About: Offset clause

The offset clause requires a foreign vendor to invest a part of the contract value in India.
The objective of the offset clause is to transfer advanced technology to India, attract FDI and improve the defence industrial base in India.
India adopted the Offset Policy for defence capital purchases above Rs 300 crore made through imports, in 2005. In such cases, the foreign vendor was required to invest in India at least 30 per cent of the value of the purchase.
Then, in 2016, the government introduced a 50 per cent offset in the government-to-government deal for Rafale fighter jets. The deal to buy 36 Rafale fighter jets was signed as an IGA with the French government.
Evidence suggests that foreign vendors generally add around 10 per cent to balance the offset costs. Thus, removing the offset clause is likely to bring down costs in such contracts.

Criticism of offset policy

Recently, in a report tabled in Parliament, the Comptroller and Auditor General (CAG) was critical of the offset policy.
The report noted that the foreign vendors made various offset commitments to qualify for the main supply contract, but do not fulfil these commitments later.
It pointed that, as part of the offset deals, not a single foreign vendor has transferred high technology to the Indian industry.
It further criticised French firms Dassault Aviation and MBDA for their failure to fulfil offsets obligations in offering high technology to India under Rafale deal.

Defence Acquisition Procedure (DAP), 2020

Revised offset guidelines:

The offset clause has been removed in government-to-government deals, single vendor deals and Inter-Governmental Agreements (IGA).
However, offsets will continue in deals that have a multi-vendor competition and bidding.
As per the revised guidelines, preference will be given to manufacture of complete defence products in India, instead of manufacturing just components.

Other highlights of DAP, 2020:

With the recent decision to hike the FDI limit to 74% from the existing 49% in the defence production sector through the automatic clearance route, the DAP incorporates a new category called Buy (Global – Manufacture in India).
This will encourage foreign companies to set up manufacturing/maintenance entities through their subsidiaries in India, while enabling required protections to the domestic industry.
Further, only companies that have more than 50 per cent Indian ownership will be allowed to participate in key Make in India categories, including strategic partnership policy.
The new DAP also has a dedicated chapter to buy weapons and platforms designed by DRDO, ordnance factories and Defence PSUs.
The chapter on Information Communication Technology looks at issues related to procurement of ICT intensive equipment. These include issues related to interoperability, enhanced security requirements and change management.

Lease of defence equipments:

The DAP provides for the option of leasing defence equipments in addition to the existing ‘Buy’ and ‘Make’ categories.
This will be useful for military equipment not used in actual warfare like transport fleets, trainers, simulators, among others.
It will significantly help in bringing the cost down in procurement of defence products.
While India has leased military equipment in the past, it has generally been through the government-to-government route, but now the process will be more open. It will allow the government to hire equipment from either domestic or foreign vendors.
India currently operates a Russian nuclear-powered attack submarine (SSN) on lease.

Time bound defence procurement:

The DAP also places greater emphasis on time-bound defence procurement processes through the setting up of a project management unit and framing of realistic and verifiable GSQRs (general staff qualitative requirements).
The government has also tried to rationalise the trial and testing procedures, to reduce the defence procurement timelines.

Defence & Security

IAS Jugaad