India has a peculiar defence scenario as the country has one of the largest defence infrastructure and at the same time is one of the largest defence importer in the world.
To overcome the various hurdles of defence sector development including measures to overcome import dependence, government introduced several measures including defence FDI and promotion of private sector participation.
A major policy thrust in this direction is the defence offset policy which is expected to become a chief instrument for India to develop its indigenous defence manufacturing sector.
Offset, in literary sense, is a factor that counterbalances or compensates an act. In the defence procurement context, it is an element of 'compensation' made by the manufacturer that mostly takes place in the form of placing a minimum per cent of value addition in the ordering country.
Defence offset means “a supplier places work to an agreed value with firms in the buying country, over and above what it would have brought in the absence of the offset."
Hence under defence offset, a foreign supplier of equipment agrees to manufacture a given percent of his product (in terms of value) in the buying country. Sometimes this may take place with technology transfer.
In the past, India obtained defence equipments at comparatively friendship terms from the former Soviet Union. But the disintegration of USSR and rising imports compelled the government to work hard on domestic production.
In this context, the government has brought some policy directions and most prominent of them is the defence offset policy.
Defence offset policy of 2016
The defence offset policy is a part of Defence Procurement and Procedure (DPP). The latest one is the DPP 2016. Developing indigenous defence sector is the major objective of the defence. Major feature of the 2016 offset policy is that it increases the threshold of defence offset to Rs 2000 crore from the current level of Rs 300 crores under “buy” and 'buy and make” categories. This means that only those purchase of above Rs 2000 crore that the foreign company has to ensure 30% domestic value addition in India.
Another major feature of DPP 2016 is the creation of a new category called 'Indian Designed Developed and Manufacture (IDDM)' and it has been given the highest priority. This category is created and promoted maximum to encourage domestic design of defence equipments.
The DPP has revised in 2006, 2008, 2009, 2011, 2013 and now in 2016 after the original version in 2005.
The 2013 DPP lays down the objectives of the offset policy: “The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian 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.”
It is estimated that India should make around $250 bn worth of defence purchase in the next fifteen years. At the same time import dependence is a matter of concern from the economic and strategic angles. Other major military powers including China have developed a sophisticated defence sector matching their pace of economic development.
In this respect, the defence offset policy may help the country to develop and support the indigenous defence manufacturing sector. Recent defence FDI policy and opening of the defence sector to private sectors are aimed at promoting indigenous defence manufacturing along with the offset policy.