India is the third largest importer of arms and equipment in the world. Every year nearly 30 to 40 % of the defence budget finds its way out of the country towards acquisitions either through direct or indirect imports. This is a major amount for any country leave alone India. The bottom line is that a substantial amount of precious National resources move out without giving corresponding benefit to the nation.
The commercial logic of Defence imports is most exploitative for any economy. When a country imports Defence equipment without offsets, it not only robs the country of dignity and makes it vulnerable to denial regimes, it also does not add to the economy of the country, either as capital / infrastructure or as consumption (money spent).
In order to leverage this buying power of the country, to achieve greater self reliance in defence production, Ministry of Defence, Government of India has announced the Offset Policy as part of the Defence Procurement Procedure (DPP) 2005.
The offset policy given in DPP 2005 mentions inclusion of an offset clause amounting to a minimum of 30 percent of the indicative costing in the RFP where the indicative cost of the contract is Rs 300 Crores or more.
CII has always strongly recommended that Direct Offsets be implemented as a matter of National Policy for Defence Procurement. The suggested aim of the Offset Policy should be to get state-of-the-art technologies for both, Public and Private Sectors to give major thrust to Self Reliance and boost Defence exports. The Illustrative list of Priorities of the Offset Policy through Direct Offsets are:
- Acquisition and development of state –of-the-art technologies.
- Acquisition and development of manufacturing competence to create world class defence production industry
- Export of defence industrial products, sub-systems, engineering design and testing services
The Offset Policy introduced in DPP 2005 was further fine tuned in DPP 2006 as the offset clause would be applicable for all procurement proposals where indicative cost is above Rs 300 Crores and the schemes are categorized as ‘Buy (Global)’ involving outright purchase from foreign / Indian vendors and ‘Buy and Make with Transfer of Technology’ i.e Purchase from foreign vendor followed by Licensed Production.
Procedure for Implementing Offsets’ Provisions
The provisions in the Defence Procurement Procedure (DPP) 2006 concerning offsets will be implemented as per the following procedure.
These provisions will apply to all Capital Acquisitions categorized as ‘Buy (Global)’, i.e., Outright Purchase from foreign/ Indian vendor, or ‘Buy and Make with Transfer of Technology’, i.e., Purchase from foreign vendor followed by Licensed Production, where the indicative cost in the Request For Proposal (RFP) is Rs 300 crore or more.
Initially, a uniform offset of 30% of the indicative cost of the acquisition in ‘Buy (Global)’ category acquisitions and 30% of the foreign exchange component in ‘Buy and Make’ category acquisitions will be the minimum required value of the offset. Based on a review of the experience of implementing these provisions, the minimum offset percentage for the following two years will be prescribed with the approval of the Defence Acquisition Council.
The DAC may, after due deliberation, also prescribe varying offset percentages above 30% for different classes of cases or for individual cases depending upon the factors involved such as strategic importance of the acquisition or technology, enhanced ability of Indian defence industry to absorb the offset, export potential generated, etc.
These provisions will also apply with appropriate modifications to ‘Buy’ and ‘Buy and Make with TOT’ components for warship construction where the value of individual contracts is Rs 300 crore or more. In such cases, references to the Acquisition Wing will mean the DDP or shipyard which is building the ship and procuring the system or sub-systems.
Defence Offset Obligations
For the purpose of defence purchases made under the DPP 2006, offset obligations shall be discharged directly by any combination of the following methods:
- Direct purchase of, or executing export orders for, defence products and components manufactured by, or services provided by, Indian defence industries, i.e., Defence Public Sector Undertakings, the Ordnance Factory Board, and any private defence industry manufacturing these products or components under an industrial licence granted for such manufacture. For the purpose of defence offset, “services” will mean maintenance, overhaul, upgradation, life extension, engineering, design, testing, defence related software or quality assurance services.
- Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development, joint ventures and co-production of defence products.
- Direct foreign investment in Indian organisations engaged in research in defence R & D as certified by Defence Offset Facilitation Agency (DOFA).
The offset obligations are to be fulfilled coterminous within the period of the main contract. All offset offers which satisfy the minimum eligibility conditions will be placed on par and no preference will be given for any extra amount offered.
The advisability of giving additional weights to offers having multiplier effects in terms of exports generated or building indigenous capability in strategic technology products, or other issues may be considered after reviewing the experience of implementing the above policy.