Indian Offset Policy on a Crossroad

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    Production delays and cost overruns have slowed down India’s defense preparedness considerably. More importantly, despite decades of effort and several specialized design and development organizations, gas turbine research establishment and aeronautical development establishment, India still does not have the capacity to research and design, prototype, produce, service and upgrade aircraft without depending on imports of components, major sub-assemblies and significant number of complete aircraft.

    Therefore there is a pressing need to build green field capability to widen the base of India’s aerospace industry and attain higher efficiencies, cost cutback and faster outputs. Public sector capability requires to be complemented by new private sector, both foreign and domestic contribution, involving joint ventures and co-production, to guarantee higher levels of technology transfer and to substantially improve the level and cost of after-sales support. This will not only take India’s technological competence to an even higher plane, but will also have a positive spin-off on our civil aerospace needs.

    India’s venerable obsession with equity caps has yielded very little in foreign direct investment flows since 2002. If India can purchase entire equipment manufactured by a wholly foreign-owned company located in another country, why cannot India receive the same from that company’s wholly owned Indian subsidiary? Allowing majority foreign ownership in high-technology field will also in part reduce convoluted issues associated with intellectual property rights and export-control regimes.

    India should establish a level playing field for a vibrant national defense sector, whether public or private. Many private sector companies are by now playing a consequential role in India’s defense manufacturing and are waiting for an opportunity to contribute more, on their own or through collaboration with foreign companies.

    In it’s current form India’s defense offset procedure is below an optimum level. It is designed mainly as countertrade to augment exports of PSU products related to defense and civilian aerospace and internal security.

    This offset policy lacks the essential focus to link acquisitions to collaborative models involving joint production, technology transfer and manufacturing capacity that develops self-reliance. Countertrade is the least meaningful element of defense offsets. Transfer of technology (ToT) is the most valuable. While it is debatable whether such huge (50%) offsets can even be fulfilled — not least because of the lack of product capacity of India’s Public Sector Units (PSU) or the existing aviation industry — it is more than likely that this requirement will inevitably increase costs. Surely that outcome cannot be justified.

    A more realistic approach would be to renovate India’s present offset policy to facilitate the entrée of high-technology aerospace manufacturing and services through a multi-tiered vendor base. This can be incentivized by offering flexible share-holding options for the setting up of local manufacturing units by foreign companies linked to proposed acquisitions under the umbrella of the primary supplier. Offsets should provide for the progressive localization of sub-assembly manufacturing by vendors under a phased manufacturing programme. This would mean transparently designating cutting edge technology vendors as long-term suppliers without obliging them to tender for every subsequent order. That is the only way to ensure that the risks and costs of rapid technological development are shared. An inclusive new offset policy that reduces costs and at the same time strengthens defense capability deserves consideration.

    India needs to leverage its current and future defense aerospace purchases to create an indigenous high-technology aerospace industrial base that will underpin its national security and economic strength. For this to happen, the need for structural and regulatory reforms of this sector cannot be exaggerated.