Indian Offsets To Bring In Substantial Investment: Recent Study

(MoneyWatch)  A study carried out by Assocham and Ernst & Young of the benefits of the Indian government's offset policy in regards to defense contracts will drive substantial investment in the country's economy. The study concludes that up to $10 billion could be generated over the next five years if the policy is followed correctly.

The policy was adopted last Summer to replace one that was considered too difficult for the foreign companies to meet. In some cases this had driven U.S. and European companies to withdraw from competition on various contracts. Bell for example abandoned an attempt to bid on a new light helicopter contract for this reason.

The study says that of this $10 billion much will flow to smaller and medium sized companies in India who provide either discrete services, parts or components to the large systems that India is buying.

India has in the last few years turned from developing their own systems and supporting creating an indigenous sophisticated armaments industry to buying more technologically advanced equipment from Western sources. To counter this lack of government investment in the economy the contracts require the winners to offset the cost by either buying parts and services from Indian companies or investing in other parts of the economy. Boeing plans to do this with their recent sale of the P-8 maritime patrol aircraft to India.

Offsets can be a difficult policy to implement. If it requires too much money back then companies will be scared off of bidding on contracts, as in the case with Bell. The companies may not also possess the necessary working capital to do the actual investment. If they are too little there may be pushback from elements in the government or populace against awarding the contract to foreign companies. The Indian program seems to strike a good compromise as it doesn't require direct investment to support the actual contract. The investors can just pump funding into India's economy.