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Defence Offset: Gaining Momentum

The recent initiative by Department of Defence Production, launch of an online portal the 'dashboard' to help in effective tracking of various initiatives and schemes. The site provides statistics for activities including defence offsets, defence production, exports etc. The data on defence offsets reveals a momentum in offsets since its inception.

Recently, the Ministry of Defence (MoD) has launched an online portal the 'dashboard https://ddpdashboard. gov.in/' to help in effective tracking of various initiatives and schemes of the Department of Defence Production (DDP). The 'dashboard' has come out with statistics for activities including defence offsets, defence production, exports, and investment in India's two defence industrial corridors. Among these the data with regards to defence offsets is eye catching as there seems to be finally seen a momentum in offsets since its inception.

Following are the key functionalities which are available through the portal:

  • The end-to-end Web Portal is digitized and automated for the Offset Contract Management process.
  • The Original Equipment Manufacturers (OEM) can digitally track and maintain the contracts along with details of Indian Offset Partner (IOP) and sub foreign vendor.
  • The process of submission and approval of Transaction Claims, Discharge Schedule and Progress Reports is done with complete transparency between Industry, Defence Offset Management Wing and Auditor.
  • Create Contracts and onboard OEMs.
  • Manage IOP, sub partner and submit discharge schedule.
  • Submit transaction claim and periodic (quarterly/six monthly) progress reports.
  • Track amendments in contract and discharge schedules.
  • Audit of transaction claims and periodic reports to Approve, Reject or seek clarifications.

The recently tabled offset data depicts a progress in discharging of offsets in last one year especially. As of 31st July 2019, a total number of 52 offset contracts has been entered with 19 foreign defence contractors with estimated worth of these defence offsets amounts to be around USD 11.80 Billion (~Rs.76700 Crores) approximately. The year wise spread of estimated offset contracts amount is in Figure below. The defence companies from Israel - Elbit Systems, Rafael Advanced Defence Systems, Israel Aerospace Industries (IAI) and Elta Systems - are engaged in nearly half of all India's offset deals (around 22), while companies from the United States - mainly Boeing are undertaking nine. These offset contracts are under different stages of implementations by the foreign OEMs.

Discharge of Offsets as on July 2019

The MoD has given some broad and generic details such as the product procured and the total amount of offsets to be discharged. As per the data released by the Defence Ministry, the total amount of defence offsets claims worth USD 2.65 Billion (~Rs. 17225 Crores), around 24 percent of the total offset value worth USD 11.80 Billion, from the period between 2005-2019, has been submitted, disposed or discharged by the OEMs. The claims disposed have been pegged at USD 1.58 Billion (~ Rs.10270 Crores). The above pattern indicates that the implementation of the policy i.e., the execution and monitoring of the offset policy has begun to gather pace. In addition, the statistics shows that more than USD 1 Billion (Rs 6500 Crores) in defence offsets claims are currently “incomplete” or are “under review” by the MoD and have been on increase year on year.

As per the data released by the Defence Ministry, the total amount of offsets discharged stand to USD 5.36 Billion (Rs 34840 Crores) from the period between 2005-2019 (July). The policy has and will further facilitate the Indian domestic industry to be a vital part of the supply chain of the major global defence industries reaping in more benefits. Also, the offset provisions will be generating substantial business to Indian companies in future as well, thus, strengthening the Defence Industrial Base (DIB).

The MoD has not come out with details such as the time window for execution of each offset contract and expected spread. The lack of information on these counts, thus, thwarts an exact periodic comparative analysis. However when we examine the data on individual basis with regards to defence offset in three segments  discharge, incomplete claims/clarifications sought and under examination - the following pattern emerges as depicted in the Figure.

Considering the period between 2005-2017, the disposed offset contracts [USD 88 Million (~Rs 572 Crores) approx.] has been meager while the incomplete claims/clarifications sought were mounting [USD 682 Million (~Rs 4433 Crores) approx.]. However, given the fact that being new policy it takes time to understand, absorb and implement. And, also, it suffered from the absence of any designated agency in the Ministry of Defence (MoD) for guiding, overseeing, executing and monitoring the implementation of the policy.

The statistics until 31 July 2019 show that the implementation with regards to the discharge of offsets has expedited considerably, indicating a major increase in the past two years. A total of USD 1195 Million (~Rs 7767.50 Crores) and USD 1582 Million (~Rs 10283 Crores) worth defence offset contracts were admitted in 2018 and 2019 respectively, which is definitely a positive indicator of the fact that the offset policy has began to gather pace.

Currently, the responsibility has been distributed between the Acquisition Wing under the Department of Defence and the DOMW under Department of Defence Production in respect of pre and post contractual activities respectively. Though DOMW has been chartered to monitor all post contractual activities it still needs to be equipped with a Legal and an Audit cell. There are likely to be offsets worth over USD 1600 Million (Rs 10400 Crores) every year, spread over a number of years and contracts which need to be monitored and audited  certainly a specialized task.

Defence Offset: An Important Mechanism for Exports, FDI and Defence Production

Offset is an important mechanism available to the domestic industry to enhance export and indigenous production capability and attracting FDI.

Defence Exports - Recently, there has been growth in defence exports partially due to discharge of offset obligations now in a fast paced manner. The exports in 2018-19 reached USD 1653 Million (~Rs 10745 Crores) in 2018-19 from USD 720 Million (~Rs 4682 Crores) in 2017-18, witnessing an increase of a about 129 percent. Further, the value of Indian defence export approvals stands to USD 2307.60 Crores (~Rs 15000 Crores), thus, expecting to move up exponentially.

Defence Production - Again, offsets have long been identified as the tools to drive defence manufacturing in India. With the offsets picking up momentum there has been a rise in defence production as well. In 2018-19 the value of defence production in India was USD 12.38 Billion (~Rs 80502 Crores), witnessing a 2 percent increase over 2017-18. While the DPSUs undertook 79 percent of total defence production work in 2018-19; the private sector secured the remaining (around 21 percent).The total defence production targeted for the fiscal 2019-20 is USD 13.84 Billion (~Rs 90000 Crores) indicating a substantial growth.

Foreign Direct Investment (FDI) - In 2014-15, 2015-16, and 2017-18, the sector attracted FDI worth USD 0.08 Million, USD 0.10 Million and USD 0.01 Million, respectively. In 2016-17, the industry had failed to attract overseas investments. Offsets are a means to attract the important FDI needed for the country to progress. The offset can be discharged by means of FDI in joint ventures and investment towards equipment and transfer of technology by the foreign vendors. India's defence industry received FDI of USD 2.18 Million (Rs 13 Crores) during 2018-19. Although this figure seems meager but it has nonetheless seen a rise as compared to previous years.

The defence offset policy which was in nascent stage seems to have taken off with growth level seen in discharging of offset obligations. The need of the hour now lies in carefully directing the policy from here. This can be done by way of choosing the goals circumspectly coupled with a clear roadmap to convert the purpose of the policy into actuality eventually. It should be kept in mind that offsets should be used as a mechanism to establish DIB in the country to promote self-reliance and boosting our defence as well as economic capability.

 

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