Indias Defence Offset Policy:

Opportunities and Challenges

Synopsis
Indian Institute of Foreign Trade (IIFT)
Executive Post Graduate Diploma in International Business (2013-15)

Dissertation Project Report

2014

Avinash Katoch
Roll no. 17
IIFT, Executive Post Graduate Diploma in International Business (2013-15)

Avinash Katoch, IIFT, EPGDIB 2013-15 Indias Defence Offset Policy: Opportunities and Challenges

Contents
Executive Summary ............................................................................................... 3
Brief overview ............................................................................................ 3
Introduction
................................................................................................ 5
Objective
................................................................................................ 5
Scope of the study ...................................................................................... 5
Research Approach and Methodology ........................................................ 5
Expected Outcome ........................................................................................ 5
Chapters
................................................................................................... 5
Chapters Scheme .......................................................................................... 5
Notes and References ............................................................................................. 6
References ................................................................................................... 6

Executive Summary

Avinash Katoch, IIFT, EPGDIB 2013-15 Indias Defence Offset Policy: Opportunities and Challenges

Brief overview
The Indian aerospace and defence market presents an attractive and significant
opportunity for Indian and foreign companies across the supply chain. India has the
third-largest armed forces in the world, and its defence budget is about 1.90% of its
GDP. India is one of the largest importers of conventional defence equipment and
spends about 40% of its total defence budget on capital acquisitions. About 70% of
its defence requirements are met through imports.
Between 2006 and 2010, India surpassed China as the worlds largest importer of
weapons systems, reflecting the nations intent to modernise its armed forces and
replace obsolete equipment. Indias defence spending has grown tremendously to 38
billion USD in 2012 as against 30.52 billion USD in 2009 at a compounded annual
growth rate (CAGR) of 7.58%. The defence expenditure of the government accounts
for about 13% of its total expenditure. The government opened this sector to private
and foreign investment in 2001. Further, it has sought to build a domestic industrial
base and has set itself a challenging target of achieving 70% indigenisation. To
broad base the acquisition, the Government has made transparent global bidding
guidelines in the Defence Procurement Procedure (DPP), which is revised annually.
The DPP also lays out the Defence Offset Policy.
The Indian offset policy imposes an offset obligation on capital acquisitions valued
over INR 300 crore categorized under Buy Global and Buy and Make with Transfer
of Technology i.e Purchase from foreign vendor followed by Licensed Production.
The key objective of the Defence Offset Policy is to leverage capital acquisitions to
develop Indian defence industry by (i) fostering development of internationally
competitive enterprises, (ii) augmenting capacity for Research, Design and
Development related to defence products and services and (iii) encouraging
development of synergistic sectors like civil aerospace, and internal security.
Offsets obligations can be discharged by any combination of the following methods:
a. Direct purchase of, or, executing export orders for eligible products
manufactured by, or services provided by Indian enterprises
b. FDI in joint ventures with Indian enterprises for manufacture or maintenance of
eligible products and provision of eligible services
c. Investment in kind in terms of ToT to Indian enterprises for manufacture or
maintenance of eligible products and provision of eligible services (through joint
ventures or through the non-equity route). Offset credit for ToT shall be 10% of
value of buy back.
d. Investment in kind in Indian enterprises in terms of provision of equipment
through the non-equity route for the manufacture and/or maintenance of eligible
products and provision of eligible services. Vendor to buy back minimum 40% of
eligible products and services.
e. Provision of equipment and/ or ToT to government institutions and
establishments engaged in the manufacture and/or maintenance of eligible

Avinash Katoch, IIFT, EPGDIB 2013-15 Indias Defence Offset Policy: Opportunities and Challenges

products and provision of eligible services, including the Defence Research and
Development Organisation (DRDO)
f. Technology acquisition by DRDO in areas of high technology
However apprehensions remain in the industry on effecting offsets in a manner that
has the potential to create a win-win situation for the country and industry as well as
foreign vendor.
Opportunities
The government has permitted 49% FDI in Defence sector and has launched a
massive `MakeinIndia` campaign to encourage manufacturing in domestic industry
and thus create jobs. These policy initiatives have the potential to transform the
Indian Defence industry through carefully orchestrated offsets.
Challenges
Since offsets come at a price, implementation of the policy also implies that the
Armed forces do not get what they would have got in the absence of offset
provisions. Therefore, there is a need to ensure that the policy is most carefully
calibrated to focus development in identified areas as opposed to the aim of creating
general defence capability, lest it should become a sterile investment of scarce
resources.

Avinash Katoch, IIFT, EPGDIB 2013-15 Indias Defence Offset Policy: Opportunities and Challenges

Introduction
Objective
The research project will study and analyse Indias Defence Offset Policy as
promulgated vide Defence Procurement Procedure 2013 and critically examine its
salient features and the potential impact on development of a military-industrial base
in India.
Primary objective
To understand Indias Defence Offset Policy and the opportunities and challenges
that it presents for the development of Indian Defence Industry.
Secondary objectives
To understand the industry overview of the Indian Defence sector.
To understand Defence Procurement Policy particular wit regards to offsets and
their evolution over the years.
To understand offsets and the relevant provisions that apply to their
implementation in the Defence Sector.
To understand the Opportunities that the offsets provide
To understand the challenges in implementation of current Offset Policy and the
way ahead

Scope of the study

The study is limited to a Offsets in Defence Sector in India .

Data collection methods

Secondary

Data This will be collected to add value to the primary data.

Reference to various websites on the internet, databases, company websites, news
articles, websites, reference books, magazines, industry reports from consultants,
journals etc. will be made.

Research Approach and Methodology

An exploratory research will be conducted to get a better understanding of the
problem. The experts from the Industry, India representatives of foreign vendors and
Govt officials will be contacted to get a grip on the issues that pose challenges to
successful implementation of Offset Policy.
.

Chapters
Chapters Scheme

Chapter 1 Industry overview Indian Defence Sector

Chapter 2 Defence Procurement Policy in India
Chapter 3 Defence Offsets Policy Framework
Chapter 4 Opportunities and Challenges
Chapter 5 Recommendations
Chapter 6 Conclusion
Chapter 7 Notes and References
Chapter 8 Questionnaire (if any)

Avinash Katoch, IIFT, EPGDIB 2013-15 Indias Defence Offset Policy: Opportunities and Challenges

Notes and References

References
Databases
CII Reports on Defence
IDSA Journals
Indian Military Review
CENJOINS Articles
DPP 2013
DDP Discussion Papers
FICCI Seminar Proceedings
Big 4 Companies Resources
McKinsey : A Bright Future for Indias Defence Industry
(http://www.mckinsey.com/global_locations/asia/india/en/our_people/~/media/mckins
ey%20offices/india/pdfs/a_bright_future_for_indias_defense_industry.ashx)
PricewaterhouseCoopers : Decoding the Indian Aerospace and Defence sector:
Domestic and foreign Investments and offset obligations
(http://www.pwc.in/en_IN/in/assets/pdfs/industries/aerospace-and-defenceservices.pdf)
KPMG, Concept Note - Defence Offset Guidelines 2012
(http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/KP
MG-Flash-News-on-Revised-Offset-Policy-August-2012.pdf)
EY (http://www.cii.in/webcms/Upload/Enhancing%20role%20of%20SMEs%20in
%20Indian%20defence%20industry1.pdf)
EY
(http://www.ey.com/Publication/vwLUAssets/Capitalizing_on_the_India_opportunity_
11Feb10/$FILE/Capitalizing_on_the_India_opportunity_11Feb10.pdf)
Deloitte (http://www.cii.in/webcms/Upload/Enhancing%20role%20of%20SMEs
%20in%20Indian%20defence%20industry1.pdf)
Other Resources
Govt of India (http://www.makeinindia.gov.in/sector/defence-manufacturing /)
Govt of India Min of Defence : Defence Procurement Policy 2013