Offset Policy in Defence

Offset Policy in Defence

  • As of 2019, the Defence Ministry had signed 52 offset contracts worth $12 billion via Indian offset partners, or domestic firms.

Findings of CAG report?

  • Between 2007 and 2018, the government reportedly signed 46 offset contracts, However, the realised investments were merely 8%.
  • Also, technology transfer agreements in the offset clause were not implemented, failing to accomplish the stated policy objective.
  • Government has not put in place an automatic monitoring system for offset contracts, as initially promised.

What is an offset policy? And how is it expected to boost domestic capabilities?

  • Initiated in 2005, on the recommendations of the Vijay Kelkar Committee.
  • The offset clause has a requirement of
  1. Sourcing 30% of the value of the contract domestically.
  2. Indigenisation of production in specified time limit and
  • Training Indian professionals in high-tech skills, for promoting domestic R&D.
  • 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.

What changes were made in the offset policy?

  • After the dilution, the offset clause will not be applicable to bilateral deals or deals with a single (monopoly) seller or Intergovernmental agreement.
  • For example, the deal to buy 36 Rafale fighter jets, was an intergovernmental agreement .so, the sellers are not obliged to fulfil the offset clause.

Why it is a concern?

  • Most defence deals are bilateral or a single supplier deal, the dilution means practically giving up the offset clause that deters India’s prospects for boosting defence production and technological self-reliance
  • It will be a Setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat.
  • Government defends its decision by stating that, the offset clause results in the higher (upfront) cost of the agreement. But in the long run it reduces costs by indigenisation of production and the potential technology spill-overs for domestic industry.

How the Offset policy performed in Aerospace? ( Case study—Success of Offset policy)

  • The offset policy was introduced in 2005, for contracts valued at ₹300 crore or more where 30% of it will result in offsets implemented through Indian offset partners.
  • According to the United Nations Comtrade Database, the exports via the offsets increased by a whopping 544% in 2007, compared to the previous year. Also, by 2014 exports increased to $6.7 billion from a mere $62.5 million in 2005.
  • It enabled India to join the league of the world’s top 10 aerospace exporters.
  • Later in 2016, the offset clause was relaxed, threshold for the policy was raised from ₹300 crore to ₹2000 crore which resulted in lowering exports.

What is the way forward?

  • The offset policy can succeed, if it is designed and executed correctly. For example, its success in Aerospace industry.
  • India needs to re-conceive or re-imagine the offset clause in defence contracts in national interest.
  • Offset policy is very much significant for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.
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