Offset or offloading? Discharging a ₹3,600-crore offset obligation
A ministry is negotiating a ₹12,000 crore imported helicopter contract, the first above the ₹2,000 crore offset threshold. The 30 per cent offset obligation therefore equals ₹3,600 crore. The vendor offers four discharge routes: ₹1,800 crore of civil aircraft components sourced from an Indian tier-2 supplier; ₹900 crore of licensed production of a gearbox already manufactured in India by a private firm, of which 70 per cent of the value is imported content; ₹600 crore of investment in an Indian joint venture; and ₹300 crore of training and skill credits claimed under a multiplier. Separately the vendor asks to bank ₹900 crore of credits against future orders. The finance ministry notes that the vendor's price build-up contains a line item called offset compliance cost. The indigenous industry lobby wants offsets tightened; the vendor warns that tightening will raise the price. Parliament's standing committee wants a one-page verdict.
1. Assess each of the four discharge routes against the test of additionality.
Read the worked answer
The test. An offset creates industrial capability only if the activity is additional - new work, new technology, or new capacity that would not have existed otherwise - and if it is auditable. Route by route:
- Civil aircraft components, ₹1,800 crore. Qualifies only if it is new work for that supplier and not a re-labelling of existing sub-Contracts. The question to ask is whether the supplier already makes this part for this vendor; if yes, the offset is a bookkeeping entry on existing trade.
- Licensed gearbox production, ₹900 crore. With 70 per cent imported content, domestic value added is about ₹270 crore. Worse, the item is already made in India, so the offset may displace an existing producer rather than create capability. This is the classic screwdriver transaction: assembly onshore, technology offshore.
- Joint venture investment, ₹600 crore. Genuine if it is equity tied to technology transfer and a defined scope of work; illusory if it is a loan, a marketing office, or land.
- Training and skill credits, ₹300 crore, with a multiplier. Soft, hard to verify, and the multiplier inflates the credit without adding a rupee of capability.
Banking ₹900 crore. Banking is a deferral, not a discharge: it converts an obligation into a financial option held by the vendor.
Verdict. Only route 3, and part of route 1, pass the additionality test; route 2 fails on both technology and displacement grounds, and route 4 fails on verifiability.
2. Calculate how much genuine industrial capability the package would create, and state the assumptions your figure rests on.
Read the worked answer
Starting point. The offset obligation is 30 per cent of ₹12,000 crore = ₹3,600 crore.
Route-by-route, on stated assumptions.
| Route | Claimed (₹ crore) | Credited value (₹ crore) |
|---|---|---|
| Civil aircraft components | 1,800 | 1,800 if new work; 0 if existing trade |
| Licensed gearbox production | 900 | 270 (30% of 900) |
| Joint venture equity | 600 | 600 if genuine equity with technology |
| Training credits | 300 | 0–300; unverifiable, treat as 0 |
| Banking | 900 | 0 now; deferred liability |
Two scenarios.
- Optimistic: 1,800 + 270 + 600 = ₹2,670 crore, leaving roughly ₹930 crore still owed plus ₹900 crore banked - i.e., the vendor has discharged about 74 per cent of the obligation.
- Realistic, if the civil components are existing trade: 0 + 270 + 600 = ₹870 crore, about 24 per cent discharged; the remainder sits as paper credits.
Assumptions to state explicitly. That the gearbox has 70 per cent imported content by value and domestic value added is the residual; that imported content in the civil components is not netted off; that the multiplier is applied only to the training line; and that banking creates no current capability.
Point for the committee. The gap between 24 and 74 per cent is not a rounding error - it is the difference between an industrial policy and a compliance ritual.
3. Should the ministry keep, redesign, or abolish offsets? Argue the position, and answer the vendor's claim that tightening will raise the price.
Read the worked answer
The vendor's claim is partly true and largely self-serving. Offset obligations are a cost of doing business, and firms price them in - which is precisely why an offset is a hidden transfer: the buyer pays the compliance cost through the contract and receives industrial benefit of uncertain value. The honest formulation is not 'offsets are free' versus 'offsets raise prices', but 'offsets buy capability at a price that must be compared with buying that capability directly'.
Against abolition. Abolishing offsets removes the only lever that binds a foreign prime to an Indian supply chain in a single-vendor import. That leverage is real, especially for tier-2 firms seeking first-time export credentials.
Against the status quo. Multipliers, banking and soft credits convert a capability instrument into an accounting exercise; the gearbox route in this very contract shows how a compliant claim can deliver a thin sliver of value added.
Recommendation: redesign, on three rules.
- Additionality first. Credit only work certified as new to the Indian supplier, with imported content netted off.
- Cap soft credits. Restrict multipliers to defined MSME or design activity and place a ceiling on training and banking.
- Price transparency. Require offset compliance cost to be separately disclosed in the price build-up so the buyer can see what capability is costing.
Judgement. The direction of travel in Indian procurement - raising thresholds, exempting intergovernmental deals, shifting weight to technology transfer and indigenous design - is sound. The task is to make the residual offset regime auditable rather than to abolish it.