Improving defence manufacturing through offset policy

Abstract

India, the world’s 5th largest country in defence expenditure, surprisingly, is also the world’s largest importer of defence products. India’s fraility in self-reliance is exposed for several decades and consequential to face several sanctions to deny access to technology. After all, India never learnt its lessons from frequent western snubs, despite threats from neighbours. Ministry of Defence releases Defence Procurement Procedure (DPP), the gospel for defence procurement policies in India, revised the policies several times to revamp the lacklustre defence manufacturing that predominated by DPSU’s. Absence of Private firms in defence sector, a highly capital-intensive market, had led to monopolised dependency. Offset Policy, initially conceived in 2006 and renewed each year, stipulates that 30% of the contracted value to OEM should be invested back into India. Offset obligations are considered valuable investments to spur the Transfer of Technology (ToT), which many countries hold close to their chest. Apart from ToT, the investments also aid in stimulating growth in the economy through employment and sub-contracting works to Indian firms. However, these dream objectives of policy makers never achieved fruition. In order to give stimulus to the ailing defence manufacturing industry and to create a strong, and sustainable supply chain, this Policy paper addresses the problem head on by suggesting renewed framework and methodology. It also identifies the root causes of the problem and how it should be tackled with clear Vision, well-defined objectives, steps and provisions. Two key elements begging the attention of policy makers are -the Nodal agency, which owns up the Management of Offset contract and MSME participation. The Paper identifies the key stakeholders, fixes the primary responsibility of leading the project to its life, enumerates steps for promoting MSME participation, the key growth drivers of the economy. The paper endeavours to find the gaping holes in the system, framework and methodology adapted for implementation of the Defence Offset Policy. In the end, it provides new direction through a proper framework, ownership and stewardship to triumph in true spirit.The framework not only addresses the pain points but also opens on the strategic goals of the nation viz, fostering growth, attaining self-reliance by 2040, and to become an export-driven market. The impact of these suggested policy changes presents a stark contrast to the existing policy. Some studies were chosen with respect to Tejas and Rafale aircraft and presents an optimistic impact of multiplier effect on the economy. In a sense, India has under utilised its position as a top importer of defence products and given up a lucrative low-cost labour market, which China exploited to its best potential. In the end, the paper makes recommendations to use Offset Policy as more than a tool to transform the defence manufacturing in India from laggard to a mighty and inflect from under capacitated industry to an energetic and export-oriented Supply Chain base.