As part of its new defense procurement policy, India is all set to sign offset agreements with two foreign companies requiring foreign vendors to source one-third of the value of the contract from within India. Israeli company Elta and French Thales sent letters of acceptance to meet these requirements.

US companies are reluctant to accede to this requirement and are arguing that the government look at the bigger picture by allowing sourcing in civilian areas be counted towards the offset requirement and not limit it by contract. Boeing is trying to sell its Super Hornets to India and is also selling many billions worth of civilian passenger planes. It has ambitious plans to set up a Maintenance and Repairs Organization in India.

Many analysts say that the government was able to get the offset deals in place only because of the size of its deals and such restrictions on larger orders with specialized products may be harder as the vendor may be worried about intellectual property protection and government interference. Besides, it may also cost the company more to source the materials from India and export it to the native country for assembly and bring it back when they could have already priced it based on approved and qualified suppliers of components in their native country.

In the bargain, the defense may have to give up state-of-the-art products because of the vendor’s reluctance to sell and instead buy products which are inferior in features or capability because of artificial contractual rules made up with questionable benefits to Indian manufacturers. Instead of making these blanket rules that may be unworkable in many situations, it may be beneficial for the nation to encourage Indian companies to enter into partnerships with foreign defense vendors and co-develop products. This natural assimilation and gradual evolution of relationship will stand in better stead than a high-handed and forced partnership