Sunday, September 13, 2015

What is a offset policy ?

Defense offset agreements are arrangements in which the seller of a product or service agrees to buy products or services from its client as an inducement. These agreement are legal trade practices in the aerospace and military industries, but seen by some as protectionist and distorting of competition.

Offsets Explained
  • Offset, as the term implies, is an element that counterbalances or compensates an act. 
  • It is a set-off from a development, in this case, military acquisition. 
  • However defined, the term offset primarily signifies an element of 'compensation' as the predominant import of the term. 
  • It occurs “when 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."

As is commonly understood, in trade, offsets have been classified as direct or indirect offsets. 
  • Direct offsets are those that are directly connected with the item being sold by the seller and can take the form of co-production, component production, licensed production, etc. 
  • Indirect offsets are those not directly related to the product being imported and here compensations can be secured in any other area with the aim of obtaining for the economy what would otherwise have not been available to the buyer but for the purchase.

Though the above two forms characterise the two widely-accepted compensatory strategies, it is necessary to add a new terminology to describe a hybrid form of offsets that is between the direct and indirect offsets that India is seeking to obtain. This may be termed as quasi-direct offsets. 

  • It can be defined as compensation given in the sector under which the purchase falls, but is not directly connected with the product that is being imported. 
  • For instance, when tanks are imported, and the offset is obtained in the form of assistance for the co-production of a warship, then it will fall within this definition (quasi-direct) as it enhances the defence capability of the importing nation, though the compensatory arrangement is not directly connected with the item being imported. 
  • Therefore, though analysts have largely described India's policy as seeking direct offsets, it would be more accurate to describe it as quasi-direct offsets.

History of India's Defence Offset Policy

India inherited some defence industries from Great Britain. They included Hindustan Aeronautics Limited (HAL), which is today India's largest defence public sector undertaking (DPSU), Mazagon Docks Limited (MDL), the largest shipyard in the nation, and more than half a dozen ordnance factories. The growth of the domestic defence industry has, however, been sporadic since Independence. It did not follow any definite plan though emphasis was placed on enhancing indigenous defence production capability.

  • Some analysts have also traced certain vigorousness in the Indian effort at developing an indigenous defence capability to the early 1960s spawned by the 1962 India-China war.
  • The war is seen as having underscored the urgency of building a domestic defence industry through foreign assistance. 
  • It was also in consonance with Nehru's policy of building a strong industrial base patterned on the Soviet model. 
  • But while the war with China has been identified as the catalyst in the effort at developing a domestic defence base, there was no concerted, systematic and well-orchestrated effort towards the achievement of this goal.

What factors stood in way of building a strong military- industrial base ?

There were many factors that stood in the way of India building a strong military-industrial base. 
  • India's comparatively easy access to various types of defence equipment from the former Soviet Union (FSU) and their purchase against deferred rupee payments and on “friendship” price were some of them. 
  • Sophisticated defence equipment was transferred to India under the favourable rupee-rouble arrangements from FSU. 
  • Some license production facilities were also established in India, for instance for the Mig-21 aircraft. 
  • The Cold War also ensured that India continued to have a favourable and preferred source of defence systems and equipment from FSU. It did not find the superpower wanting in any critical manner in fulfilling India's defence requirements. 

However, with the collapse of the FSU, India lost easy access to sophisticated defence equipment at cheap prices. The problem was compounded by the absence of an alternate source of modern defence equipment. The situation became worse with the almost complete disruption in the supply of services and spare parts necessary to maintain the predominantly Soviet-equipped Indian armed forces. The navy was particularly affected, as it was dependent on Soviet designs and equipment for some of the ships that were under construction in India. This led to huge cost and time overruns in the indigenous construction programme of naval vessels.

In 2005, India had announced its first offset policy.....!!!!

Defence Procurement Procedure (DPP) 2005.
  • It was in 2005 that India formulated a defence offset policy to contribute to the nation's goal of developing its domestic defence industry. 
  • This policy was incorporated in the Defence Procurement Procedure (DPP) 2005. 
  • The policy introduced a 30 per cent offset in contracts valued above Rs 3 billion under “buy” and 'buy and make” categories.

The offset policy was, however, in the nascent stage and it lacked clarity in many areas. It also suffered from the absence of any designated agency in the Ministry of Defence (MoD) for guiding, overseeing, executing and monitoring the implementation of the policy. In reality, confusion reigned in equal measure in the corridors of South Block as in the minds of the vendors on how to implement the offset obligations. Consequently, the offset policy did not yield any dividend.

The absence of any offset benefit to the Indian defence industry led the Government of India (GoI) to make significant changes in DPP 2006 and they included the following:
  • offset was made mandatory in defence contracts of the size and nature as prescribed in the 2005 policy;
  • foreign firms were allowed the flexibility of forming joint ventures (JVs) with Indian firms, and;
  • a new organisation called the Defence Offset Facilitation Agency (DOFA) was established comprising of representatives of all stakeholders; the Services, DPSUs, Defence and Research Organisation (DRDO), etc.

Offset Policy in DPP 2008
  • The limited success of the offset policy of 2006 led to its elaborate revision in 2008. 
  • India had by now become one of the largest importers of defence equipment, with nearly 70 per cent of its requirements being met by foreign suppliers. 
  • The demand of the armed forces also resulted in the high growth of India’s defence budget. 
  • The 2008 policy aimed at the creation of conditions for assisting in the development of a domestic military-industrial complex.

What now ?

Establishing a link between MAKE IN INDIA and OFFSET POLICY !!

In a bid to build domestic capabilities in defence and to link defence production with Prime Minister Narendra Modi's 'Make in India' campaign, India has relaxed its offset policy.

Some features of relaxed offset policy !!
  • Exempting foreign firms from obligations, like declaration of Indian offset partners' name, amount of FDI and value of equipment. Thus under the new deal, any foreign company will not have to declare name of its Indian partner.
  • It can set up its factory in India under new offset rules without declaring FDI and value of machines installed there.
  • Vendors can give mandatory details at the time of offset credit.
  • Defence secretary (procurement), not defence minister as in the previous offset policy, will be the final word on any changes within an offset proposal.

What has not changed ?
  • No change in rules of offset amount, which mandates a foreign firm to invest 30% of the contract value in India.

What analysts say ?
  • India is perhaps the only major arms importing country that has a very modest offset percentage (30%).
  • It should be raised to atleast 50% to ensure an enhancement flow of offsets to the Indian industry.
  • Videshi companies k liye 30 percent bhi bahut ho raha hai !!

In terms of dollars and contract what is the scene ?
  • India has recently signed 25 offset contracts worth $4.87 billion. 
  • There are 44 more contracts under various stages of procurement with a potential value of $15 billion for discharge until 2028. 
  • The Modi government had agreed to $20 billion dollar worth arms procurement deals. ( now claims of about $35 billion)
  • But half of these deals were in limbo due to strict offset policy. 
  • India is world's top arms importer and struggling to make domestic capabilities more competitive and produce high-tech defence equipment through offset policy.

Summarising the OFFSET POLICY AMENDMENT...!!!
- Technical and commercial proposal to be submitted at the time of Request for Proposal
- Foreign firms to declare Indian offset partner
- Declare offset obligation i.e. how much amount via FDI, via technology transfer and via import of equipment
- Vendor don't require any of these to declare at the time of RFP
- Vendor can declare at the time of offset credit; but if found wrong, deal can be declared invalid and penalty imposed
- Vendor can also declare all these thing one year before offset obligation begins

 A key defence ministry appointed panel led by former home secretary Dhirender Singh to suggest changes in the procurement policy is discussing several leniencies in the current offset policy, including the new concept of a 'green channel' for companies with a proven record, even as it has concurred with a government view that misdeeds (corruption) of an entity should not affect the equipment itself that has been selected by the armed forces after due process.

Miscellaneous !!

·                     Rafale deal: France says no to offset, yes to 'Make in India'

Print Friendly and PDF

Blog Archive