India Needs a National Offset Policy

Major General Mrinal Suman, AVSM, VSM, PhD

Offset policy of every country is always in consonance with its national economic objectives – offsets are sought either to fulfil an emergent economic need or to fill a critical technology gap, or both. Therefore, all governments carry out an exhaustive exercise to decide areas in which they should obtain offsets for optimum gains. As every country faces different challenges, objectives are always country specific to satisfy its own needs.

A large number of countries like Austria, Belgium, Czech Republic, Finland, Greece, Holland, Poland and Spain seek upgradation of their technological and industrial base. They have prepared their offset policies accordingly. Bulgaria demands dual-use technologies and products. Finland wants development of its SMEs. Generation of additional employment opportunities is the objective of many developed countries like Austria, Czech Republic, Holland and Poland.

On the other hand, countries like Britain, Holland, Hungary Italy, Poland, Portugal and Spain seek to use the leverage of offsets to enhance competitiveness of their indigenous defence industry by improving key skills and export potential. Austria, Bulgaria, Hungary, Portugal and Britain also seek new markets for their defence products and want to become a part of the supply chain.

Need for a National Offset Policy

As offsets carry considerable cost penalty, every country strives to draw maximum benefits from them. For this, a detailed national offset policy is prepared as a part of the overall economic-cum-industrial endeavour with explicit objectives spelt out in definite terms. As it is not the quantum and type of offset but its relevance that matters, buyer nations take great pains in identifying areas in which offsets can prove most advantageous. It is a very crucial decision. The success of any offset programme primarily depends on proper selection, detailed planning, close supervision and regular monitoring. Therefore, an offset policy can be effective only if it is exhaustive and encompasses the complete gamut of offset activities.

Unfortunately, India has no national offset policy. Procedure for defence offsets is a standalone initiative of the Ministry of Defence (MoD). This is its biggest weakness as well. It is time the Ministry of Commerce issues a national policy to cover all facets of offsets. Policy on defence offsets must flow from the national policy. For example, it can be laid down that offsets in respect of contracts with indicative value of more than 1000 crore rupees be handled at the national level while contracts of lesser value be managed by MoD.

The policy should have well-evolved, clearly spelt out aims and objectives. It should be pragmatic with long term applicability but with sufficient inbuilt flexibility to cater for changing situations. The policy should contain directions for apportioning weightage to direct and indirect offsets along with norms for fixing offset threshold and offset percentages. As poorly chosen programmes invariably prove highly wasteful, detailed guidelines for their proper selection must be laid down. It should also lay down guidelines for approving, validating, discharging and measuring offset contracts. A broad structure for monitoring and evaluating offset programmes should also be specified. Instructions regarding offset banking and trade in offset credits should be unambiguous.

National Offset Authority

The policy should also cater for the creation of a National Offset Authority (NOA) as an overarching body at the national level. It should be chaired by a Minister of State under the aegis of the Ministry of Commerce. It should be a multi-disciplinary and well represented body with members drawn from different ministries dealing with large scale imports. Director General Foreign Trade, Director General Technical Development and representatives of Indian industry (both public and private sectors) should also be closely associated. Experts from various fields can be co-opted on requirement basis.

The primary task of NOA should be to oversee smooth implementation of the national offset policy, issue clarifications in case of doubt and grant ‘in principle approval’ to offset packages for all import deals over 1000 crore rupees. It should meet at regular periodicity to prioritise areas and fields in which offsets should be sought and apply multipliers accordingly. While discussing specific import proposals, it could debate and fix offset threshold and offset percentage on case to case basis. NOA should also develop a reliable system of receiving regular feedback for evaluation and course-corrections. A credible data bank will prove immensely helpful to NOA in carrying out appraisal of strengths and weaknesses of the regime and recommend changes in the policy.

Defence Offset Facilitation Agency

As stated earlier, the defence offset policy should flow from the national offset policy and be in consonance with the directions issued by NOA from time to time. It should be duly approved by the Defence Acquisition Council. Defence Offset Facilitation Agency (DOFA) should continue to function under the Department of Defence Production at MoD. However, its charter of duties needs to be enlarged. It should become the nodal implementing agency and provide a single window interface for all defence offsets related issues. For this, it needs to be strengthened and be delegated additional powers.

DOFA must be headed by an Additional Secretary level officer with no other encumbrances. It should be adequately staffed to undertake allotted functions. Expert advice from non-governmental sources should be made available to it when discussing specific programmes.

In addition to the existing duties, DOFA should identify areas for defence offsets; evolve and issue guidelines for fixing offset thresholds and offset percentages; and prioritise various offset programmes by assigning differential weightage to them through multiplier values. In cases where technology is sought, DOFA should consider the level of technology to identify the most suitable recipient – whether a public or private sector entity.

DOFA should also develop necessary skills to negotiate offset contracts and sign them. An effective mechanism for appraisal, oversight and monitoring should be evolved. Need for an exhaustive data bank cannot be over-emphasised.

Conclusion

More than 130 countries are demanding offsets in one form or the other. They all have well-considered offset policies and empowered central bodies to oversee offsets in their entirety. India stands out as an odd exception. It neither has a national policy nor a central body to handle offsets. Management of offsets worth billions of dollars has been left to MoD which is ill-equipped for the task.

As regards India’s defence offset policy, it has been framed in a highly amateurish and slapdash manner. Normally, every policy document starts with duly specified objectives at the outset. The whole policy, thereafter, lays down detailed methodology to achieve them with a broad roadmap for guidance and periodic stock-taking. Unfortunately, India’s defence offset policy is bereft of any objectives and is truly a directionless document, wherein foreign vendors have complete freedom to choose programmes and partners. Indian government has abdicated all decision making powers in their favour – they choose programmes that are easy to implement and cost the least. Worse, India does not accept transfer of technology against offsets, thereby wasting a potent tool for illusory and transitory countertrade gains.