India’s offset advantage: high-technology transfers

by Ajai Shukla

Business Standard: 10th April 2007

(Part 3 of a three-part series on offsets)

India will be required to absorb approximately Rs 90,000 crores worth of offset projects that will flow from its projected military purchases of $100 billion (Rs 4,30,000 crores) over the next five years. Every foreign contract worth Rs 300 crore or more will require the vendor to plough back 30% of the contract value in offsets, or production in India that is directly related to that contract.

State-of-the-art is the new mantra in offset partnerships. For the first time last Tuesday, the Ministry of Defence (MoD) publicly announced its demand for cutting edge technology transfers under the Defence Offset Policy. The head of MoD’s Defence Offset Procurement Agency (DOFA), Dr Kiran Chadha, minced no words in telling executives from European defence giant, EADS, that New Delhi is displeased by the tendency to palm off outdated technology. Dr Chadha complained that “when foreign companies and vendors choose to share their technology with us, they do not --- and I repeat they do not --- share with us their core technologies. And therefore we are a little unhappy.”

This reluctance to transfer core technologies --- in highly restricted fields like missile guidance, electronic warfare and night vision image intensification --- is sought to be whittled away by permitting technology transfers as offsets in defence deals. The monetary value of the technology, being highly subjective, will be hammered out in a negotiating committee. But the MoD has signalled that it will no longer accept the earlier practice of handing over a blueprint in the garb of technology transfer. Instead of simple blueprint-based manufacture, vendors would have to part with technical documents relating to materials and design. 

Such is the need for high technology, Business Standard has learned, that the MoD has waived the offset requirement in at least one ongoing purchase, where the technology considered vital for Indian defence. The MoD has refused to confirm or deny this, or to identify the product. Offsets have also been waived for procurements under the MoD’s “fast track procedure”. 

With high technology the new buzzword, India’s information technology industry is being brought into offsets. Minister of State for Defence, Rao Inderjit Singh has directed the MoD to organise a half-day seminar in May with IT majors like TCS, Infosys and Wipro, to garner industry views on structuring IT-based offsets. The industry has welcomed the initiative. NASSCOM chief, Kiran Karnik told Business Standard, “Foreign vendors have traditionally concluded offset deals in the manufacturing or trading sectors, so they have viewed offsets as an inconvenience, a cost in finalizing a deal. With offsets in IT, vendors could see it as a gain for themselves”.

The drawback, for IT companies, lies in the conditionality laid down by the MoD for entering the defence field; getting the required industrial licence is often a lengthy and frustrating process. The NASSCOM chief also points out that, unlike in the manufacturing sector where companies are required to have a certain size, capability and turnover, IT companies should be permitted to participate in offsets regardless of size, the only proviso being their ability to absorb offsets. This has been accepted by the MoD, which has now announced that IT companies of all sizes could tie up offset partnerships. DOFA chief Dr Kiran Chadha promises, “This will be clarified to the IT industry by the MoS for Defence Production, Rao Inderjit Singh, during the industry seminar next month.”

Unlike conventional industry bodies like CII and FICCI, the IT industry body, NASSCOM, has not yet set up a defence cell. Individual companies are driving their respective initiatives into the sector of defence design and offsets.