Defense Offsets in India
August 16, 2012
As India purchases billions of dollars’ worth of military hardware in the coming years, it is poised to receive billions of dollars in offsets. For India, offsets represent one of the best opportunities to build a world-class defense-industrial capacity that can meet the country’s own defense needs and demonstrate its prowess as a rising world power. In an August 2 press release from the Ministry of Defence highlighting the latest updates to India’s offset policy, the government laid out its objective for offsets, which is “to leverage capital acquisitions to develop India defence industry by (i) Fostering development of internationally competitive enterprises, (ii) Augmenting capacity for Research, Design, and Development related to defence products and services and (iii) Encouraging development of synergistic sectors like civil aerospace and internal security.”
Clearly, India has lofty ambitions for its offset resources. Unfortunately, the current state of India’s offset policy does not appear to be leading the country toward its ultimate aim of self-sufficiency in defense production.
To begin with, India appears to lack the needed strategic vision and prioritization for its offset policy. What are the key technologies India is trying to accrue? What are the priorities for its offset program aside from generically developing its defense industry? As a result, Indian officials put the onus of developing offset projects on foreign firms whose natural inclination will be to choose projects that are easily executable or do not require clearances for sensitive, high technology.
Secondly, India does not currently appear to have the absorptive capacity to effectively channel the large volume of offsets. The country’s various Defense Public Sector Undertakings (DPSUs) are inefficient and lack adequate infrastructure to effectively absorb the billions of dollars in offsets that will be coming its way over the next decade. This lack of absorptive capacity will not only stymie the country’s defense-industrial development but will also create the potential for widespread waste and corruption.
Third, India’s reluctance to aggressively develop its private defense sector has prevented the development of effective offset partners for U.S. and other foreign firms. Many Indian officials posit that private industry does not have the capacity to build the defense equipment India requires. Other officials resist the idea of developing a private defense-industrial complex similar to the United States. And yet others will put forth the specious argument that private industry will not deliver in times of national emergency if it is driven by profit motives rather than national security concerns. Regardless of the reasoning, the government’s reluctance to implement favorable policies deters the private sector from making the needed infrastructure investments for defense production. Why build the infrastructure if it will not be financially profitable?
To be sure, India has made some reforms to its offsets policy to answer the various critics of its offset program. It has opened the number of areas allowable for executing offsets to the fields of civil aviation, training, and homeland security. It has recently established the Defense Offsets Management Wing (DOMW) within the Ministry of Defence to more effectively monitor the implementation of offsets. India also now allows technology transfers as a legitimate way to discharge offset obligations and has extended the period of completing offset obligations to two years beyond the period of the main procurement contract. Measures such as these will no doubt be welcome to the foreign defense industry, but they will still fall short of getting India to the final destination of self-reliance in its defense production without more wide-ranging, systemic reforms.
While foreign firms may wish offsets away, the reality is that offsets will grow as a feature of the defense business landscape for years to come. As U.S. defense companies face shrinking defense budgets in the coming years, international markets such as India will become increasingly important. For years, offsets were viewed as a nuisance by many defense companies who saw them as secondary to the main defense business being transacted. However, with the anticipated downturn in demand for defense equipment within Western markets, offsets are becoming a more prominent feature of the defense sales landscape. Simply put, offsets are here to stay for the foreseeable future.
Given these circumstances, the challenge for India and foreign firms is to develop an offset environment that provides good value for India as well as defense companies. Doing so will require a fresh look at how offsets are utilized.
Time for a National Commission on Offsets?
While India has focused its offset resources exclusively toward building the defense-industrial sector, it may be time to consider alternative uses for offsets that could aid other dimensions of India’s national security, while aiding the economy. For example, offsets directed toward jobs training for skills in the defense industry would be a way to not only build marketable skills for young people but also aid India’s defense industry in the process. Offset resources could also be creatively employed to build research and development facilities in national universities that could perhaps serve as germinators for original defense research. Another possibility could be using offsets to fund infrastructure projects that have civil as well as military application, such as upgrading airport communications infrastructure at India’s many airports to accommodate growing passenger traffic as well as possible military usage.
Such out-of-the-box thinking on offsets is unlikely to come from the Ministry of Defence alone. Instead, it may be time for India to consider a national commission on offset resources. The purpose of such as commission would be to scrutinize the current approach to offsets and determine whether these resources are best used solely for defense-industrial purposes. Given India’s myriad developmental and national security challenges, there may be significant benefits to examining how these two important areas of India’s growth might be fused to ensure optimal use of these resources. A national commission should be a public- and private-sector undertaking, composed of former high-level officials and eminent persons from a variety of disciplines—including defense, diplomacy, development, agriculture, planning, and other such diverse areas—to take a fresh look at how offsets resources should be used.
Offsets are seen by many in India as one of the most promising pathways to building its defense industry. Yet, the record of building defense-industrial capacity through offsets has been decidedly mixed. As India embarks on its ambitious defense modernization in the coming years, it would be well served by an objective, impartial review as to whether offsets are the best way of building its defense-industrial capacity. Such a review could develop uses for these resources that not only build national security, but also contribute to building India’s economy and human capital, all of which are critical to building a strong, confident India.
(This Commentary originally appeared in the August 2012 issue of Issue Perspective.)
S. Amer Latif is a visiting fellow with the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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