India’s experience with the defence offsets demonstrates that the central issue is not the absence of defence industrial and economic activity. The objective must shift from asking how much of the cost of a foreign acquisition returns to India to asking what capability India will acquire or create (in future) through that acquisition.

India introduced its defence offset policy in 2005 with an ambitious objective: to use the country’s substantial expenditure on foreign defence acquisitions to strengthen its domestic defence-industrial and technological base. Since then, the policy has undergone several revisions. During this period, Indian industry has received significant business through defence offsets, while the base of Indian Offset Partners (IOPs) has expanded substantially, with the private sector and Micro, Small and Medium Enterprises (MSMEs) accounting for a larger share. The defence offsets policy also contributed to manufacturing partnerships, exports and capabilities in selected areas. But it did not consistently lead to critical technology transfer, high-end manufacturing or indigenous design capabilities in Indian companies.

This experience thus raises a fundamental question: what has India acquired through offsets beyond business, production and participation in global supply chains? The policy was never intended only to generate orders for Indian companies. Its larger purpose was to leverage foreign procurement for technology acquisition, investment, industrial capacity and eventually greater indigenous capability.

The Public Accounts Committee’s recent audit of the defence offsets policy has brought these implementation and outcome-related weaknesses back into focus. Apart from this, the absence of official clarification on whether offsets have been discontinued raises a larger policy question as India moves towards greater defence indigenisation and a revised version of the Defence Acquisition Procedure (DAP) is slated for finalisation.

This brief proposes continuing and modifying the offset policy, moving beyond the binary question of whether India should retain or abolish offsets. It analyses India’s intent and experience with defence offsets, assesses where the existing framework has produced value and where it has fallen short, and proposes action points to modify the policy before incorporating it into the acquisition procedure.

The Intent and Evolution of India’s Defence Offsets Policy

India formally introduced the Defence Offset Policy in the year 2005, based on the recommendations of the Vijay Kelkar committee.[i] It initially required a 30 per cent ‘offset’ for qualifying capital acquisition contracts. An offset is a mechanism generally established with the triple objectives of: (a) partially compensating for a significant outflow of a buyer country’s resources in large purchases of foreign goods; (b) facilitating the induction of technology; and (c) adding capacities and capabilities to domestic industry.[ii]

The policy was subsequently revised in 2008, 2011, 2012 and in the Defence Acquisition Procedure (DAP) 2020. The evolution of the policy shows that offsets were not merely treated as a mechanism to recover part of the value of foreign purchases. The policy aimed to use India’s considerable defence-import expenditure to strengthen the domestic defence industrial base. To enable this, it permitted foreign vendors to discharge their offset obligations through direct purchases from Indian industry, investment and other forms of industrial cooperation.[iii]

Indian industry has received defence business worth more than US$ 13.2 billion through offsets.[iv] Further, the IOP base has expanded to more than 350 vendors, of which 95 per cent are from the private sector.[v] Also, MSMEs have benefitted through the assignment of multipliers in offset credits, with almost 40 per cent of the IOP base constituted by MSMEs.

The policy’s limitations were identified surprisingly early. A 2009 assessment at IDSA argued that although India had established a formal mechanism for implementing offsets, the structure and procedures lacked sufficient thrust to energise the defence industry.[vi] It also highlighted the absence of a clear technology-transfer roadmap linked to India’s long-term defence-industrial objectives. The main question was how India could move from receiving offset business to acquiring strategically relevant industrial capabilities.

The 2012 offset guidelines represented an important attempt to address some of these weaknesses. They expanded the permissible avenues for offset discharge and introduced multipliers to incentivise activities considered more valuable to India’s industrial and technological development. These included investment by foreign vendors, technology transfer and critical technology acquisition by DRDO.[vii] However, the revised guidelines still gave considerable leeway to foreign vendors, contained ambiguities, and lacked adequate monitoring and auditing capacity.[viii]

The trajectory culminated, at least for the existing policy framework, in DAP 2020. Its offset provisions are more sophisticated than the original 2005 arrangement. DAP 2020 stated that the offset policy’s objective is to leverage capital acquisition to foster “internationally competitive enterprises” and augment the capacity of Indian defence-related research and development.[ix] The policy permitted offset obligations to be discharged through direct purchase from Indian industry, investment in defence manufacturing, foreign direct investment, joint ventures, co-production, co-development, transfer of technology, research and development and technology acquisition by DRDO. It explicitly differentiated between these avenues through a system of multipliers. Investment in defence manufacturing and certain MSME purchases receive preferential treatment, while technology acquisition by DRDO for specified critical technologies received the highest multipliers.[x] The policy therefore recognised, at least conceptually, that not all offset activity has equal strategic value.

This evolution shows that India did not create the offsets mechanism to increase domestic procurement. Nor did it subsequently redesign the mechanism merely to attract more foreign capital. The underlying intent was deeper: to use foreign procurement as leverage to develop an indigenous defence-industrial-technological ecosystem. But this intent also created a trade-off.

The easiest route for a foreign vendor subsequently was not necessarily the one that creates the greatest strategic value for India. A purchase from an Indian supplier could satisfy the offset contract obligation easily for him. A genuine technology-transfer arrangement, by contrast, requires nuanced negotiations over work-share, intellectual property rights, know-how, know-why, manufacturing processes, design authority, and long-term commercial interests. It also requires an Indian partner to be capable of absorbing the technology.

Scholarly analysis later found that the offsets policy contributed to certain exports but did not effectively catalyse foreign investment, technology transfers to India, or high-end manufacturing facilities in India. Much of the export activity associated with the offsets remained concentrated in parts and components.[xi] Secondary sources also........

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