With India planning to invest over US$80 billion in defense procurement in upcoming years, the majority of the spending – 65-70 percent will be directed to imports. “We have to reverse this trend.” Shri A.K, Antony, Indian Defense Minister, said, “Our aim is to have a strong defense industrial base in India, because a country like India cannot indefinitely depend on foreign suppliers for majority of our equipment.” While support for Defense Public Sector Units (DPSU) continues, the government realizes the public sector will not be able to transform the industrial base on its own. A point in case is the Indian Navy procurement, for which Antony outlined a new strategy. “We are formulating a new policy, where both public sector shipyards will have to compete with the Indian private shipyards to get projects for the Indian Navy.” Antony explained, adding that in future, the Indian navy will be from ‘Buy Indian, Make Indian’, where public sector ad private sector shipyards compete on naval shipbuilding rather than Indian shipbuilders competing against foreign suppliers. According to Antony, ‘Buy Indian and Make Indian’ is going to be the major component of our procurement policy.
Offsets were introduced with the Defense Procurement Procedure (DPP) of 2005, requiring manufacturers in the category of ‘Buy’ and ‘Make and Buy’ for acquisitions over and above Rs. 300 crore, (US$60 million) to invest 30 per cent of the estimated cost in indigenous defense industries.
Three years later, the government further tightened its offset demands, reflected in DPP 2008, that restricted foreign procurement of locally produced goods related only to defense and aerospace products as applicable for offset investments. These requirements encountered increasing objection among foreign suppliers, raising concern within the administration, about the validity of the entire system, since the local market could not produce enough goods to fulfill the huge offset requirements derived from the growing defense imports.
DPP 2011 introduced significant changes in this offsets policy, making civil aviation, internal security and training products and services eligible for defense offsets. In 2012 commercial shipbuilding is expected to be added to the approved industries eligible for offset transactions. Moreover, it has also relaxed insistence on foreign direct investment (FDI) only in domestic defense industries. It also recognized offsets accrued by through investment into defense JVs set up in India; or through investment into Indian R&D organizations. Against these relaxed rules, India is expected to increase the level of offset to 40 or most major acquisitions and even 60 percent on certain acquisitions such as shipbuilding, where Indian suppliers are well positioned to act as major subcontractors.
Additional concessions are also being evaluated, including the recognition of technology transfer and introducing ‘offset multipliers’ for investments in priority fields, including investments in small and medium enterprises (SME).
The new offset policy provides more opportunities for foreign enterprises doing business in India while preventing cash outflows by mandating foreign firms that bag major defense contracts in India to reinvest a part of the total contract value, by entering into local tie-ups in the local defense industry, developing local human resources and skills, technology and infrastructure. The new DPP includes training services or equipment like simulators that were not part of the previous DPP. This change is significant with India embarking on large-scale acquisition, including the 126 Medium Multi Role Combat Aircraft, military jet and helicopter trainers and tank upgrading programs, where simulators are becoming an important component.
The Minister of State for Defence Dr. M Pallam Raju has stated that the scope and potential of the Indian defense industry has significantly increased due to reforms in the Defense Offset Policy. Dr. Pallam Raju has announced that the Indian defense offsets contracts worth US$3.3 billion have been signed and more such deals worth $10 billion are in the pipeline.
The policy change is likely to give a huge fillip to these two sectors as investments worth billions of dollars are expected to be made in view of the large number of offsets deals to be signed in the near future as India looks to spend over $ 80 billion for defense acquisitions.
The introduction of the “Buy and Make (Indian)” category in the defense acquisition process aims to increase participation by the Indian Industry for meeting India’s requirements for state-of-the-art defense systems and platforms. The procedure will enable Indian defense sector firms to get into tie-ups with technology providers through the mode of technology transfer and joint ventures.
According to defense industry analysts, India’s private sector in aerospace and defense sector needs to become more effective and may currently lack the scope and scale. However, entering into foreign collaboration will result in greater innovation. The defense offsets policy is a powerful tool to ensure that large purchases from foreign vendors are matched by investments domestically, thereby enabling the private sector to boost its capabilities. It also charts out innovative ways of doing business, leading to partnerships and joint development plan. The defense offset policy aims to enable the Indian defense sector to build long-term capability.
In view of above policy changes, it is imperative for Indian companies from Defense sector to engage with Indian PSU as well as international firms interested to invest in India.