Defense Procurement and Offset Policy in India

Defense Procurement and Offset Policy in India

Recently the government has decided to remove the ‘offset’ policy in defense procurement. This policy decision has been taken to reduce the cost of defense deals and in response to the Comptroller and Auditor General (CAG) report on the same issue. Hence the offset clause will not be applicable to bilateral deals and with a single (monopoly) seller. However, India’s major defense deals will be done under the route mentioned above. And the defense offset policy will be revised.

Many experts say that this step will prove to be an obstacle towards increasing domestic capabilities or achieving the goal of self-reliant India. Therefore, the government should reconsider its defense offset policy to reap the benefits associated with it. It is noteworthy that CAG, in its report presented in Parliament, has demanded major changes in the entire offset policy. CAG had expressed displeasure over the non-transfer of technology by foreign defense companies under the offset policy. Citing France’s Rafale deal, CAG had said that Dassault Aviation, the fighter jet manufacturing company, and MBDA, the weapons supplying company, have not transferred technology to India. It is noteworthy that as per the policy in the Rafale deal, 50% of the spare parts were to be made in India instead of 30%.

offset policy

Under the offset policy, it was mandatory for foreign defense production companies to spend at least 30 percent of the total value in India for deals worth more than Rs 300 crore. Foreign companies had to spend this money on purchasing spare parts, transferring technology or setting up research and development (R&D) units. Under the offset policy, it is ensured that technology transfer is required on the purchase of defense equipment by the Government of India, so that the manufacturing of defense equipment in the country can be promoted and foreign investment can also be done.

However, it has been estimated that this offset policy introduced in 2005 has only increased the cost of defense deals so far and India has not achieved much in terms of transfer of military technology from foreign companies. Under the new defense acquisition process, the armed forces have been allowed to take immediate lease of urgently needed defense equipment like transport planes, air refueling planes, helicopters, simulators etc.

The offset policy is an obligation of international parties to defense deals to promote India’s domestic defense industry. Since defense contracts are expensive, the government wants to use some of that money either to benefit Indian industry or to bring technological benefits to the country.

main objective

The main objective of the Defense Offset Policy is to promote capital acquisition to develop the Indian defense industry in the following ways:

• By promoting the development of internationally competitive enterprises.
• Research related to defense products and services, By enhancing capacity for design and development.
• By promoting synergistic sectors like civil aerospace and internal security.

Why the need?

Defense purchases by developing countries often include industrial base and research and development (R&D).R&D) There is lack of facilities. However, large buyer countries like India try to use their ‘buying power’ to secure defense deals, rather than trying to get the lowest price. to upgrade the product and R&D Efforts are also made to acquire technology to build capabilities. The offset clause is a means to achieve these goals.

Benefit

• The defense offset policy helped develop an aerospace cluster around Bengaluru, consisting mostly of micro, small and medium industries.
• According to the UN COMRADE database, India’s exports grew from $62.5 million in 2005 to $6.7 billion in 2014.
• The offset clause allowed India (the only country that does not have a major domestic aerospace firm,Enabled India to join the league of world’s top 10 aerospace exporters.

Issues related to the new policy

• cag report

  • According to the recent CAG report, between 2007 and 2018, the government reportedly signed 46 offset contracts in which Rs 66,427 crore was invested. However the realized investment was only 8% i.e. Rs 5,454 crore.
  • It was also observed that there was not a single case in which any foreign vendor had transferred high technology to the Indian industry.

• new policy

  • In response to the CAG report, the government has decided not to adopt offset clause in defense equipment procurement if the deal is made through Inter-Governmental Agreement (IGA), Government-to-Government or through a single vendor.
  • The Government acknowledged that the offset weighting in contracts is an additional cost to offset costs and removing these offset clauses could reduce the cost of such contracts. However, the high cost of the agreement due to the offset clause will pay for itself in the long run through indigenization of production and potential technology cost reduction for the domestic industry.

• Impact of new policy

  • Since most defense deals are bilateral, or one supplier (has a monopoly on technology), Therefore-
  • Weakening of this clause would mean practically abandoning the offset clause.
  • This will impact India’s prospects with respect to increasing defense production and technological self-reliance.
  • India voluntarily gave up a powerful bargaining tool to acquire advanced technology.