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Defence Offsets

Defence Offsets

Context:

The Defence Ministry came up with its latest Defence Acquisition Procedure 2020 (DAP 2020) which comes into effect from October 1.

  • The government has also 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.

Defence offsets:

  • The policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005. The first offset contract was signed in 2007.
  • The first policy mentioned that all defence procurements exceeding Rs 300 crore, estimated cost, will entail offsetting obligations of at least 30%, which could be increased or decreased by the DAC (Defence Acquisition Council).
  • The offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it.
  • The Comptroller and Auditor General (CAG), in a report defined offsets as a “mechanism established with the triple objectives of:
    • Partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods
    • Facilitating the induction of technology and
    • Adding capacities and capabilities of domestic industry”.
  • An offset provision in a contract makes it obligatory on the supplier to either reverse purchase, execute export orders or invest in local industry or in research and development in the buyer’s domestic industry.

The objective of the Defence Offset Policy:

  • To leverage capital acquisitions to develop Indian defence industry by fostering the development of internationally competitive enterprises, augmenting capacity for Research, Design and Development related to defence products and services and encouraging the development of synergistic sectors like civil aerospace, and internal security”.

Offset obligations:

  • There are multiple routes through which foreign vendor fulfil its offset obligations. Until 2016, the vendor had to declare around the time of signing the contract.
  • In 2016, the new policy amended it to allow it to provide it “either at the time of seeking offset credits or one year prior to discharge of offset obligations”.
  • 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.
  • The DAP 2020 has given transfer of critical technology to DRDO.

Will no defence contracts have offset clauses now?

  • Only government-to-government agreements (G2G), ab initio single vendor contracts or inter-governmental agreements (IGA) will not have offset clauses anymore. For example, the deal to buy 36 Rafale fighter jets, signed between the Indian and French governments in 2016, was an IGA.
    • IGA is an agreement between two countries under which you can go on signing individual contracts. G2G is a transaction-specific or an acquisition specific agreement.
  • According to DAP 2020, all other international deals that are competitive, and have multiple vendors vying for it, will continue to have a 30% offset clause.

Source: Indian Express