In a bid to boost local defence manufacturing sector, Ministry planning overhaul of offsets policy

NEW DELHI: Dissatisfied with the manner in which the defence offsets policy has failed to significantly increase the capability of the Indian defence manufacturing sector, the government is planning a major overhaul with a new proposed three way formula that includes a compulsory transfer of critical technology by foreign vendors who want to bag Indian military equipment orders.

The defence ministry has circulated a new draft Offsets policy that also states its intention to impose directed offsets — making it compulsory for the vendor to invest in manufacturing capabilities mandated by the government and using offsets in the skill development sector as well.

While in the past, defence offsets were a compulsory, minimum investment of 30% of the contract value bagged by foreign vendors in India, the draft policy seeks to give the government much more control on how this money is utilised to benefit the manufacturing sector. The draft policy that has been reviewed by ET states that in each case of capital acquisition, the manner in which offsets will be discharged will be mandated beforehand by a committee headed by the Vice Chief of the Service which will include scientists and bureaucrats. In cases where an Indian joint venture firm is bidding for a contract, the offset obligations would not be applicable.

In other cases, either of the three options will be applicable. The first would be transfer of technology – in which the foreign vendor will be asked to part with a particular type of technology to DRDO. The research agency in turn will utilise this technology and pass it on to production agencies that will include private companies. The other option would be directed offsets in which the winning firm will need to set up defence manufacturing facilities in India as part of the Make in India drive.

The third is to use the offsets for creating infrastructure for skill development — like R&D center, innovation centers etc — in defence and aerospace. While the draft policy has been circulated for comments, the final product could be different as defence ministry has also set up an independent committee under former Home Secretary Dhirendra Singh to suggest changes in the defence procurement policy.