DMPQ-Discuss the implications of govt’s decision to dilute the ‘offset’ policy in defence procurement.

. 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. Many contend that the move is a setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat. But why is it a setback for the goals under Atmanirbhar Bharat? The experience with the procedure in the aerospace industry since 2005 seems to offer useful lessons in redesigning defence offsets.

Initiated in 2005, the offset clause has a requirement of sourcing 30% of the value of the contract domestically; indigenisation of production in a strict time frame, and training Indian professionals in high-tech skills, for promoting domestic R&D. However, the policy has been tweaked many times since.

Most defence deals are bilateral (as stated above), or a single supplier deal (given the monopoly over the technology). The dilution means practically giving up the offset clause, sounding the death knell of India’s prospects for boosting defence production and technological self-reliance. The government, however, has defended the decision by claiming a cost advantage. It is a lamentable excuse for the reported policy failure. 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.

The offset policy can, however, succeed, if it is designed and executed correctly, as a parallel episode in aerospace industry demonstrates. 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 much-touted National Civil Aircraft Development (NCAD) project — to come up with an indigenously designed Regional Transport Aircraft (RTA) — has remained a non-starter from day on.

 

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