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| Offset debate within defence ministry |
| Ajai Shukla / New Delhi Dec 11, 2010, 00:12 IST |
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On the coming Wednesday, the ministry of defence’s apex decision-making body, the Defence Acquisition Council (DAC), will hold a crucial meeting to decide on far-reaching changes in the Defence Offset Policy. Significant sections of the MoD fear the proposed changes would unduly benefit foreign arms vendors, while derailing the offset policy’s aim of strengthening domestic defence industry.
Business Standard has learnt from senior MoD sources that DAC will consider, and possibly approve, the following amendments to the offsets policy, which have long been sought by the global arms industry:
- Liberalising the policy to permit indirect offsets in civil aviation and homeland security. Currently, vendors must discharge their offset obligations entirely within the defence industry.
- Expanding the definition of services that qualify as offsets. Currently, those that qualify for defence offsets are “maintenance, overhaul, upgradation, life extension, engineering, design, testing of defence products, defence related software or quality assurance services”. Many more are being considered, including training.
- Allowing transfer of technology to be eligible for offset credit. So far, the MoD has insisted it will pay upfront for technology, as a part of the main contract. Now, by providing technology as an offset, a vendor could discharge his offset liability.
- Permitting foreign vendors to invest ‘in kind’ in Indian defence industry. Presently, the policy permits ‘direct foreign investment’. Permitting investment in kind would allow vendors to claim as offsets the supply of goods and services, e.g. training simulators.
Yesterday, Business Standard had reported that Lockheed Martin’s $275-million offset offer — arising from its $962-million sale to India of six C-130J Super Hercules transport aircraft — had been accepted by the MoD, despite not meeting the current offset policy. If the DAC okays the proposed amendments, offset proposals like Lockheed Martin’s would become permissible. The MoD’s current offset policy mandates that foreign vendors awarded defence contracts above Rs 300 crore must plough back at least 30 per cent of the value into Indian defence production or research and development (R&D). But global vendors, particularly US arms corporations, insist the Indian defence industry does not have the capacity to absorb the Rs 40,000-50,000 crore worth of offsets that could arise over the next five years.
Global industry has kept pressure on the MoD ever since offsets were announced in the Defence Procurement Procedure of 2006 (DPP-2006). The influential US-India CEOs Forum is pushing for permitting defence offsets in civil aviation and homeland security. And, on August 25, six defence and aerospace bodies representing almost every major US, British, German, French and Canadian arms corporation sent the MoD a joint memorandum, urging “liberalisation” of the offset policy.
India Inc opposed
Indian industry, meanwhile, fiercely resists dilution of the offsets’ policy, especially companies that have invested in defence capabilities and now see offsets as a lever for growth. On November 29, at a meeting in the MoD, industry bodies CII and Ficci opposed the proposed changes, arguing strongly that Indian defence companies are capable of absorbing offsets. On the other hand, Assocham, dominated by companies that see defence as an opportunity for mass manufacture rather than high-tech capability creation, has argued for liberalising the policy. “Liberalising offsets would completely defeat the purpose of an offset policy,” says the CEO of a major private defence company, speaking anonymously. “Expanding offsets to civil aviation, for example, would mean a vendor could fulfil his obligations by producing luggage conveyer belts.”
Meanwhile, a divided MoD has internally debated whether to allow transfer of technology as offsets. The Defence R&D Organisation (DRDO), which has drawn up a list of 18 key technologies that must be acquired from abroad, argues that offsets provide a viable route for obtaining these. But MoD bureaucrats have resisted this plea, arguing it would be difficult to fix an acceptable price for a particular technology.
“It would be very easy for a foreign vendor to give us artificially tailored financial arguments about what it cost to develop a technology,” says a senior MoD official. “We could end up with a valuation much higher than what that technology actually cost.”
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