Offset Dilution in Defence: Best NDA Coaching in Lucknow
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Offset Dilution in Defence
Recently, the government diluted the “offset” policy in defence procurement, reportedly in response to a Comptroller and Auditor General (CAG) of India’s report tabled in Parliament last month. The Defence Ministry came up with its latest Defence Acquisition Procedure 2020 (DAP 2020), which comes into effect from October 1, 2020. Changing a 15-year old policy, the government has decided to remove the clause for offsets if the equipment is being bought either through deals or agreements between two countries or through an ab initio single-vendor deal.
What are the defence offsets?
In simplest terms, the offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it. Since defence contracts are costly, the government wants part of that money either to benefit the Indian industry or to allow the country to gain in terms of technology. The Comptroller and Auditor General (CAG), in a report submitted on September 23, defined offsets as a mechanism generally established with the triple objectives of:
(a) partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods
(b) facilitating the induction of technology and
(c) adding capacities and capabilities of domestic industry”.
Offset ties up the ends
Most countries restrict trade in defence equipment and advanced technologies to safeguard national interests. Yet, for commercial gains and for global technological recognition, governments and firms do like to expand the trade. Geopolitics, the price of the product and the technical know-how involved in the equipment have huge importance involved in the contracts. The product and technology compel buyers to stick to them for the advantages of bulk purchase, and dependence on the supplier for spares and upgrades. Developing country buyers often lack an industrial base and research and development (R&D) facilities (which take a long time to mature). Large buyers such as India seek to exercise their “buying power” to secure not just the lowest price. They also try to acquire the technology to upgrade domestic production and build R&D capabilities. The offset clause — used globally — is the instrument for securing these goals.
Setback for defence
Most defence deals are bilateral (as stated above), or a single supplier deal (given the monopoly over the technology). The dilution means practically giving up the offset clause, sounding the death knell of India’s prospects for boosting defence production and technological self-reliance. The government has defended the decision by claiming a cost advantage. The higher (upfront) cost of the agreement due to the offset clause would pay for itself by reducing costs in the long term by indigenisation of production and the potential technology spill-overs for domestic industry. Hence, giving up the offset clause is undoubtedly a severe setback.
Developments so far
Initiated on the recommendations of the Vijay Kelkar Committee in 2005, the offset clause has a requirement of sourcing 30% of the value of the contract domestically; indigenisation of production in a strict time frame, and training Indian professionals in high-tech skills, for promoting domestic R&D. According to the recent CAG report mentioned above, between 2007 and 2018, the government reportedly signed 46 offset contracts worth ₹66,427 crores of investments. However, the realised investments were merely 8% or worth ₹5,457 crores. Reportedly, technology transfer agreements in the offsets were not implemented. The CAG had not found “a single case where the foreign vendor had transferred high technology to the Indian industry”. On September 28, the government has diluted this policy. Henceforth, the offset clause will not be applicable to bilateral deals and deals with a single (monopoly) seller, to begin with.
The August 2012 Defence Ministry note mentioned these avenues:
Direct purchase of, or executing export orders for, eligible products manufactured by, or services provided by Indian enterprises foreign Direct Investment in joint ventures with Indian enterprises (equity investment) for eligible products and services Investment in ‘kind’ in terms of transfer of technology (TOT) to Indian enterprises, through joint ventures or through the non-equity route for eligible products and services Investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route for manufacture and/or maintenance of products and services Provision of equipment and/or TOT to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products, and provision of eligible services, including DRDO (as distinct from Indian enterprises).
Technology acquisition by DRDO in areas of high technology
Offset Policy has worked in the aerospace
The offset policy can succeed, if it is designed and executed correctly, as a parallel episode in the aerospace industry demonstrates. With the introduction of the offset policy in 2005, for contracts valued at ₹300 crores or more, 30% of it will result in offsets, implemented through Indian offset partners. As aerospace imports rose rapidly, so did the exports via the offsets. By 2014, exports increased to $6.7 billion from a paltry $62.5 million in 2005, according to the United Nations Comtrade Database. The offset clause enabled India to join the league of the world’s top 10 aerospace exporters, the only country without a major domestic aerospace firm. The success was short-lived, however. Exports plummeted after the offset clause was relaxed.
Reportedly because of the CAG’s critical remarks in its latest report tabled in the Parliament, the government has virtually scrapped the defence offset policy. Thus, India has voluntarily given up a powerful instrument of bargaining to acquire scarcely advanced technology — a system that large and politically ambitious nations seek to exercise. There are successful examples to draw lessons from, as the aerospace industry episode demonstrates. India needs to re-conceive or re-imagine the offset clause in defence contracts with stricter enforcement of the deals, in the national interest, and to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.