The Indian government expects defense offset contracts to rise sharply in the next few years, given several megadeals in the pipeline.

Since the introduction of the offset clause in India’s Defense Procurement Procedures in 2005, the country has attracted offset contracts worth nearly $4.28 billion, Defense Minister A.K. Antony said May 14. The first offset contract was signed in 2007.

Under the offset clause, international companies getting any Indian defense contract must source nearly 30% of the contract within India. But the $15 billion deal to buy 126 medium multi-role combat aircraft (MMRCA) for the Indian air force has an offset requirement of 50%. The government is expected to sign the deal for Dassault’s Rafale fighter during India’s current fiscal year, which ends March 31, 2013.

In April of this year, the Indian defense ministry announced yet another round of changes to its offsets policy, including extending the deadline for offsets by two more years beyond the execution of the main contract, the inclusion of non-cash equity in the form of training, tooling, etc., and the extension of the validity of offsets banking credits to seven years from two years.

“The positive impact of the offsets on development of the indigenous defense industrial base will be visible in the coming years,” Antony told parliament.

While offset contracts worth around $3.435 billion have been signed in conjunction with Indian air force procurements, the Indian navy booked total offsets worth $843 million while acquiring fleet tankers, maritime reconnaissance aircraft, radars and UAVs. The army does not figure in this list, probably because of the slow pace of its modernization projects.

According to consultancy firm Frost and Sullivan, a major portion of the defense offsets opportunity for Indian companies is in the areas of engineering outsourcing and maintenance, repair and overhaul, with the revised policy encouraging the development of small- and medium-sized enterprises.

It says 70% of India’s procurement needs are still met by foreign imports rather than by domestic production. The easing of offset regulations promotes the growth of Indian domestic players and ultimately changes this ratio.

The revised offset norms are expected to create a win-win situation for all the major stakeholders in the offsets program, that is, the government, original equipment manufacturers (OEM) and local industry, the firm says.

Antony says 216.12 billion rupees ($4 billion) were spent on capital acquisition for the defense forces in 2006-2007, and 179.93 billion rupees in 2007-08.

In 2008-09, 203.47 billion rupees were spent by the government. And in 2010-2011, the figure jumped to 314.45 billion rupees, he says.

Since 2007, the air force has spent significant sums on the acquisition of new systems and aircraft, as well as upgrades of existing fleets. Some of the major contracts include upgrades to India’s MiG-29 fighter aircraft, the acquisition of C-130J and C-17 transports and the upgrade of Mirage-2000 jets.

Antony says 154.43 billion rupees were spent on capital acquisition from foreign sources in 2010-11.