Offset Policy Of Defence

Topics Covered

  • Introduction
  • What Is Defense Offset?
  • Defence Offset Policy Of 2016
  • Objectives Of The Offset Policy (DPP 2013)
  • What changes are required in Defence Offset Policy Of 2016?
  • Issues With Effective Implementation

 

Introduction

  • India has a peculiar defence scenario as the country has one of the largest defence infrastructure and at the same time is one of the largest defence importers in the world.
  • To overcome the various hurdles of defence sector development including measures to overcome import dependence, government introduced several measures including defence FDI and promotion of private sector participation.
  • A major policy thrust in this direction is the defence offset policy which is expected to become a chief instrument for India to develop its indigenous defence manufacturing sector.

What Is Defense Offset?

  • Offset, in literary sense, is a factor that counterbalances or compensates an act. In the defence procurement context, it is an element of ‘compensation’ made by the manufacturer that mostly takes place in the form of placing a minimum per cent of value addition in the ordering country.
  • Defence offset means “a supplier places work to an agreed value with firms in the buying country, over and above what it would have brought in the absence of the offset.”
  • Hence under defence offset, a foreign supplier of equipment agrees to manufacture a given percent of his product (in terms of value) in the buying country. Sometimes this may take place with technology transfer.

Defence Offset Policy Of 2016

  • The defence offset policy is a part of Defence Procurement and Procedure (DPP). The latest one is the DPP 2016.
  • Developing indigenous defence sector is the major objective of the defence.
  • Major feature of the 2016 offset policy is that it increases the threshold of defence offset to Rs 2000 crore from the current level of Rs 300 crores under “buy” and ‘buy and make” categories.
  • This means that only those purchase of above Rs 2000 crore that the foreign company has to ensure 30% domestic value addition in India.
  • Another major feature of DPP 2016 is the creation of a new category called ‘Indian Designed Developed and Manufacture (IDDM)’ and it has been given the highest priority.
  • This category is created and promoted maximum to encourage domestic design of defence equipments.
  • The DPP has revised in 2006, 2008, 2009, 2011, 2013 and now in 2016 after the original version in 2005.

Objectives Of The Offset Policy (DPP 2013)

The key objective of the Defence Offset Policy is to 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.

What changes are required in Defence Offset Policy Of 2016?

  • Fair Competancy Anong Indian Companies– Defence procurement should be subject to transparent processes that ensure that Indian companies, big and small, compete on a level playing field.
  • Need For Fair And Diverse Procurement Process– While the procurement policy recognizes the need for domestic private partnership, it does not mandate a fair and diverse procurement process for offsets. Given the large contract values involved, this makes it likely that foreign suppliers will partner with just one or two large industrial groups to discharge their offset obligations.
  • The definition of IOP is flawed– IOPs are defined as Indian enterprises engaged in making eligible products and/or services. If the objective is to build a domestic defence sector, the focus should instead be on direct investments. In other sectors where India has succeeded, foreign technology and know-how has followed investments, irrespective of ownership. “Indian” ownership does not necessarily contribute to the growth of a sector, as much as investments within Indian shores. Focussing on investments will ensure that companies of all sizes, including foreign companies who wish to manufacture in India, are permitted to grow and flourish. For this, regulations that restrict foreign investments in the defence sector require a dose of reform.
  • Transparency- Transparency is essential in procurement contracts. While national security arguments may withstand scrutiny in outright sales (regarding, say, specifications and customization) or where specific components or technology transfer are involved, they do not stand scrutiny in relation to offsets. In the interest of fairness, foreign suppliers should be free to invest in India, yet at the same time, offset investments/procurement must be subject to safeguards along the lines of those that govern public procurement, because after all, they are expending public funds.

Issues With Effective Implementation

  • 2012 CAG report points of lack of effective monitoring mechanism. There are no clear cut definition and role of various stakeholders.
  • CAG also pointed out that this policy was only a paper exercise as there was no visible impact either on Defence production or on domestic manufacturing sector.
  • Elevation of the offset threshold limit to Rs. 2,000 crore from Rs. 300 crore has reduced the avenues for the local industries.
  • The domestic contractors and manufacturers (i.e Indian Offset Partners) were chosen by the foreign investors / vendors in arbitrary manner and in some cases the IOP was a 100% owned subsidiary of the foreign vendor.