New offset policy is a shot-in-the-arm for domestic defence industry, say analysts

The new offset policy is expected to boost domestic defence industry, reduce import dependence and make India a defence manufacturing hub in the long run, say industry experts.

In a major change of stance, the Ministry of Defence (MoD) on Wednesday granted greater flexibility to change Indian Offset Partners (IOPs). It also restored the option of services such as research and development (R&D), maintenance, repair and overhaul (MRO) and technology transfers among others to discharge offset obligations of the players.

“The provision allowing for the vendor to finalise his offset partners and offset product details one year prior to the intended offset discharge and change the partner or component are indeed welcome steps. This will provide more flexibility and time to the vendors in choosing their IOPs,” Neeraj Gupta, Managing Director, MKU Pvt Ltd, told BusinessLine .

“They will not be under pressure to finalise at the time of bidding for the contract. This will provide a boost to the Indian industry and give more opportunity to the new entrants to take advantage of opportunities provided by offset contracts,” he added.

As per the new guidelines, at pre-contract stage an option has been given to the vendors to submit detailed offset proposals at a later stage. The Ministry has also allowed vendors to finalise the offset partners and products one year before the offset goals are met. While at the post contract stage, enabling provisions have been made in the offset guidelines for change in IOP/component and re-phasing of offset schedule, thereby giving “complete flexibility to the vendor”.

According to Amber Dubey, partner and head of aerospace and defence at KPMG, this will now augur well for the upcoming DPP, which is expected to be released soon. “The new DPP will have greater role of strategic partners from the private sector, which will perhaps be its biggest highlight. By ending the monopoly of DRDO and defence PSUs, we may have a far more vibrant defence manufacturing industry wherein every contract will be eagerly fought and there would be no entitlements,” Dubey added.

The offset provisions were introduced in 2005 in the DPP with the objective of developing a robust defence industrial base. Under this it is stipulated that for defence deals worth more than ₹300 crore, the OEMs will have to invest a mandatory 30 per cent of the contract value from within the country. However, in the last one decade the policy has failed to meet the desired results.

“It remains to be seen whether the intended results will be achieved under the offset provisions after this. But these are certainly game-changing amendments and contribute to ease of doing business for the OEMs. We expect some of the OEMs upping their investment levels,” said Dhiraj Mathur, partner (aerospace and defence), PwC India.

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