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.
• Many experts contend that the move is a setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat. 

What is an offset policy?

•  The offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it. 
• Since defence contracts are costly, the government wants part of that money either to benefit the Indian industry, or to allow the country to gain in terms of technology.

Objectives of offset

• The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by 

(i) fostering development of internationally competitive enterprises, 

(ii) augmenting capacity for Research, Design and Development related to defence products and services and 

(iii) encouraging development of synergistic sectors like civil aerospace, and internal security.

Need for offset policy

• Developing country buyers often lack an industrial base and research and development (R&D) facilities.
• Apart from securing the lowest prices, large buyers also try to acquire the technology to upgrade domestic production and build R&D capabilities through the offset policy.

Changes over time 

• 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.

Issues with the current policy

• 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. 
• Also technology transfer agreements in the offsets were not implemented, failing to accomplish the stated policy objective. 
• The government has diluted this policy further. Henceforth, the offset clause will not be applicable to bilateral deals and deals with a single seller. 
• Most defence deals being bilateral or a single supplier deal,
  • The dilution means practically giving up the offset clause.
  • This impacts India’s prospects for boosting defence production and technological self-reliance. 
• Due to the CAG’s latest report, the government has virtually scrapped the defence offset policy. Thus, India has voluntarily given up a powerful instrument of bargaining to acquire scarce advanced technology.

Offset short lived in aerospace

• According to the offset policy in 2005 for contracts valued at ₹300 crore or more, 30% of it will result in offsets, implemented through Indian offset partners. 
• By 2014, exports increased to $6.7 billion from $62.5 million in 2005, according to the United Nations Comtrade Database.
• The 2005 policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru. 
• 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. 
• The success was short-lived, however. 
• Exports decreased rapidly 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. 

Aiding self-reliance

• 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.
• There are successful examples to draw lessons from, as the aerospace industry episode demonstrates. 

References:

1. https://www.mod.gov.in/sites/default/files/revised-guidelines.pdf 
2. https://indianexpress.com/article/explained/defence-ministry-acquisition-procedure-offsets-6654837/ 
3. https://www.thehindu.com/opinion/lead/offset-dilution-in-defence-a-flawed-policy-turn/article32903639.ece