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INDIA CHANGES OFFSET POLICY

INDIA CHANGES OFFSET POLICY TO BENEFIT EUROPEAN COMPANIES
By Bulbul Singh

15 Jan 11. Following pressure from overseas defence companies, the Indian government has liberalized defence offset policy to include Training and Simulation in the list from which overseas companies can meet their defence offset needs. In addition, even the Civil Aviation and the Homeland Security sector has been included for defence offsets. The Defence Procurement Procedures (DPP-2011)is the latest policy statement which included changes in defence offsets.

Overseas defence companies were finding it difficult to meet their offset requirements from the defence sector exclusively as the Indian defence industry is not in a position to absorb offsets. It is estimated that defence offsets to the tune of $10 billion will be generated in the next five-to-seven years from big ticket defence contracts, including the $10 billion MMRCA program, where defence offsets have been kept at 50% of the total contract value.

Under law, overseas defence companies have to discharge defence offsets when the contract is bigger than $66.6 million. The offsets can be met by either direct purchase of equipment and weapons or other products from the specified list or investment in the Indian defence industry by way of R&D.

However, defence companies were not able to meet their defence offset requirements as there are very few private sector defence companies which could produce quality products which these companies could procure.

This was the main reason why the French were unable to meet their offset requirement in the $2.1 billion Mirage program for 49 aircraft. The French had demanded that the training which they would sub-contract to Hindustan Aeronautics Limited should be included as an offset. This demand was not accepted by the Indian defence ministry.

The Indian armed forces training market is estimated to be worth more than $1.5 billion, thus several overseas defence companies are likely to enter into partnerships with Indian entities to set up training infrastructure to take advantage of the new changes.

EADS OFFSET

EADS will be one of the beneficiaries by way of inclusion of civil aviation, as the company has set up substantial in-country aerospace R&D, and confirmed that it will jack-up investments in India after these changes. Over the next 15 years EADS plans investments of around $2.5 billion and create nearly 2500 jobs in the aerospace and defence sector.

EADS operates in India through its wholly-owned subsidiary EADS India Private Limited. Two additional subsidiaries have been set up under this subsidiary, the EADS Technology Center India and the Airbus India Engineering Center.

The EADS Technology Center will be the apex of all future tie-ups with Indian partners. Employees, mostly engineers, are working on engineering and information technology services. The Airbus India facility, focuses on high-end engineering analysis and design, has been operating since 2006 and employs around 400 engineers and plans to increase the manpower by 1000 in the next two years.

EADS has major plans to tie-up with India’s R&D and production centre to design and develop products and is also actively involved in R& D with the parent company on specific products.

The inclusion of Civil Aviation sector has not gone down well with some Indian defence companies who say that some may have to close shop as the overseas companies will prefer to meet their defence offset needs from the Civil Aviation sector which is already mature compared to the nascent defence sector.

Defence analysts are also critical of not allowing mandatory defence offsets when the contract is executed on government-to-government basis, especially with deals with Russia.

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