New offset rules rile Indian defence firms

Ajai Shukla

Business Standard, 10th Jan 11

Hyderabad

The ministry of defence has ignored private Indian defence companies by announcing that global arms vendors can channel offsets into the fields of civil aerospace and internal security, instead of exclusively into the defence industry. Meanwhile, several other potentially far-reaching changes to the offset policy have been referred to an internal ministry committee.

The ministry’s apex defence acquisition council decided at a meeting on December 15 that the committee, headed by the director-general of acquisitions, would submit recommendations on: Whether transfer of technology should be eligible for offsets; whether offset multipliers could be introduced allowing vendors to claim enhanced credits for investment in earmarked areas; arrangements the ministry needs to institutionalise to evaluate, monitor and audit anticipated offsets; and whether the current time validity of banked offsets needs to be changed.

Confirming this to Business Standard, Minister of State for Defence M M Pallam Raju said, “A high-level committee has been formed and it is taking inputs from industry. We will definitely tweak the offset policy wherever necessary to include best practices. It is learned that the committee has been asked to submit its findings in three months.

The defence ministry has written to industry bodies Ficci, CII and Assocham, as well as major private companies in defence, informing them that their views would be sought while revising the offset guidelines. Business Standard has reviewed a copy of this letter, dated December 23.

But there is deep disquiet within private industry over the ministry’s rejection of their “repeated suggestions” not to allow defence offsets in civil aviation. “The ministry of defence only asks us for our views to provide a façade of consultative decision-making. Evidently, it had decided beforehand to allow offsets in civil aviation. Now, it is going through the motions of consulting with us again,” said a senior Ficci official.

Defence Minister A K Antony’s signed introduction to the Defence Procurement Policy (DPP)-2011 states that the new rules were “based on the experience of procurement agencies and feedback from the defence industry, both Indian and foreign”.

But the Indian defence industry’s feedback was apparently ignored. “Global vendors told the defence ministry that the Indian defence industry cannot absorb the huge amount of offsets that would be coming into India; we were confident that we can. But the ministry chose to listen to foreign industry,” said the CEO of a major private company that was counting on investments through offsets.

“This illustrates our low levels of self-confidence as a country today,” said Rahul Chaudhry, CEO of Tata Power’s strategic electronics division, which has aggressively pushed into the defence business.

Foreign arms vendors, who have openly lobbied for offsets in non-defence fields (for indirect offsets) on the grounds that the Indian defence industry does not have the capability to absorb billions of dollars worth of offsets, have welcomed the liberalised policy.

Vivek Lall, Boeing’s vice-president in charge of defence, space & security business in India, said: “The government’s release of the (DPP-2011) is a very progressive step. We welcome the new revisions on broadening the aperture of offset credit to include civil aviation and internal security. The synergy of these areas will directly benefit the indigenisation of the aerospace and defence industry.”

The new policy, which was posted on the Internet on Thursday night, allows foreign vendors to discharge offset obligations in the fields of “civil aerospace, internal security and training”. This is a significant climb down for the defence ministry, which has insisted on keeping the defence offset policy separate from the national offset policy with the specific aim of channelling offsets into India’s nascent defence industry.

“Take a look at the easy opportunities the civil aviation sector offers for offsets. Now, very few foreign vendors are going to discharge their offset obligations in the defence industry,” said Rajinder Bhatia, Bharat Forge’s executive vice-president for defence & aerospace.

DPP-2011, which will come into effect from January 1, 2011, is the seventh modification of procurement rules this decade. Private industry was allowed into defence production in 2001.