India's Defence Offset Policy Seems To Have Run Its Course

The Wire

27-06-2025

The Union government's Defence Offsets Policy, aimed primarily at boosting local defence production by mandating foreign vendors to reinvest a part of their contract value in India, seems to have run its course and faces an uncertain future. Juxtaposition of various reports of the Standing Committee on Defence shows that just one offset contract was signed between March 2021-March 2025, rendering its future continuance somewhat remote.
The Ministry of Defence (MoD) introduced the offset policy in 2005 to leverage arms imports worth Rs 300 crores for strengthening the domestic defence industry by making the foreign vendors, with whom contracts were inked for outright purchases, plough back at least 30% of the contract value into the domestic defence sector.
Until around 2020, the arrangement functioned reasonably well, with 54 defence offset contracts being inked by the MoD. In 2021, only two contracts were signed and in the next four years since then just one contract was signed, raising the total to 57. The value of these contracts is approximately $13.52 billion and, according to some reports, their implementation timelines extend to 2033.
As of December 27, 2024, offset obligations were to be discharged to the tune of $8.92 billion, against which vendors had submitted claims worth US $8.67 billion. However, of the latter amount, only $6.85 billion worth of these claims had, so far, been officially 'disposed-of' by the government.
The meltdown of the scheme began when the offset threshold was raised nearly seven-fold – from Rs 300 crore to Rs 2,000 crore and exemption given to all purchases made through intergovernmental agreements (IGAs) and single-vendor buys from offset obligations in 2020.
Both these modes of procurement had become increasingly common by then. A case in point is the increasing number of procurement under the US's Foreign Military Sales (FMS) programme which became New Delhi's default procurement route from Washington – effectively replicating the IGA arrangement and bypassing offset requirements altogether.
Additionally, the shift toward awarding defence contracts to local vendors – and permitting them to tie-ups with foreign OEMs for technology transfer – further reduced the scope for offsets. In fact, over the past two years, 75% of the MoD's capital acquisition budget for equipment purchases and force modernisation has been domestically disbursed.
However, in the intervening years between 2005-20, the offset policy largely achieved its original goal of bringing business to India's domestic defence industry by helping it integrate into the global supply chain. As a result, local industry became increasingly self-reliant, even as the vendors continued fulfilling their obligations under the remaining offset contracts. The spurt in defence exports is a testimony to this newly acquired capability.
A detailed analysis of India's offset policy offers useful insight.
Though the MoD first introduced the offset concept through the Defence Procurement Procedure (DPP) in 2005 – the precursor to the Defence Acquisition Procedure (DAP) 2020 – its implementation began only in 2006. The policy saw further revisions in 2008 and 2011, but it wasn't until July 2012 that the MoD formally articulated its objectives with regard to offsets.
The key objectives outlined in 2012 were to leverage capital acquisitions to build India's domestic defence industry by promoting internationally competitive enterprises. Additional goals included enhancing research and development (R&D) capacity for defence goods and services and fostering growth in related sectors like civil aviation and internal security.
But within a short span these objectives were severely curtailed.
The DAP 2020 – currently in force – makes no reference to enhancing industrial capacity for services or promoting synergetic sectors. Notably, technology transfer also continued to be absent from the list of stated objectives.
Critics of the offset policy often lament its failure in securing technology transfers to Indian companies – overlooking the fact that, since 2012, this was never explicitly listed as an objective.
The lament is further weakened by the flexibility built into the policy which permitted foreign vendors to choose from multiple offset discharge avenues that included: Direct purchase of or executing export orders for eligible products manufactured by or services provided by Indian enterprises, investment in defence manufacturing via FDI or direct investment or joint ventures, an equity route via non-equity route for co-production, co-development and production or licensed production of defence products, and transfer of technology to Indian enterprises or government institutions like the Defence Public Sector Undertakings.
While technology transfer was among the permitted offset options, foreign vendors often opted for easier routes – such as direct purchase of eligible defence products or, at one point, services from Indian companies. Given these easier alternatives offered to the vendors by the offset policy, complaints about the lack of technology transfer lack a strong footing.
More broadly, defence offsets have suffered from flawed policy design and excessive micro-management – first by the Defence Offset Facilitation Agency, and later by the Defence Offset Management Wing (DOMW), both under the administrative control of the Department of Defence Production.
For long, the MoD has claimed that foreign companies were free to choose their Indian Offset Partners (IOPs), as long as they complied with licensing and investment norms and were not debarred by it. However, this supposed autonomy, along with the freedom to select offset discharge avenues, remained largely illusory, since all offset proposals still required MoD's approval, effectively undermining that flexibility.
This broad schism between the offset policy's theory and practice only widened over time.
A March 2025 report by the Standing Committee on Defence even recommended that the MoD should 'play a more proactive role in the selection of offset partners from the outset,'– a suggestion that runs counter to the policy's stated intent of giving foreign vendors freedom in choosing their Indian Offset Partners.
Perhaps most damagingly, the offset policy created a false sense of progress. By showcasing big-ticket deals with offset clauses, successive governments projected the illusion of industrial advancement. But behind the paperwork, the actual gains in terms of local innovation, employment, and capability-building remained questionable.
There were also few incentives for foreign OEMs to part with high-end technology. The absence of an enforceable intellectual property regime, clear MoD guarantees or enforceable joint venture norms with strict regulation, only added to the problems. And locally, the offset policy remained disconnected from India's wider defence manufacturing ecosystem, often at odds with the MoD's overall Atmanirbharta goals of achieving self-sufficiency in indigenously meeting most, if not all, military equipment requirements.
But these modest gains pale in comparison to the opportunity cost. For nearly 20 years, offsets were treated as a proxy for a real industrial policy. As a result, India missed a chance to use its defence procurement power to build world-class research, manufacturing, and design ecosystems. Today, while the MoD speaks of indigenisation and strategic autonomy, it continues to rely heavily on import of key platforms and technologies.
Moving forward, India must accept that offsets cannot substitute for a coherent defence industrial strategy. A more viable approach would prioritise domestic capability-building through targeted R&D investments, stable procurement pipelines, greater private sector participation, and long-term partnerships with trusted OEMs. Instead of chasing compliance through paperwork-heavy offset rules, India should foster co-development models rooted in trust, commercial logic and joint innovation.
Looking back, the offset policy did give a leg up to domestic manufacturing to some extent and brought a modest foreign investment into the defence sector, but here on the local industry is going to be increasingly on its own. How well the Indian companies performs depends on the capabilities they have acquired over the years from their experience as offset partners of the foreign giants.
Amit Cowshish is a former financial advisor (acquisitions), Ministry of Defence.
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