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Skirting the rules leaves India’s defence industry short-changed

Defence ministry figures on the offset obligations on 25 contracts signed since 2008 show a shortfall in implementation in 13, according to data examined by Bloomberg. India imposed penalties in 12 cases. Photo: AFPPremium
Defence ministry figures on the offset obligations on 25 contracts signed since 2008 show a shortfall in implementation in 13, according to data examined by Bloomberg. India imposed penalties in 12 cases. Photo: AFP

With an estimated $15 billion in outstanding investment in military technology at stake, PM Modi's plan to transform India into an arms exporter remains unfulfilled

New Delhi: Two years after Prime Minister Narendra Modi took office, his plan to transform India from the world’s top weapons buyer into an arms exporter remains unfulfilled.

A key plank of Modi’s plan has been requiring foreign manufacturers to route some defence orders through Indian companies to boost local industry. But with an estimated $15 billion in outstanding investment in military technology at stake, the programme—started under a prior government—is faltering.

The risk is the shortfall, caused by foreign companies skirting their “defence offset" requirement or by local industry lacking the capacity to handle increased orders, and puts in doubt Modi’s plan to spend up to $250 billion on military modernization over the next 10 years.

Defence ministry figures on the offset obligations on 25 contracts signed since 2008 show a shortfall in implementation in 13, according to data examined by Bloomberg. India imposed penalties in 12 cases.

“Of the approximately $5 billion offset obligations, only about $2 billion have been accounted for by the global companies," said K.V. Kuber, an independent analyst and former army colonel who served in the section of the ministry that monitored the offset policy. “Of these, only about $250 million worth of offsets has been approved by the ministry of defence as implemented."

Limited benefit

One issue, he said, is that the kind of offsets being offered to local companies don’t necessarily involve a transfer of technology or expansion in manufacturing capacity. Rather, the technical standard of work required can be low and of limited benefit.

In the last decade, contracts signed with global arms companies have fetched about $5 billion worth of offsets, where at least 30% of the contract amount was invested in India’s defence industry, secretary for defence production Ashok Kumar Gupta said in New Delhi on 16 September.

“There is another $15 billion of offset that is likely to accrue in the next 15 years," Gupta said at an industry event. “This means an average of $1 billion offset every year. A lot of foreign original equipment manufacturers are keen to tie-up with Indian vendors. This provides an opportunity to the Indian companies to be part of the global supply chain."

However, industry representatives and analysts say it is difficult to quantify the domestic benefit, with major companies stating it had not helped their industrial capability. The defence ministry did not respond to four calls requesting comment.

Mumbai-based Larsen and Toubro Ltd’s Mohan Nair, the head of its international defence and aerospace business, said L&T had not profited from the policy. “The quality of the manufacturing work that were offset our way by foreign companies were of low technology," Nair said at an industry event in New Delhi on 31 August. “It was not worthwhile for us."

Mahindra Aerospace Pvt. Ltd chairman S.P. Shukla echoed those concerns, saying at the same event that his company had not received much defence offset work since the policy was introduced a decade ago. L&T and Mahindra did not respond to requests for further comment.

The ministry data showed India imposed a cumulative total penalty of about a million on global companies—four from Israel, two each from Italy and Russia, and one each from France, Switzerland and the US. Efforts to contact some of the companies for comment were unsuccessful or they declined comment.

Israel’s Elbit Systems Ltd completed all its offset obligations for its contract, vice-president Dalia Rosen said by e-mail.

Sorry state

Still, with some foreign companies opting to pay a fine, the current policy is a “sorry state of affairs", according to Kuber.

“The global companies have been finding ways of not doing offset, and the ministry of defence has not been engaging with them in a more proactive manner," he said. “Indian industry has also been slow to gear up to the global standards in quality and processes and certifications."

“Even the direct buys are in the form of nuts and bolts," he said. “Hence, no industrial capability as such is being developed." Bloomberg

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