An advanced defence aerospace sector offering both high-technology jobs and an independent production capability is the dream of many governments. Nowhere is this more true than India. New Delhi's recent revamp of its defence offset policy seeks to address some of the shortfalls of its previous efforts to ensure that 30% of its defence import expenditure is reinvested at home.
Technology transfer is given greater emphasis through the use of multipliers, and foreign vendors are granted more time to dispense offset obligations. The new rules also allow a higher degree of flexibility to make amendments to an offset agreement after it has been signed.
On paper, it all sounds great. Certainly, it seems that vendors need only to sell a modest part of their soul in return for vast contracts. However, behind the scenes another picture emerges.
In private, contractors question the ability of India's still nascent defence sector to absorb advanced technologies, materials and processes. The leap from where Indian industry is now to where parliament wants it to be is, in some cases, simply too great.
Moreover, the monetary value of intellectual property may be open to debate. One industry source indicates that companies are content to hand over advanced blueprints in return for high-value offsets because the blueprints end up in desk drawers, unused, and there is limited follow-up to check whether offset agreements are implemented properly.
Figures released by the Indian defence ministry certainly highlight the importance of getting offset arrangements right. Across the financial years 2009-2010 and 2010-2011, the nation's defence equipment spending favoured indigenous sources over foreign manufacturers by a factor of 2:1, but in 2011-2012 the gap narrowed to 15%, and in the first quarter of the current financial year, external suppliers slightly got the better of their domestic counterparts. In absolute terms, each group was favoured with more than $1 billion of spending in that single quarter.
For India to make offsets work, it needs to make a realistic assessment of the strengths and weaknesses of its defence sector, and reward the types of offset agreements that will help it rise up the global value chain.
More crucially, it must increase the level of transparency and accountability involved in the execution of offset obligations.
(This first appeared as the main leader in Flight International 28 August)
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