has ‘no significant control, strict capacity/product constraints, no purchase guarantee, no open access to other markets’,” argues defence expert Mrinal Suman. Weak enforcement, with $2.24 billion in defaults by 2021, per ThePrint, and inadequate monitoring exacerbate challenges. “The monitoring of implementation of offset contracts was inadequate and had involved failing to recover penalties due for non-fulfilment,” a 2013 RUSI report noted.

Monitoring and enforcement have also been weak. A 2013 Royal United Services Institute (RUSI) report highlighted that “the monitoring of implementation of offset contracts was inadequate and had involved failing to recover penalties due for non-fulfilment of annual offset obligations.” The CAG echoed this in 2020, noting, “In view of the fact that the offset policy has not yielded the desired result, the Ministry needs to review the policy and its implementation.”

The 2020 dilution of the offset policy, exempting bilateral and single-vendor deals, has further undermined its potential. “As most defence deals are bilateral, or a single supplier deal… this would virtually mean the scrapping of the defence offset policy,” warns the Drishti IAS analysis. This move, intended to reduce costs, may compromise long-term indigenization goals. “The higher (upfront) cost of the agreement due to the offset clause would pay for itself by reducing costs in the long term by indigenisation,” the analysis argues.

Comparative Analysis

Israel: R&D-Driven Success

Israel’s offset policy, managed by the Industrial Cooperation Authority under the Ministry of Economy, emphasizes technology transfer and economic competitiveness. “Israel’s purchase of Combat Aircraft from McDonnell Douglas for a 100% offset package… enabled the development of Israeli Aircraft Industries, Cyclone Aviation Products, Israeli Military Industries, and TAT Aero,” notes an Economic Times analysis. High offset thresholds (often 100%) prioritize R&D and co-production, fostering export-driven firms. “Focusing on R&D will improve the economy’s ability to absorb heavy transfers and reap economic benefits,” the analysis adds. Unlike India’s MoD-centric model, Israel’s integration with national economic goals ensures broader impact. “Israel’s offset policy has been a key driver in building a robust defence-industrial base,” says an IDSA monograph.

Australia: Flexible Global Integration

Australia’s offset policy, revised in 2007, focuses on integrating local industries into global supply chains. “The Australian approach is to use the industrial engagement elements… to give Australian industry opportunities to capture business in the global aerospace and defence market,” an IDSA analysis highlights. Managed by the Department of Industry, it aligns with economic goals, unlike India’s siloed MoD structure. “In Australia, Germany, Greece, South Korea… the Ministry of Defence plays an important part, albeit in conjunction with commerce and trade ministries,” notes an Indian Defence Review article. Australia’s flexible, indirect offset approach diversifies benefits, contrasting with India’s rigid 30% direct offset model.

Brazil: Targeted Technology Transfer

Brazil’s offset policy, embedded in its defence procurement framework, prioritizes technology transfer, as seen in the Gripen fighter jet deal with Saab. “The Gripen offset programme transferred technology to Brazilian firms, enabling co-production of aircraft components,” a 2020 Janes report notes. Managed by the Ministry of Defence and industry bodies, Brazil’s policy ensures specific technology transfers through clear contracts. “Brazil’s offset agreements have significantly enhanced its aerospace capabilities,” says a SIPRI report. India’s lack of such specificity limits similar outcomes.

South Korea: Export-Oriented Growth

South Korea’s offset policy, managed by the Defense Acquisition Program Administration (DAPA), focuses on self-reliance and exports. “South Korea’s offset policy has been instrumental in developing indigenous platforms like the K2 Black Panther tank,” a 2021 Defense News article notes. With a 50% offset threshold and strict technology transfer requirements, South Korea has become a global defence exporter. “Offsets have enabled South Korea to become a global defence exporter,” says a CSIS report. Unlike India’s bureaucratic delays, South Korea’s streamlined DAPA oversight ensures compliance.

Inferences: A Mixed Legacy

India’s policy has fostered MSME growth but lags behind Israel, Australia, Brazil, and South Korea in achieving technological self-reliance. “India’s defence offset policy is mired in criticism for its failure to produce the intended results,” notes the Financial Express. Israel’s R&D focus and high offset thresholds have built an export-driven industry, while Australia’s flexible approach integrates global supply chains. Brazil’s targeted technology transfers and South Korea’s strict enforcement have yielded strategic capabilities. In India, benefits are concentrated, with “the top 5 of these 15 IOPs received 51.76%… of the offset business,” per the IDSA study. The lack of a national offset policy, unlike other countries, limits coherence. “Every country has a national offset policy and defence offset flows from the national policy. India is perhaps the only exception,” critiques the Indian Defence Review.

Areas for Reform

India can adopt Israel’s R&D focus and Brazil’s targeted technology transfer model. “Focusing on R&D will improve the economy’s ability to absorb heavy transfers,” advises the Economic Times. Australia’s cross-ministerial approach could diversify benefits. “We need to diversify offsets to non-defence sectors for overall economic benefits,” argues Pradeep S. Mehta of CUTS International. South Korea’s streamlined oversight offers a blueprint for enforcement. “What India needs is an effective body to handle offsets, liberal FDI and licensing policies, and a better banking provision,” a 2009 Strategic Analysis article suggests. A national offset policy, a clear technology transfer roadmap, and a dispute resolution tribunal, as proposed by Lt. Col. JS Sodhi, could enhance effectiveness. “India needs to re-conceive or re-imagine the offset clause in defence contracts with stricter enforcement,” emphasizes Drishti IAS.

Conclusion

India’s defence offset policy has achieved modest industrial growth but falls short of its goals of technological self-reliance and global competitiveness, unlike Israel, Australia, Brazil, and South Korea. “India’s defence markets become ever more lucrative… However, if India wishes to use offsets to create a strong indigenous defence industry, it needs to foster a transparent and streamlined regulatory environment,” warns a RUSI report. By prioritizing technology transfer, aligning with national economic goals, and adopting global best practices, India can strengthen its defence-industrial base and advance toward ‘Atma Nirbhar Bharat.’

References

• Latif, S. Amer. (2012). Defense Offsets in India. Center for Strategic and International Studies.
• India’s Defence Offset Policy – A comprehensive analysis. (2022). The Financial Express.
• What India can learn from Global Offset Experiences. Institute for Defence Studies and Analyses.
• Behera, L. Kumar. (2009). India’s Defence Offset Policy. Strategic Analysis, 33(2), 242-253.
• Indian Defence Offset Regime: Need for Reforms. (2024). Indian Defence Review.
• Dilution of Offset Policy. (2020). Drishti IAS.
• Defence Offset Policy: View. (2022). The Economic Times.
• The Implementation of India’s Defence Offset Policy. (2013). Royal United Services Institute.
• India’s defence offset contracts are in shambles. (2022). ThePrint.
• Brazil’s Gripen Offset Programme. (2020). Janes.
• South Korea’s Defense Industry Growth. (2021). Defense News.
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