Centre drops offset clause in govt-to-govt deal in new weapons buying policy
In a significant departure from India’s existing weapon-buying procedures, a new policy announced on Monday has done away with offsets in government-to-government deals and single-vendor contracts for purchasing military equipment on the grounds that this has not resulted in bringing cutting-edge technology into the country, a top official said.
This overrides the offset policy that required foreign vendors to invest in the country to boost indigenous capabilities at least 30% (it could go up to 50%) of the value of all contracts worth more than ₹300 crore awarded to them.
The scope of the offset policy will now be confined only to military contracts that involve competitive bidding, said director general (acquisition) Apurva Chandra during a presentation on the new Defence Acquisition Procedure-2020. The DAP-2020, cleared by defence minister Rajnath Singh on Monday, will be effective from October 1.
“No offset contract has led to transfer of technology into the country, with the scope being limited to product purchase as pointed out by the Comptroller and Auditor General in a recent report. There will be no offsets in intergovernmental agreements, government-to-government deals and ab initio single-vendor cases,” Chandra said.
This appeared to echo and address concerns raised in a Comptroller and Auditor General (CAG) report tabled in Parliament last week that said several offset contracts built into multiple defence deals had failed to bring in high-end military technology into the country. The critical observations were part of CAG’s scrutiny of the status of a raft of offset contracts — including the September 2016 Rafale deal — between 2005 and 2018.
Commenting on the ₹59,000-crore Rafale deal, the top auditor said that the plane’s maker Dassault Aviation and weapons-supplier MBDA had not confirmed the transfer of technology to the Defence Research and Development Organisation (DRDO), which was part of the offset contract.
“DRDO wanted to obtain Technical Assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. Till date the Vendor has not confirmed the transfer of this technology,” said the report.
CAG also sharply criticised foreign vendors who made several offset commitments to qualify for a contract, but were later not earnest about fulfilling their commitments.
According to experts, doing away with offsets could result in savings as foreign military contractors tend to increase their prices by about 10% to cater for their offset commitments.
The offset guidelines have been revised to give preference to the manufacture of complete defence products over components, the ministry said on Monday in a statement.
DAP-2020 has been aligned with the government’s vision of Atmanirbhar Bharat (self-reliant India) and empowering the domestic industry through the Make in India initiative, with the ultimate aim of turning the country into a global manufacturing hub, the statement said.
“The three key focus areas of DAP-2020 are Atmanirbhar Bharat, Make in India and ease of doing business. The procedure has five new chapters including leasing, acquisition from the DRDO and post-contract management,” Chandra said. It will allow the armed forces to lease military hardware for the first time — a move that could cut down on costs associated with buying weapons and systems. Leasing could be cheaper in the longer run, Chandra said.
The policy underlines that field evaluation trials for weapons and systems are to be conducted with the objective of nurturing competition rather than rejecting players for minor deficiencies. It seeks to increase local manufacturing and reduce timelines for procurement of critical military equipment. It incorporates a price variation clause “for large and protracted contracts in order to avert inflated initial quotes by vendors and arriving at a realistic price of the project,” the defence ministry statement said. The policy has also introduced a new provision for acquiring weapons and systems: “Buy Global — Manufacture in India”. It stipulates that only a minimum necessary quantity of defence equipment will be bought from abroad with the rest being manufactured in India. “The new category incorporates manufacture of either the entire/part of the equipment or spares/assemblies/sub-assemblies and maintenance, repair and overhaul (MRO) facility for the equipment through its subsidiary in India,” the statement said.
DAP-2020 should help self-reliance in the defence sector, most importantly by bringing in pragmatism into the process, said Lieutenant General Subrata Saha (retd), a member of the National Security Advisory Board and a former army deputy chief. “It has acknowledged realities based on experience and suitably adapted the policy. Introduction of leasing opens up new opportunity to get value with financial prudence. Increasing indigenous content in various categories and introduction of new categories for import substitution should enable greater participation by domestic industry,” Saha said.
Formulating general staff qualitative requirements (GSQR) on the basis of what’s available addresses the oft-stated concern of industry of unrealistic specifications, he said. “This should bring in clear distinction between QRs for systems to be acquired and QRs for systems to be developed,” he said, adding that including post contract management in the policy was a good and long overdue step.
Industry welcomed the new policy. “DAP-2020 has created pragmatic avenues for foreign original equipment manufacturers (OEMs) to manufacture in India on their own and in collaboration with Indian industries. It completes the triad of policy, organisation and procedure towards creating a vibrant and capable domestic defence industry base and marching towards self-reliance,” said CII director general Chandrajit Banerjee.
He added that for the defence sector, self-reliance was not just an economic necessity but also a strategic imperative.
To leverage the strength of the Indian software industry, the DAP-2020 has introduced a new chapter that deals with acquisition of products and information and communication technology (ICT) systems to address existing voids. “Peculiar issues related to procurement of ICT-intensive equipment especially of interoperability and built-in upgradability, enhanced security requirements and change management have been included (in the DAP),” the defence ministry said.
The DAP-2020 states that several categories of acquisition and the strategic partnership model will be “exclusively reserved” for Indian vendors who meet the criteria of ownership and control by resident Indian citizens with foreign direct investment not more than 49%. “This reservation will provide exclusivity in participation to domestic Indian industry,” the ministry said.
According to defence ministry officials, the DAP-2020 has clearly laid down that only those firms that have over 50% Indian ownership will be eligible to take part in key Make in India purchases. As a measure to enhance indigenous content, the policy seeks to promote the use of indigenous military material and reward vendors for utilising indigenous raw material.