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...!!!
Earlier
- Technical and commercial proposal to be submitted at the time of Request for Proposal
- 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
- Declare offset obligation i.e. how much amount via FDI, via technology transfer and via import of equipment
Now
- 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
- 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
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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.
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Miscellaneous
!!
·
Rafale
deal: France says no to offset, yes to 'Make in India'
