Reinstatement of services in Defence offset policy to boost IT firms

IT service firms, particularly those in engineering services and software development, can expect an additional business of about $300 million as the government decides to reinstate Defence offsets in the services space. Of an annual spending of about $5 billion, the services component of the mandatory 30 per cent spend would be at $300 million.

The government agreed to allocate 20 per cent of the offset spend to go to services. The practice was suspended two years ago during the UPA regime after finding a firm abusing the facility. The offset policy mandates the foreign firms to assign at least 30 per cent of the jobs to local firms.

Quantification of the IT services component was hazy, leaving scope for uncertainty. The new directive made it tangible this time.

“There was an effort to make it tangible and bring in transparency and accountability. The government agreed to reinstate the facility for services business and pegged the component at 20 per cent,” Nasscom Chairman BVR Mohan Reddy told

As per the announcement made in consultation with the Defence Acquisition Council, the offset discharge in engineering design and testing as well as software development is subject to a cap of 20 per cent.

While welcoming the move, he said there was room for increasing the ceiling. “We have been invited for a meeting by the Union Government on December 21. We are going to pitch for a higher percentage of share for service firms, keeping in view the importance of software services,” he said.

Mohan Reddy, who is also the Executive Chairman of engineering services firm Cyient, said the association would ask for 30 per cent share.

“A framework to assess eligibility and scrutiny has been prepared to bring in accountability.

“Firms will have to have Capability, Maturity, Model Integration (CMMI) certification for contracts above certain threshold. They will be subjected to random audits,” he said.

This directive will help companies plan for meeting offset obligations and also encourage investments in building strategic capabilities and capacities being held up till now.

“This will help in the long run create a roadmap for a strong ecosystem of Defence in the country, which will encompass product design and development, manufacturing, technology transfer, research and development with deep domain expertise,” he said.