Keep the faith: Offsets remain a useful strategic tool to compress development time locally


A new iteration of Defence Acquisition Procedure (DAP) was unveiled this week by the government, after lengthy consultations with the stakeholders. The new procedure, which takes effect next month, has introduced interesting concepts such as leasing, which will provide an opportunity to lower military hardware costs. However, it’s another cost saving provision which is arguably the most significant change in the current iteration. DAP will in future not build in offsets in a contract with a supplier, when the contract is directly between governments or limited to a single vendor. Offsets represent a reinvestment back into India by a successful bidder.

This policy change needs to be seen in the context of observations in a CAG report and the government’s aim of enhancing self-reliance in procuring defence equipment. Last week CAG, yet again, observed that India’s offset policy didn’t produce desired results. Among the examples mentioned by the CAG is one where Dassault Aviation, which supplies the Rafale aircraft, had not yet fulfilled its offset obligation to transfer technology which would help DRDO develop the Kaveri engine. This engine has been under development for 30 years, highlighting the technological challenge confronting indigenous defence development.

India does have a domestic defence industry, with both public and private sector presence. However, it faces challenges of quality and lacks cutting edge technology. Offsets, where India can leverage the size of its contracts, are a way to compress the development time for domestic industry. This strategy has met with success in Canada, Israel and South Korea, countries which have generally had tougher offset obligations than India. Unfortunately, India appears to have partially lost faith in offsets as a strategic tool.

Government to government procurement accounts for a significant extent of India’s arms imports, which came to Rs 45,706 crore in 2018-19. With an import bill of this magnitude, India can ill afford to ease up on any strategic tool to promote local development. There is no dearth of local vendors; 48 contracts were signed by the government between April 2019 and July 2020 of whom 30 were from the private sector. But they need a leg up if the proportion of imports in acquisitions is to come down. Offsets represent a useful way to bring this about. New Delhi shouldn’t lose faith in the efficacy of offsets, a critical tool for realising Atmanirbhar Bharat’s goals.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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