Why in news?
The government has diluted the offset policy in defence procurement.
Why was it diluted?
- Reportedly, it was diluted in response to the Comptroller and Auditor General (CAG) of India’s report.
- Many contend that the move is a setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat.
Why defence trading is done?
- Most countries restrict trade in defence equipment and advanced technologies in order to safeguard national interest.
- Yet, for commercial gains and for global technological recognition, governments and firms do like to expand the trade.
- Negotiated bilateral sales between countries are a way out of the dilemma.
What are the factors?
- Soft credit often sweetens the deals with restrictions imposed on use, modification and resale of such equipment and technologies.
- In such trade negotiations, the price of the product is one of the many other factors.
- Geopolitics and the technical knowhow involved in the equipment weigh-in considerably as the contracts are for the long term, with technological fixities.
- The product and technology compel buyers to stick to them for:
- The advantages of bulk purchase, and
- Dependence on the supplier for spares and upgrades.
- In other words, there is considerable “path dependency” in such choices, rendering the decisions difficult to reverse.
- Developing country buyers often lack an industrial base and research and development (R&D) facilities (which take a long time to mature).
How will offset clause help?
- The price and the terms of the contract reflect the government’s relative bargaining strength, and political and economic considerations.
- Large buyers such as India seek to exercise their “buying power” to secure not just the lowest price.
- They also try to acquire the technology to upgrade domestic production and build R&D capabilities.
- The offset clause is the instrument for securing these goals.
What was the initial offset clause?
- Initiated in 2005, the offset clause has a requirement of sourcing 30% of the value of the contract domestically.
- Indigenisation of production in a strict time frame, and training Indian professionals in high-tech skills, required for promoting domestic R&D.
- However, the policy has been tweaked many times since.
What are the changes made?
- As of November 2019, the Defence Ministry had signed 52 offset contracts worth $12 billion via Indian offset partners, or domestic firms.
- The duration of these contracts extends up to 2022.
- According to the CAG report, between 2007 and 2018, the government signed 46 offset contracts worth ₹66,427 crore of investments.
- But, the realised investments were merely 8%, or worth ₹5,457 crore.
- Reportedly, technology transfer agreements in the offsets were not implemented, failing to accomplish the stated policy objective.
- Recently, the government has diluted this policy further.
- Henceforth, the offset clause will not be applicable to bilateral deals and deals with a single seller (monopoly), to begin with.
Why is it a setback for defence?
- Most defence deals are bilateral, or a single supplier deal (due to the monopoly over the technology).
- The dilution means practically giving up the offset clause.
- This may mean an end to India’s prospects for boosting defence production and technological self-reliance.
- But, the government defended the decision by claiming a cost advantage.
- Price is but one of many factors in such deals, as explained above.
- The higher (upfront) cost of the agreement due to the offset clause would pay for itself by,
- Reducing costs in the long term by indigenisation of production,
- The potential technology spill-overs for domestic industry.
- Hence, giving up the offset clause is undoubtedly a severe setback.
What should be learnt from the aerospace industry episode?
- Despite the heft of Hindustan Aeronautics Limited, India is a lightweight in global civilian aircraft manufacturing.
- This is due to the fact that the public sector giant mostly devotes itself to defence production.
- With the introduction of the offset policy in 2005, things changed dramatically.
- For contracts valued at ₹300 crore or more, 30% of it will result in offsets, implemented through Indian offset partners.
- As aerospace imports rose rapidly, so did the exports via the offsets by 544% in 2007, compared to the previous year.
- By 2014, exports increased to $6.7 billion from $62.5 million in 2005.
- The offset clause enabled India to join the league of the world’s top 10 aerospace exporters.
- The success was short-lived, however. The policy dilution undid success.
- Exports plummeted after the offset clause was relaxed.
What could be done?
- Because of the CAG’s critical remarks in its latest report, the government has virtually scrapped the defence offset policy.
- Thus, India has voluntarily given up a powerful instrument of bargaining to acquire scarce advanced technology.
- But, there are successful examples to draw lessons from, as the aerospace industry episode demonstrates.
- India needs to re-conceive or re-imagine the offset clause in defence contracts with stricter enforcement of the deals.
- This should be based in national interest, and in order to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.
Source: The Hindu
