Not ambitious enough

The ministry of defence, traditionally a support base for a network of public sector production units, is at last thinking of defence production in terms of free-market competition. Beginning with a new and transparent defence procurement policy last year, the MoD has now come out with forward-looking guidelines on offsets, which will go some way in mobilising the country's industrial and technological abilities towards national defence.

Offsets are simply trade arrangements that oblige an arms vendor to reinvest (offset) the proceeds of his contract in the buyer country's economy. They have been around, in various forms, for decades. During the Soviet era, there were counter-trade arrangements in which India paid for many of its warships and fighters with shiploads of rice, tea and bananas. Offsets then moved to the manufacture of simple components from blueprints provided by vendors. The next level was what was called "transfer of technology", but basically meant the in-country production of more complex components or weapon systems. In reality, technology was seldom transferred, manufacturing blueprints were. Now, however, as the MoD realises, a technologically maturing India can demand offsets in terms of a mutually beneficial, high-technology partnership.

This is good news for India and, equally, for the countries from which it buys weaponry. Arms sellers, like the United States, while grudgingly accepting offsets as a cost of doing business, officially term them as inefficient and trade-distorting, an added cost to the equipment being sold. But a country like India, with a vibrant software industry to which foreign manufacturers are already outsourcing high-technology design, offers arms sellers offset opportunities that are in no way a financial burden. Software majors like Tata Consultancy Services and Infosys are already in the business of cutting-edge aviation design for companies like Boeing and Airbus. Outsourcing design solutions to Indian software companies already makes economic sense for foreign arms corporations; designating them as offsets provides that with a welcome impetus.

Already off to a good beginning, India's defence offsets policy must be synergised with the national offsets policy that the government is now formulating. Instead of separate policies for defence, civil aviation, space and software, giving rise to unco-ordinated and piecemeal offset arrangements, it makes better sense to place all offsets under a nodal ministry like the ministry of commerce. An inter-ministerial group, including the defence, aviation, IT, finance and commerce ministers, must co-ordinate nationally to target offsets at sectors which require foreign inputs. And foreign vendors, bidding for large contracts in defence, civil aviation, etc, must be clearly told that the offsets they offer will be critically important considerations in deciding Indian contracts.

There is scope for criticism, however, in the lack of ambition in the defence offset policy, which demands as offsets a mere 30 per cent of the overall value of any contracts worth more than Rs 300 crore. The global norms are far more demanding. The UK demands offsets of minimum 100 per cent in any defence contract worth over £10 million. So too does South Africa, which negotiated offsets worth over 300 per cent for an arms package in 1999. India will buy a stupendous $100 billion worth of defence equipment over the next five years, an estimated 70 per cent of that going on foreign arms. The difference between 30 per cent and 100 per cent offsets is close to $50 billion (Rs 2,20,000 crore).