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Current Affairs

Defence offsets

Date: 02 October 2020 Tags: Miscellaneous

Issue

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.

 

Background

The Defence Ministry came up with its latest Defence Acquisition Procedure 2020 (DAP 2020), which comes into effect from October 1. It has changed a 15-year old policy.

 

Details

  • 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) has 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.

  • The first policy said that all defence procurements exceeding Rs 300 crore, estimated cost, will entail offset obligations of at least 30%, which could be increased or decreased by the DAC (Defence Acquisition Council).

  • 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”.

 

Methods of offsets

  • Direct purchase of, or executing export orders for, eligible products manufactured by, or services provided by Indian enterprises

  • Foreign Direct Investment in joint ventures with Indian enterprises (equity investment) for eligible products and services

  • 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.