In line with the government’s assurances to streamline defence procurements, the Defence Ministry is set to bring about major changes in offset provisions in the new Defence Procurement Procedure (DPP) 2015, to be released in the next two months.
Offset obligations were introduced in 2005 to develop the defence industrial base in the country. It stipulates that for deals worth over Rs. 300 crore, the Original Equipment Manufacturer (OEM) has to reinvest 30 per cent of the contract value in the country.
One of the key changes in the DPP will be an option to migrate from offset obligations to ‘Buy and Make’ category, sources said. Under the new provision, the value of Foreign Direct Investment by the OEM and the eligible products being manufactured in India will be counted against offset obligations. This will provide a boost to ‘Make in India’ programme in defence and bring in greater FDI, sources said.
Of the 24 contracts signed between 2007 and 2013, total offset obligations were close to Rs. 30,000 crore. Ninety per cent of them under-performed their targets and annual offset obligations remained unfulfilled, the sources observed. In addition, the cost of contract goes up as OEMs charge for technology transfer and also significantly slowed the procurement process while no meaningful technology was accrued.
Speaking at Aero India 2015 in Bengaluru, Prime Minister Narendra Modi stressed the importance of offsets and said, “I want our offsets policy not as a means to export low-end products, but to acquire state-of-the art technology and skills.”
He further added: “We have introduced significant reforms in our offsets policy. I am acutely aware that it still needs a lot of improvements. We will pursue them in consultation with domestic industry and our foreign partners.” Defence Minister Manohar Parrikar too had assured that the offset policy would be made more lucrative to derive better value out of it. However, noted defence analyst Brigadier (Retd.) Gurmeet Kanwal sounded a note of caution. “At present our defence industry’s technological base is not of the level that we can absorb 50 per cent offsets of the project like the Rafale. The proposed amendments to the policy are unlikely to change this substantially.”
The industry responded positively. “The new policy will help in getting work in India and technology which will develop our manufacturing capability further,” said Ashok Wadhawan, president, Manufacturing Business, Punj Lloyd.
