Table of Contents
What has happened?
- The Defence Ministry came up with its latest Defence Acquisition Procedure 2020 (DAP 2020) on Monday, which comes into effect from Thursday, October 1.
- 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 defence offsets?
- 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:
- Partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods.
- Facilitating induction of technology.
- 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, according to CAG.
When was the policy introduced?
- The policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
- The first offset contract was signed in 2007.
How can a foreign vendor fulfil its 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.
- Technology acquisition by DRDO in areas of high technology.
- The 2012 Defence ministry note also introduced offset Banking and Multipliers.
- Banking means that in anticipation of getting a contract from the Defence Ministry, a vendor could discharge offsets and earn the credit which could be banked.
- Later on, if you got the contract, you could use the banked credits, subject to certain conditions.
- For multipliers,
- If you discharge offset obligation by taking an MSME unit as an IOP (Indian Offset Partner), you get the multiplier of 1.5,
- Which is to say if you discharge an offset obligation of Rs 100, but your IOP is an MSME unit, you will get an offset credit of Rs 150.
- The DAP 2020 has given transfer of critical technology to DRDO the highest multiplier of 4.
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.
- 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.
Why was the clause removed?
- Vendors would “load” extra cost in the contract to balance the costs, and doing away with the offsets can bring down the costs in such contracts.
- There are “administrative costs” involved in discharging offset obligations, which the vendors pay.
Criticism by CAG
- The CAG has been critical of the entire policy.
- From the first contract signed in 2007 until March 2018, CAG said, 46 offset contracts have been signed for Rs 66,427 crore.
- On the whole, from 2007 till December 2018. Rs 19,223 crore worth of offsets should have been discharged.
- However, the claimed discharge of the offset obligation by the vendors till December 2018 was Rs 11,396 crore.
- “The remaining offset obligation of about Rs 55,000 crore is due to be completed by 2024”.
- The CAG is not very hopeful of the obligations being met by 2024.
- The CAG had not found “a single case where the foreign vendor had transferred high technology
- to the Indian industry”.
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