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Wednesday, June 03, 2015

Defence Offsets-IDSA Monograph

Like many other countries, India has a formal offset policy to enable it to leverage its huge arms imports in order to develop a strong indigenous defence industry. The offset policy, which was formally announced for the first time in 2005, has been revised several times, with the latest policy coming into force since August 2012. As per the extant provision of the policy, a 30 per offset is mandated in import contracts valued Rs 300 crore or more. Till December 2014, the defence ministry had signed 25 offset contracts– 16 for the Air Force, six for Navy and three for Army ­– valued at $4.87 billion. 
However as highlighted in the successive reports of the Comptroller and Auditor General of India (CAG), India’s experience of offsets has been less than satisfactory.The CAG observed that offsets in some contracts did not result in any value addition in India; that the foreign companies had a free run in selecting ineligible Indian offset partners for discharge of their obligations; and that the monitoring mechanism for offset contract implementation was weak.In the procurement of Low Level Transportable Radar (LLTR), the French company, Thales was allowed to have Thales International India, its 100 per cent Indian subsidiary, as its Indian offset partner to discharge a part of its total offset obligations of $ 34.8 million. In the case of the Euro 159.3 million fleet tanker contract with Fincantieri (signed on April 23 2008), the Italian company was also allowed to have two foreign subsidiaries (Wartsila India Ltd and Johnson Pumps Ltd) as its Indian offset partners to discharge part of its Euro 41.6 million offset obligations.
Complementing the audit findings of the CAG, this monograph presents further evidence, indicating the poor impact of the policy on Indian defence industry.
Beyond Defence: Offset Policy at National Level
Some countries including India have an offset policy that operates within the narrow prism of defence procurement only. In other words, the offset requirement is not applicable for the non-defence sector. South Korea and Israel are, however, figure among the countries whose offset policy is applicable at the national level for both defence and civil procurement. In the case of Israel, the offset requirements, as enshrined in its official Industrial Cooperation (IC) guidelines, can be applied to any procurement by the state, government corporations and public agencies when the value of the purchased foreign goods or services exceeds $5 million. Moreover, Israel is also in the process of bringing municipal authorities under the offset purview, enabling contracts such as for sewage treatment, water treatment, power systems, etc. to mandatory industrial cooperation conditions.

Download the report: Laxman K Behra

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