The ‘offset clause’ could help the country achieve the technological expertise and consequently self-reliance. However, India recently relaxed some norms in the policy. The article discusses the stated reasons for tweaking and its implications for the defence manufacturing industry in India.

Context

• Recently, the government diluted the “offset” policy in defence procurement, reportedly in response to a Comptroller and Auditor General (CAG) of India’s report tabled in Parliament last month.

Let’s understand ‘offset’ policy

•  In order to safeguard national interest, most countries restrict trade in defence equipment and advanced technologies.
• Yet, for commercial gains and for global technological recognition, governments and firms do like to expand the trade through negotiated bilateral sales.
• Restrictions are often imposed on the buyer country on use, modification and resale of such equipment and technologies.
• 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.
• The price and the terms of the contract often reflect the government’s relative bargaining strength and also domestic political and economic considerations.
• Large buyers such as India seek to exercise their “buying power” to secure not just the lowest price but also try to acquire the technology to upgrade domestic production and build R&D capabilities.
• The offset clause — used globally — is the instrument for securing these goals.

Changes in the offset policy

• Initiated in 2005, the offset clause has following requirements:
• 1) Sourcing 30% of the value of the contract domestically.
• 2) Indigenisation of production in a strict time frame.
• 3) Training Indian professionals in high-tech skills, for promoting domestic R&D.
• However, the policy has been tweaked many times since.
• According to the recent CAG report,  between 2007 and 2018, the government reportedly signed 46 offset contracts worth ₹66,427 crore of investments.
• However, 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 changed this policy further so that the offset clause will not be applicable to bilateral deals and deals with a single (monopoly) seller, to begin with.

Implications of the changes in offset policy

• The dilution means practically giving up the offset clause, and a setback to India’s prospects for boosting defence production and technological self-reliance.
• The government, however, has defended the decision by claiming a cost advantage.
• Howver, 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 and the potential technology spill-overs for domestic industry.
• Hence, giving up the offset clause is undoubtedly a severe setback.

How did offset policy work for aerospace industry?

• Despite the heft of Hindustan Aeronautics Limited, India is a lightweight in global civilian aircraft manufacturing, as the public sector giant mostly devotes itself to defence production.
• The National Civil Aircraft Development (NCAD) project — to come up with an indigenously designed Regional Transport Aircraft (RTA) — has remained a non-starter from day one.
• However, 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 a whopping 544% in 2007, compared to the previous year.
• By 2014, exports increased to $6.7 billion from a paltry $62.5 million in 2005, according to the United Nations Comtrade Database.
• The offset clause enabled India to join the league of the world’s top 10 aerospace exporters; the only country without a major domestic aerospace firm.
• However, exports reduced after the offset clause was relaxed, primarily when the threshold for the policy was raised from the hitherto ₹300 crore to ₹2000 crore, in 2016.
• The offset exports fell to $1.5 billion by 2019.
• The 2005 policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru.

Consider the question “How far has the offset clause been successful in enhancing the domestic capabilities of India in defence manufacturing? What are the challenges in achieving the objectives of the policy?”

Conclusion

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, in national interest, and in order to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.

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