India’s defence offset policy, introduced in 2005, has largely failed to achieve its objectives due to constant tweaks, as well as reluctance on the part of foreign defence manufacturers to take the additional cost burden of offsets, defence industry experts say.
On September 23, the Comptroller and Auditor General of India said in a report that the objectives of India’s offset policy had remained largely unachieved more than a decade after its adoption.
The CAG also slammed french aerospace firms Dassault Aviation and MBDA, the main contractors in the Rs 59,000 crore Rafale deal for the Indian Air Force, and said they had not discharged 30 percent of their offset obligations, which was to transfer high-end technology to help India’s Defence Research and Development Organisation (DRDO) develop a jet engine for the LCA Tejas.
“Till date the Vendor has not confirmed the transfer of this technology,” the CAG’s report, tabled in Parliament on Wednesday, said.
“A concern here is constant changes to the offset policy as well as defence procurement policy. By the time the industry gets used to one iteration, another one comes up,” said an executive from a global defence contractor. The person did not wish to be named as the company is involved in a few defence equipment bids for the armed forces.
India had put together an offset policy in 2005 to ensure that a foreign vendor from whom defence hardware worth over Rs 300 crore was procured, invested at least 30 percent of the value of the purchase, in India.
The foreign vendor could do this either through foreign direct investment, offering of free transfer of technology to Indian firms or purchasing products and components manufactured by Indian firms. To complete their offset obligations, foreign vendors had to select an Indian firm as a partner. The offset policy has undergone multiple revisions, in 2006, 2011, 2016 and 2018.
However, the fault also lies with defence manufacturers, said Colonel KV Kuber, director for Aerospace and Defence with EY. Kuber was also the director of capital acquisition programmes in the Ministry of Defence from 2005 to 2009.
“There is an inherent reluctance on part of any overseas equipment manufacturer to do offsets, as it is an additional cost, on top of manufacturing the equipment. That reluctance brings in complacency, because the company has already got the contract. Till the contract is signed, the company is vulnerable. Once it is signed, the government is vulnerable,” Kuber said.
“India’s offset policy is actually one of the most liberal in the world. The defence contractors get to choose their own Indian partners without any interference from the government,” Kuber said.
The CAG said in its report that of the total defence offsets contracted till 2018, only 3.5 per cent were contracted to be discharged through Foreign Direct Investment. The report stated that CAG did not find a single case where the foreign vendor transferred high technology to Indian companies.
It its report, the CAG stated that 46 offset contracts worth Rs 66,427 crore were signed between March 2005 and March 2018, but only Rs 11,396 crore were discharged till December 2018
“In many cases, it was found that the foreign vendors made various offset commitments to qualify for the main supply contract but later were not earnest about fulfilling these commitments,” the report said.