India decided to seek offsets against defence imports in 2005 and issued detailed policy in May 2006, with the proviso that the policy would be reviewed after two years. The policy is applicable to all purchases where indicative cost is over Rs 300 crores for ‘Buy’, ‘Buy and Make with Transfer of Technology’ and ship-building. Value of offsets has been fixed at 30 per cent of the cost of the contract.
Offset obligation can be discharged through any one or a combination of the following routes:-
Direct purchase of or executing export orders for defence products and services provided by Indian defence industries.
Foreign Direct Investment (FDI) in Indian defence industries.
FDI in Indian organisations engaged in research in defence R&D.
As is apparent, India took a deliberate decision to follow an approach of gradual, incremental and phased application of offsets. Being a new entrant, the government wanted to move cautiously and evolve the policy as it gained experience. Therefore, the current policy provides broad guidelines only and does not cover the complete gamut of issues related to the management of offsets. The government has been seeking inputs and advice from all concerned entities to make the policy more comprehensive and focused. The policy is currently under review as a part of the revision of Defence Procurement Procedure — 2006.
Suggestions under Consideration by the Government
Numerous suggestions have been received by the Ministry of Defence (MoD) from various quarters including the Confederation of Indian Industry, the US India Business Council and other foreign/Indian experts. The suggestions relate both to policy and procedural issues. MoD has shown its willingness to examine all suggestions and take a considered view for incorporation in the revised policy. Major suggestions with likely government responses are discussed in the following paragraphs.
Inclusion of Indirect Offsets
Offsets can be direct or indirect. In direct offsets, the trade arrangement is related to the primary product sold, its sub-assemblies and components. On the other hand, indirect offsets have a much wider applicability and cover other economic activities as well. India has decided to follow a semi-direct path and demands offsets related to the defence industry as a whole. Many experts feel that Indian defence industry is incapable of absorbing expected quantum of offsets. They recommend that the scope be enlarged to include indirect offsets as well.
The above suggestion is unlikely to be accepted as defence offset policy is MoD’s initiative. There is no national offset policy in place at present. Additionally, MoD wants to strengthen Indian defence industry and increase export of defence goods and services.
Offset Banking
Offset banking allows a vendor to generate potential offset credits through programmes undertaken prior to the award of main contract for future use against likely obligations. Bankable offsets can be created either by excess generation through ongoing offset programmes or by executing fresh offset-centric programmes. Offset banking and trade in offset credits are intrinsically and mutually contingent. In case a vendor fails to get the anticipated contract, he can recover his costs by selling the banked credits to a needy vendor. There has been spirited advocacy of offset banking by major foreign defence producers. As the Indian policy stipulates co-terminus completion of offset programmes, confident vendors want to get early-starter advantage.
The government is likely to permit offset banking, albeit with a number of restrictive clauses. Defence Offset Facilitation Agency (DOFA) may be empowered to approve programmes for the purpose. Trading in offset credits is unlikely to be accepted. Therefore, the foreign vendors may not be fully satisfied.
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