Defence offsets

What are defence offsets ?

  • An offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it.
  • Benefits of Offsets :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.
  • Legal definition :The Comptroller and Auditor General (CAG) 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”.
  • National Policy : 
    • The policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
    • The idea was that since India has been buying a lot of defence equipment from foreign countries, so that India can leverage its buying power by making them discharge offset obligations, which is the norm world over.
    • 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.

How can a foreign vendor fulfil its offset obligations?

  • There are multiple routes. Until 2016, the vendor had to declare around the time of signing the contract the details about how it will go about it. In April 2016, the new policy amended it to allow it to provide it “either at the time of seeking offset credits or one year prior to discharge of offset obligations”.
  •  Investment in ‘kind’ in terms of transfer of technology (TOT) to Indian enterprises, through joint ventures or through the non-equity route for eligible products and services.
  •  Investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route for manufacture and/or maintenance of products and services.
  •  Provision of equipment and/or TOT to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products, and provision of eligible services, including DRDO (as distinct from Indian enterprises).
  • Technology acquisition by DRDO in areas of high technology.

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 you can go on signing individual contracts. G2G is transaction specific, or an acquisition specific agreement.

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.

 The CAG is not very hopeful of the obligations being met by 2024. It said the audit “found that the foreign vendors made various offset commitments to qualify for the main supply contract but later, were not earnest about fulfilling these commitments”.