Defence OffSets,  Ministry of Defence, India 

India is one of the biggest importers of defence equipment. It is, therefore, natural that it seeks effective offsets to support its indigenous development process in the Indian Defence Industry while signing the contracts for defence imports in line with such practices worldwide.

Offsets are formal arrangements of business wherein a Foreign Supplier undertakes to compensate the Buyer to mitigate his procurement expenditure through certain special arrangements and programmes. Buyer uses his leverage to obtain benefits by asking the Seller to undertake well-designated activities in a timeframe to support the Buyer. Offsets are included in the contractual obligations. The negotiated deal consists of the primary contract, and the compensatory offsets.

Offsets could be Direct, or Indirect. Direct offsets include co-production or licensed production or sub-contracting the systems / sub-systems and buy-back. In this arrangement, the seller helps the buyer produce the product or a part thereof and purchases it back for incorporation in similar systems. Best form of Direct Offsets is technology transfer, and buy-back of sub-systems, not only for the ongoing contract but for all similar systems manufactured by the Manufacturer/Supplier.

Indirect Offsets generally take the form of compensation trading; Counter-Trade arrangements of the desired value.

Certain key points with regard to India’s Offset Policy for defence procurements are as under:

• It is applicable for all defence purchases over INR 300 Crore.
• 30% of the cost of the Proposal would be the offset amount. Scope relates to direct purchases, or providing market access, or creating new markets by generating export orders by the Supplier for products, components or services from any of the Indian Industries, Public or Private, as indicated in the RFP. This would also include FDI in the Indian Public Sector undertakings for development or creation of defence industrial infrastructure.
• Presently only Direct Offsets are envisaged.
• Selection of the industry for participation in the offset programmes would be done in consultation with the Industry Associations.
• Monitoring of the Offset Implementation is to be done by the DPSUs, or OFB. This could be enlarged to include others later.
• Ministry of Defence , India, would set-up a separate organization to facilitate and co-ordinate offset related issues.

It is estimated that 10 billion USD is likely to flow back into India during the 11th Plan Period, 2007-2012, through offsets in defence deals.

As per the latest thinking in the MOD (27 Jul 2006) conveyed by the Defence Secy in the CIIs Workshop on the 'Implementation of Offsets in Defence', India will look for Direct Offsets in all capital acquisitions made by the MOD.

Offsets would depend on the strategic importance of acquisition or technology, the ability of the Indian defence industry to absorb the Offsets, and the export potential generated. India has a large industrial base, and Offsets will further enhance its technical and manufacturing potential. They will also help to increase investments in domestic research and development.

The latest policy stipulates that the Offsets provisions will apply to capital acquisitions categorized as outright purchase from a foreign or Indian vendor(s), or purchases followed by licensed production. However, the Defence Acquisition Council can prescribe offset percentages higher than 30 percent, if required. India would like to pursue Offsets that will be beneficial to both Indian industry and foreign collaborators.

The concept and benefits of Offsets could also be leveraged for large purchases by leading Indian companies individually, or through Consortiums. This would strengthen the collective bargaining abilities.

Offsets will also help foreign collaborators take advantage of India's software capabilities and low-cost technical manpower.

The benefits of Offset are likely to flow equally to public and private sectors, and the Research and Development. 

Our industry should gear-up accordingly to participate in the offset programmes of the Defence.

Also visit www.IndianDefenceIndustry.blogspot.com for articles on Defence Offsets.

www.DefenceOffsetsIndia.com refers.