National leaderships are consistently confronted with complex policy choices on matters related to defence procurement. Self-reliance in defence, which I attempt to explain as ?attainment of a reasonable degree of strategic autonomy and capability to design, develop and produce military goods and services for comprehensive national security purposes?, deserves attention of Indian policy makers in current times.
Indian efforts for the past several decades have not resulted in a desirable level of self-reliance in defence, with a result that more than 70% of India’s weapons inventory is still filled with imported equipment. To make matters worse, India?s growing equipment needs, slated to be in the range of $50 billion over the next five years, have necessitated further imports, thanks primarily to the inability of the Indian defence industry to meet such huge demands.
An attempt has been made to address the critical aspects of self-reliance in defence through an improvised defence procurement policy known as DPP-2006. A clause stipulating a minimum of 30% direct offset has been made mandatory for each purchase worth over $65 million. Offset obligations, it is argued, would result in bringing back portions of money spent on military acquisition, which will, in turn, help Indian industry improve its design and production capabilities, and contribute substantially toward self-reliance in defence.
The defence offset has been hailed as a viable and prudent policy in India. At a conservative estimate, offsets could bring in defence production work worth about $15-17 billion in the next five years. This is reason enough to make defence industries ecstatic, and some analysts and industry watchers have even fallen into this lucrative trap.
Some observations on offsets are in order at this point. First, a generally agreed upon definition of offsets does not exist. In a report to the US Congress, it has been defined as ?industrial compensation practices required as a condition of purchase in either government-to-government or commercial sales of defence articles and/or defence services?.
Such generally worded explanations have led to differing policy choices exercised by beneficiary countries across the globe (more than 120 countries follow offsets in differing forms, from direct offsets of about 20% to indirect offsets exceeding 100%).
DPP-2006 has faced a similar problem in defining offset obligations, emphasising only the monetary value of obligations, leaving the implementation portion for negotiation, presumably on a case-to-case basis. Unless defined in clearer terms, negotiations often tend to be prolonged and do not necessarily entail desirable results.
Second, common defence industrial compensation practices include joint/licensed/sub-contractor production, foreign direct investment, technology transfer and counter-trade. Each of these?lumped together under the broader concept of offsets?as argued by noted defence economist Keith Hartley, carries its own implications for cost, programme risks, control over specifications and wider industrial and economic benefits. Such issues must be weighed carefully by India.
Third, as offsets mostly depend on consensual agreements between supplier and recipient, the results are seldom quantifiable. Dunne and Brauer admit, ??there has been little empirical research on how offsets work in practice?. Hence, one does not know how much qualitative, or even quantitative, benefit the recipient country derives through offsets in real terms.
Last but not least, offsets benefit two categories of recipients: a trusted strategic partner (preferably a very close ally) on the one extreme; and recipient countries in dire need of economic development on the other. Aspiring regional or global powers fall in neither category. Offsets, thus, become a tricky choice for policymakers, especially for a country like ours.
Offset policy options for India should include the following priorities: maximisation of front-line technology inflow (both design and product development, and certainly not mere licensed production arrangements); benefits for both state-controlled and private Indian industries for eventual upgrade to system integrator stage; making state-owned defence enterprises realise the inevitability of achieving global competitive levels; and justifying both qualitative and quantitative benefits of offsets for the Indian economy in general and production capability in particular.
?Tens of queries confront us before we think of parting with our primary scientific knowledge even to our trusted friends. Economics do matter pal, but most importantly it depends on how we look at you (strategically),? remarked a veteran defence analyst. While the offset card must be played very carefully to one?s advantage (it requires tough negotiating skills and depends on the level of long-term mutual strategic interest), routes to become great powers still depend on the basics (read: self-reliance).
?The author is a senior fellow in security studies at the Observer Research Foundation, New Delhi. These are his personal views.
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