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Inaugurating Indo-US Economic Summit on
September 13, 2006, the then Defence Minister Mr. Parnab Mukherjee
indicated that a ‘roadmap for indirect offsets in defence industry was
also under consideration’. The US manufacturers or for that matter any
other foreign vendors find offsets as an unpleasant obligation which
have almost become a mandatory practice, especially, in defence
industry. And direct offsets which usually involve exporting firm’s
obligation in the form of co-production, sub-contracting, technology
transfer, licensed production or financing are generally frowned upon
by the exporting country and they would certainly prefer indirect
offsets, that is, in areas other than defence sector.
India which expects to receive offsets of
up to $ 10 billion in the eleventh Five Year Defence Plan (2007-12),
has the opportunity to use the offset route to achieve twin objectives
of transfer of high technology and adequate FDI for developing
indigenous strategic defence industry. India has good industrial base
and offsets does not mean that every thing has to be made here. It
would amount to trade off in which Indian industry undertook some work
while the associated industry abroad used Indian facilities to market
the product globally. India has the advantage of having a large pool
of technical manpower and thus cost advantages over developed
countries could provide a competitive edge. It could be a win-win
situation for all involved.
However, the US business interests are
looking at the provisions of New Framework of Defence Relations
agreement signed between India and the US in June 2005 and special
strategic relationship to lessen their pain of providing 30 percent
direct offsets of the contracted value of the main deal. The deal
emphasizes, “in the context of our strategic relationship,(we will)
expand two-way defense trade between our countries. The United States
and India will work to conclude defense transactions, not solely as
ends in themselves, but as a means to strengthen our countries'
security, reinforce our strategic partnership, achieve greater
interaction between our armed forces, and build greater understanding
between our defense establishments”. Though many US interlocutors
talk of competing for Indian arms market yet there is an element of
expectation that basis for selection may not be quality or price of
the systems or even the associated offset package. Rather India’s
purchase of US weapon systems is seen as a means to reinforce
the strategic partnership. During our Prime Minister’s visit
to the US in July 2005, Pentagon briefed the Press that it expected $
7 billion worth of conventional weapon systems orders from India.
Therefore, Defence Minister’s willingness
to consider indirect offsets was a slight shift from the official
offset policy which has been stated in the new Defence Procurement
Procedure-2006 promulgated in August this year. Asking for only 30
percent in direct offsets is just about the minimum international
norm.
For instance, European countries which
are both offset recipients and offset givers typically demand 100
percent as offsets of the defence contracts and generally these deals
are with the US and also in between themselves. Thus if India is
purchasing Scorpene submarines from France or AJT Hawks from the UK or
some other armaments from Sweden, it would be quite in order to demand
a similar percentage of offsets in both direct and indirect form from
these countries. A 12 year study (1993 to 2004) carried out on offset
activity by European nations reveals that the average offset
percentages for Europe exceeded 90 percent from 1999-2003, however, it
was 101 percent from 1993-2003 and during the entire period of
1993-2004 it was 99.1 percent. In two cases the offset percentage was
at least 200 percent. In about two dozen agreements the offset
percentage specified was more than 100 percent.
Besides India there are only South Korea,
New Zealand and South Africa which have an official policy of
demanding a minimum of 30 percent but countries like South Africa and
South Korea have actually demanded much more percentages in offsets
and have received the same. For instance, between the years 1999 to
2004, the average of offset requirement of South Korea from the US was
68.6 percent which was double of previous five year period. Indonesia,
Malaysia and Philippines demand 100 percent offsets. It can be easily
deduced that the countries with developed, technically advanced
economies have demanded higher levels of offsets than the other
countries. India’s economy which is growing and gaining in
technological strength can definitely absorb increased percentages of
offsets but both in direct and indirect forms. India’s infrastructure
and trained and skilled workforce in both defence and civil industrial
arena with a variety of defence and commercial firms would be better
able to distribute offset transaction to get best and synergistic
value from offsets.
Even the relationship between the direct
and indirect offsets based on the international offset activity
reveals that 40 percent of the value of offsets is in direct offset
mode and 60 percent in indirect mode. And applying the international
norm of obtaining 100 percent of offsets our demand of 30 percent
direct offsets is the absolute minimum. Therefore, it makes sense to
stick to our stated policy of demanding 30 percent direct offsets and
in addition there is a case for demanding indirect offsets over and
above that limit on case by case basis.
But quality of offsets before quantity,
through life concept for the imported equipment, good technological
and commercial intelligence, focus on critical technologies, having a
team of skilled negotiators and continuous audit of implementation of
offset obligations would be the key determinants of a successful
offset policy.
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