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Will dilution help?

Moving from direct to indirect offsets will help leverage this policy in many key areas like energy and infrastructure, while producing better results for MoD too.

On April 1, 2012, the Indian defence ministry announced yet another round of changes in the offsets guidelines. These changes, among others, bring in transfer of technology including multipliers and in ?kind? under the ambit of offsets, extension of offsets discharge by two more years beyond the execution of main contract, inclusion of non-cash equity in terms of training, tooling etc, and extension of validity of offsets banking credits to seven years instead of two years as stipulated earlier.

The MoD had constituted a committee under the Director General Acquisition (Mr Vivek Rae) to review defence offsets guidelines and institutional arrangement and recommend further changes for effective implementation of the offsets policy in November 2010. The committee had held more than a dozen review meetings, including presentations from the stakeholders, and finally submitted its report some time in July 2011. It is learnt that the committee had recommended more than ten major changes in the defence offsets policy, including measures to improve institutional mechanisms. However, the Defence Acquisition Council, headed by the defence minister, has accepted changes only in two key areas?ToT and banking of offsets credits.

It is important to note that while the MoD has announced changes in its offsets policy, the Indian government is planning to bring out a national offsets policy, to be implemented under a nodal agency?National Offsets Authority?under the Cabinet Secretary, which would bring in all ministries and departments under the umbrella organisation for discharge of offsets.

What implications would the new changes in offsets policy entail? What are the key issues that impinge the relative success of defence offsets? These are some of the key questions that need to be addressed in order to make an assessment of the future directions of Indian defence offsets policy. I advance a set of five arguments for consideration by all stakeholders, primarily by the MoD.

First, the central objective of Indian defence offsets policy has been to strengthen the Indian military industrial complex in order to achieve a reasonable degree of self-reliance in military products and services. A careful analysis of the way the defence offsets policy has evolved in the last half a decade suggests that it has slowly moved from ?direct? offsets (applicable only to exclusive military products) to ?indirect? offsets (to include dual-use and a few civilian products). This dilution is not surprising as there is a parallel effort at the national level to leverage offsets in many key areas like energy and infrastructure under the broader rubric of the National Offsets Authority. Thus, it may not be a bad idea if exclusivity attached to defence is diluted. It may even produce better results if the MoD carefully pursues its objectives in key defence technology areas only, preferably on a case-to-case basis.

Second, dilution of offsets products into civilian areas like civil aerospace and internal security may create intra-departmental/ministerial problems while implementing offsets obligations on the one hand, and may encourage vendors to take advantage of ?kind? as well as ?multiplier? provisions in offsets conditions. New changes allow ToT as part of offsets, whereby non-equity route can include investment in ?kind?, which will invariably include license fee, documentation, training, tooling, spares, testing equipment, etc. The ToT will thus come in an expanded package, which the vendor can skillfully manipulate to its advantage. The committee had perhaps sensed this and hence suggested uniform 40% offsets on all acquisitions above R300 crore, which has not been accepted. Also, the problem area of inter-ministerial coordination would be a big headache for the MoD mandarins, which may slow down the process of offsets implementation.

Third, whether or not foreign capital investment (read FDI) in defence sector is required is a matter of debate. It is argued that investment can be sourced from domestic sources if the government gives enough acquisition guarantee to the private sector and lays out a roadmap for future requirements. However, the MoD seems to go in for a supposedly easier option by blending FDI with ToT under the offsets conditions to attract foreign vendors. As foreign vendors have shown reluctance to making large investments or sharing technology, it is too early to say whether such a strategy will work or not. If the foreign vendors start manipulating the methods to their advantage, relaxed norms in both FDI and ToT could prove costly for the government.

Fourth, extending the time limit of banked offsets credits to seven years is again designed to help the foreign vendors to park and use their offsets credits for contracted programmes as well as enable them to create further offset programmes in anticipation of future obligations. However, the MoD?s contractual obligations are confined to the foreign vendor alone. There is a need to ensure that both the foreign vendor and its Indian offsets partner be legally bound to the offsets conditions and in case of non-compliance, punitive action must be taken against such companies.

Finally, there is the question of accountability. Two key offices?department of defence production and director general acquisition?have the overall responsibility of discharge of defence offsets. But neither seems to own responsibility if any thing goes wrong. The MoD needs to seriously debate this issue and find out a clear solution for this problem. It could prove prudent for the MoD if it conforms to larger national objectives of offsets rather than preserving its exclusivity.

The author is a New Delhi-based defence analyst

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First published on: 23-04-2012 at 02:26 IST
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