explained-what-are-defence-offsets

Context: The Defence Ministry released its latest Defence Acquisition Procedure 2020 (DAP 2020) which diluted the “offset” policy in defence procurement.

More about news:

  • DAP 2020 changed a 15-year old policy by removing 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.
  • Many contend that the move is a setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat. 

About defence offsets

  • 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.
  • Most countries restrict trade in defence equipment and advanced technologies in order to safeguard national interest. But for commercial gains and for global technological recognition, governments and firms engage in offset deals.

Objectives of offset policy: The Comptroller and Auditor General (CAG) 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 and 
  • Adding capacities and capabilities of domestic industry

Rationale behind offsets:

  • Boosting domestic defence industry: 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.
  • Leverage capital acquisitions to develop Indian defence industry by 
    • Fostering development of internationally competitive enterprises,
    • Augmenting capacity for Research, Design and Development related to defence products and services and 
    • Encouraging development of synergistic sectors like civil aerospace, and internal security”

Factors in the offset deal:

  • Soft credit
  • Restrictions imposed on use, modification and resale of such equipment and technologies, to protect the proprietary knowledge 
  • The price of the product
  • Geopolitics 
  • The technical knowhow involved in the equipment 

Features of offset deals:

  • The contracts are for the long term, with technological fixities. 
  • “Path dependency”: 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. 
  • The price and the terms of the contract often reflect the government’s relative bargaining strength and also domestic political and economic considerations.

India’s offset policy

  • Initiated 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. 
  • The policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
  • The first policy said that all defence procurements exceeding Rs 300 crore, estimated cost, will entail offset obligations of at least 30%, which could be increased or decreased by the DAC (Defence Acquisition Council).
  • CAG criticism: According to the recent CAG report, between 2007 and 2018, the government reportedly signed 46 offset contracts worth ₹66,427 crore of investments. 
    • However, the realised investments were merely 8%, or worth ₹5,457 crore.

Concerns with offset clause removal

  • Setback for defence

    • The government has defended the decision by claiming a cost advantage as it said that due to offsets clauses the sellers were charging higher upfront costs. But Price is just one of many factors in such deals. 
    • 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.
  • Short Lived offset policy in aerospace
    • Due to the offset clause, aerospace imports exports via the offsets, 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. Exports plummeted after the offset clause was relaxed.
    • India is a lightweight in global civilian aircraft manufacturing, as the public sector giant Hindustan Aeronautics Limited mostly devotes itself to defence production. 
    • The National Civil Aircraft Development (NCAD) project has remained a non-starter.
    • The 2005 offset policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru. 

The offset policy can, however, succeed, if it is designed and executed correctly, like in the aerospace industry. India needs to re-conceive or re-imagine the offset clause in defence contracts with stricter enforcement of the deals, in order to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.

Image source: Indian Express

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Q) The Defence Ministry released its latest Defence Acquisition Procedure 2020 (DAP 2020) which diluted the “offset” policy in defence procurement. Many contend that the move is a setback for augmenting domestic capabilities. Critically analyse. (250 words)