94% foreign investment in aerospace alone.
Since 2005, when the Ministry of Defence mandated that every foreign defence purchase above Rs 300 crore would impose on the vendor an offset liability of 30 per cent of the contract value, global arms majors have scurried to tie up partnerships with Indian defence manufacturers.
Today, for the first time, the defence ministry revealed exactly how much business the defence offsets policy has generated. Satyajeet Rajan, the chief of the Defence Offsets Facilitation Agency (DOFA) revealed that, since 2007, foreign vendors have signed up for offsets worth about Rs 8,000 crore.
In 2007, a mere Rs 243 crore worth of offsets were firmed up. The figure rose tenfold to Rs 2,598 crore in 2008. In 2009, DOFA has already cleared Rs 4,870 crore worth of offsets and counting.
These values are of planned production; actual production has still to begin in all but a handful of offset partnerships that were tied up over the last three years.
Interestingly, 94 per cent of all planned offsets are in the aerospace sector; the remaining 6 per cent covers the manufacture of naval systems. Apparently, the defence ministry’s Rs 42,000 crore tender for the purchase of 126 medium fighters has been a major driver in encouraging offsets partnerships. Most of the six vendors competing for that contract have been identifying potential partners within India’s private sector, as well as with public sector aerospace giant HAL.
Foreign vendors are currently permitted to discharge their offsets obligations in three possible ways. Defence products purchased from India’s defence manufacturers for export are eligible for offsets credits. So too are investments in India’s defence industry. Finally, investments made in Indian R&D facilities would be counted as offsets.
Also Read
So far, the investment into Indian R&D has been negligible. And in choosing Indian partners, foreign arms vendors have preferred private companies to the public sector. So far, 40 per cent of all offsets have gone to defence ministry-owned entities: factories of the Ordnance Factory Board and the eight defence PSUs. Thirty-three per cent of the offsets have gone to large private companies and a healthy 27 per cent have gone to small- and medium-sized manufacturers.
The potential value of offsets business is enormous. India currently buys foreign weaponry worth about Rs 50,000 crore annually, a figure that is rising. Taking the minimum offsets liability of 30 per cent, about Rs 15,000 crore worth of offsets must be discharged annually. In fact the figure is higher; the medium fighter tender specifies an offsets liability of 50 per cent.
The global arms industry complains bitterly about offsets; the United States government officially frowns at offsets demand, but allows its companies to meet the conditions of buyers. But India’s defence ministry insists that global defence contractors actually derive commercial benefits from partnering Indian companies in defence manufacture. The DOFA chief says, “Offsets requirements force foreign vendors into looking for Indian companies to partner. But this is for the present; 10-15 years down the line we will not need offsets at all to galvanise Indian defence manufacture.”
Offsets were first demanded by European countries in the late 1950s, when the US was arming NATO against the Soviet Union. But the practice gathered momentum only in the last two decades. In 1990, only 20 countries demanded offsets as a part of arms purchases. Today, offsets are demanded by over 130 countries.
In India, defence offsets were first approved by the defence minister in 2004 and included in Defence Procurement Policy of 2005 (DPP-2005). This was amended in DPP-2008, which permitted “offset banking” and the waiving of offsets in “fast track” purchase. This year, DPP-2009 permitted a long-standing request by foreign vendors, allowing them to change offset partners.
Today, indicating that more changes could be legislated in DPP-2010, DOFA Chairman Satyajeet Rajan asked the private sector to suggest useful changes to the offsets policy.