Off with offset training wheels

Last month's Public Accounts Committee (PAC) report released in Parliament noted that as of December 2025, nearly 45% (about $4.5 bn of $9.9 bn) of defence offset obligations remain unfulfilled. It flagged poor execution and weak monitoring, and called for a review of the offset policy itself.

Earlier, CAG reports had flagged the same issues. PAC also faulted MoD for failing to secure significant tech transfers through offsets. While many concerns are justified, this one isn't. More importantly, with the draft Defence Acquisition Procedure (DAP) 2026 replacing offsets with minimum indigenous content (IC) requirements, the issue is no longer whether offsets worked, but whether India's private sector defence industry, which exported with the help of offsets, can export without it.

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India introduced defence offsets into policy in 2005. Offset provisions require foreign vendors of imported defence platforms to either reverse purchase, invest in JVs or transfer technology into India for 30% of the spend value. In practice, they chose the simplest route: buying components and sub-assemblies from Indian companies for integration into their global supply chains. PAC observed that from 2007 till March 2018, 90% of value of offsets was contracted to be discharged through direct purchases of products and services. Expecting offsets to deliver any meaningful tech transfers was always unlikely.

By 2016, as domestic procurement was prioritised over global imports, offsets became less relevant and were progressively replaced with higher IC requirements. Offset thresholds were raised nearly 7x in 2016, and in 2020, G2G agreements and single-vendor purchases were exempted. No offset contract has been signed in the past 5 yrs. Draft DAP 2026 contains no offset provisions, and requires IC of up to 30% on global buys.

Effectively, all imports will have a 'Make in India' component. For the Rafale-Marine fighter jets G2G in 2025, Dassault is setting up a Rafale fuselage manufacturing plant in partnership with Tata, and a maintenance, repair and overhaul (MRO) facility on its own.

Since India signed its first offset contract with Israel's Elta Systems in 2007, it has signed 56 such contracts, giving Indian industry $13.2 bn of defence business. 20 offset contracts are completed and closed. Another 10 are completed, and under final audit. Of the remaining 26, the ongoing offset obligation of $9.9 bn is to be met by 2033.

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Many large global defence companies have established JVs in India to meet offset obligations, rather than bid for domestic contracts. Lockheed Martin set up its JV with Tata in 2010 to fulfil its 2009 offset obligation on the C-130J military transport aircraft. Similarly, Boeing set up its JV with Tata in 2016 on the 2015 sale of AH-64E Apache helicopters. Dassault and Thales formed JVs with Reliance in 2017 on the 2016 sale of Rafale fighter jets.

As a result, India has more than 350 Indian offset partner (IOP) exporters, of which almost 40% are MSMEs. More than 95% of IOPs are private companies. JVs of Lockheed Martin, Boeing, Dassault and Thales are all IOPs.

India's defence exports have grown 56x from 2013-14 to ₹38,424 cr in 2025-26. GoI aims to reach ₹50,000 cr by 2029. Paradoxically, while most of India's defence production comes from DPSUs, bulk of its exports are from private companies. Some 145 export defence products to more than 80 countries. From 2017-18 to 2024-25, the private sector share of defence exports ranged from 57% to 91%.

Surprisingly, there is no official estimates of how much of this private sector share is attributable to offsets. GoI-sourced data suggests private defence exports cumulatively exceeded $12 bn since 2010-11. Against this, IOPs claimed $9.4 bn in discharged offsets through December 2025.

But 2025-26 marked an important reversal. For the first time since 2017-18, private sector share of exports fell below 50%, to 45%. This decline was due to a 151% surge in DPSU exports. However, with pending offset obligations drawing down to less than $3.2 bn, and no new offset contracts expected, the pipeline that helped Indian private sector companies enter global defence supply chains is steadily running out.

MoD recognised this early. The 2021 C-295 military transport aircraft contract with Airbus permits export of aircraft manufactured in India to other countries, subject to government approval. Draft DAP 2026 explicitly aligns domestic procurement with export potential at the platform level. MoD should build a framework for defence exports through G2G agreements and sovereign guarantees, as it has so successfully used G2G for defence imports.

The offset era is ending. Offsets helped the private sector develop technology, quality and reliability needed to compete globally. The challenge now is to turn those capabilities into an export industry that can stand on its own.

The writer is former strategy director,BAE Systems India.