Defence Offsets

  • The Defence Ministry came up with its latest Defence Acquisition Procedure 2020 (DAP 2020), 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?

  • In simplest terms, 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: (a) partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods 
  • (b) facilitating induction of technology and 
  • (c) 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.
  • Policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
  • The Sixth Standing Committee on Defence (2005-06) had recommended in December 2005 in its report on Defence Procurement Policy and Procedure that modalities for implementation of offset contracts should be worked out.
  • The first offset contract was signed in 2007.
  • The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by 

(i) fostering development of internationally competitive enterprises, 

(ii) augmenting capacity for Research, Design and Development related to defence products and services and 

(iii) encouraging development of synergistic sectors like civil aerospace, and internal security”.

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, and could be an umbrella contract, under which they can go on signing individual contracts. 
  • G2G is 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.

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.
  • Sources explained that there are “administrative costs” involved in discharging offset obligations, which the vendors pay.

What has the CAG said?

  • 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. 
  • This was only 59 per cent of the offsets which were due by December 2018.”
  • The CAG had not found “a single case where the foreign vendor had transferred high technology to the Indian industry”.