The defence ministry has revised its offset policy, which requires any foreign company that wins an order of Rs 300 crore or more to plough 30 per cent of the business back to India. Apart from other changes, it will allow foreign companies to get offset credits of three times the value of the technology transferred to India. Thus, a foreign company can meet its offset obligation by transferring technology worth 10 per cent of the order. With defence purchases expected to range from $75 billion (Rs 3.8 lakh crore) to $100 billion (Rs 5 lakh crore) over the next seven years, it is suggested that much technology could thus be transferred to Indian companies.
However, it is unlikely that even this revised offset policy will achieve its larger goal of developing a vibrant domestic defence industry with the help of technical advances made by the private sector overseas. The work that it has delivered to Indian companies is often low-tech, involving little beyond screwdriver technology. Rather than promoting transfer and trade, the defence offset policy has thus led merely to a diversion of resources. As a result, Indian makers of defence equipment – government-owned as well as private – have remained fringe players. Foreign companies so far reluctant to bring their technologies to India may have had good reason to seek the amendments in the offsets policy that the government has now granted. For them, eager local partners will not be hard to find. Business groups like the Tatas, Mahindras and Godrej have already drawn up ambitious plans for the defence sector on the premise that production costs in India are way below those in Europe and the United States. Sooner rather than later, they expect, the world’s top defence companies will wake up to the benefits of manufacturing in India. However, foreign companies are likely to wish to transfer lucrative, proprietary technologies only to Indian companies in which they have a stake, so that they can monitor the use of the technology and maximise their gains. (The amendments stipulate that the Indian company that gets the technology can use it for any product in the future; it need not be tied down to the offset contract.) So they are now likely to lobby hard to raise the cap on foreign direct investment (FDI) in defence from the current 26 per cent to 49 per cent. This could almost double their monetary gains from the transfer of technology without taking control away from their local partners.
Regardless of the anti-lobbyist sentiment currently in the air, there is no reason for the government to not liberalise the FDI cap in this sector. Meanwhile, defence public sector units need reform so they do not use their considerable departmental clout to crowd out private players. They should no longer be directly controlled by the ministry of defence or its bureaucrats, and must be handed over to another ministry — perhaps heavy industries. Even if India is entering a new era of collaboration, one caveat is important: the valuation of technology has always been a tricky issue. What an Indian partner is ready to pay is usually short of what the technology supplier expects. In the past, some foreign companies agreed to lower licence fees in order to enter the big Indian market, hoping to raise it later. These hopes were usually dashed. Defence is a regulated sector; foreign companies do need an Indian partner who they cannot dump at will. So these are negotiations that partners will have to carry out carefully.
