New Delhi. A decade-and-a-half after making offsets mandatory in all major defence deals, Indian has shelved this provision for future government-to-government contracts, like that for the Rs.59,000 crore ($9 billion) purchase of 36 omni-role Dasault Rafale combat jets from France, with an official admitting that “these are not working”.
We removed some of the offset requirements as they are not working. From now on there will be no offset clause in government-to-government, single vendor and IGAs,” Director General Acquisition Apurva Chandra told the media on September 28 soon after Defence Minister Rajnath Singh announced the Defence Acquisition Policy (DAP) 2020.
Offsets entails the transfer of high-end technology to boost the level of the domestic industry and issues like costs, economies of scale and India’s policy on the export of military hardware, which currently restricts this to the non-lethal variety.
At the bottom line, is not only the capability of the Indian industry to absorb and leverage this high-end technology but also the manner in which a behemoth like the state-owned Hindustan Aeronautics Limited (HAL) that would be responsible for translating the benefits from the offsets on the ground has been playing footsie with the international players that would be transferring such technology.
The first test, in fact, had come soon after the offsets clause of ploughing back 30 per cent of the value of high-end deals was introduced and made applicable to an Indian Air Force (IAF) tender floated in 2007 for 126 Medium Multi-Role Combat Aircraft (MMRCA) , with 18 to be purchased in fly-away condition and the remaining 108 to be manufactured by HAL under a Transfer of Technology (ToT) agreement. (In this case, the value of the offsets was raised to 50 per cent.)
Six aircraft were in the fray and after a torturous process of trials, the Rafale had emerged on top in 2012. Price negotiations commenced but collapsed on a clause for the responsibility for the aircraft to be manufactured in India. Rather speciously, HAL insisted that while it would be manufacturing the aircraft in India, the responsibility for their performance would rest with Dasault!
Quite naturally, Dasault flatly turned this down, leading to the collapse of the tender. Then, during a state visit to France in 2015, Prime Minister Narendra Modi announced that India would be purchasing 36 Rafales in a fly-away condition under a G2G deal. The first five arrived in late July 2020, with another lot expected in October and final deliveries are to be completed by 2021. There is obviously an offset clause but this appears to be of a “bankable” variety since there is no manufacture involved and the obligation could be fulfilled in other areas of military hardware at a later date.
This came in for adverse comments last week, with the government auditor, the Comptroller and Auditor General of India (CAG) noting that no transfer of technology of any kind had taken place by either Dasault or the weapons’ supplier MBDA.
For instance, the Defence Research and Development Organisation (DRDO), the channeling agency for the offsets, “wanted technical assistance for the indigenous development of the (Kaveri) engine for the Light Combat Aircraft (LCA it had developed)” but till date “the vendor has not confirmed the transfer of this technology”, the CAG report tabled in Parliament said.
Days later came the announcement that the offset clause had been waived for future G2G deals and would only apply to deals signed after competitive bidding.
On paper, the MMRCA tender has been refloated but there is no clarity on the numbers now involved, even though there are suggestions that there would be a follow-on order once the delivery of the 36 Rafales is completed. So, in reality, it is back to square one when the offsets clause was first introduced.
There is also the question of costs, with a senior Defence Ministry official admitting when the IAF tender was floated that this would rise due to the offsets clause.
“It’s like this. If you are paying me x amount and I have to plough back 30 to 50 percent, this obviously cannot eat into my bottom line and would have to be factored in, thus raising the overall cost,” the official had explained, cutting through the jargon that such discussions normally entail.
There are other practical issues involved, for instance economies of scale.
“I have an order for manufacturing 100 aircraft, so I either retool the existing facilities or set up a whole new plant (one US manufacturer had in fact offered to relocate its entire plant that manufactured a jet that was in contention for the IAF tender). What happens after I have made the 100 aircraft? I can’t just shut down the plant; I have to continue manufacturing. Let’s say the IAF does not require the additional aircraft. The only way out is exports but I can’t do this in the present environment because India permits only the export of non-lethal military hardware,” the official explained.
Per se, there can be no denying the benefits of offsets but the manner in which they are implemented has to be carefully thought through. But, given the inability of India’s manufacturing industry to absorb high-end technology, HAL being a classic example, bankable offsets that are implemented at a later or in non-defence areas of industry, seems to be the only way out – even though this is the second step of the process.
But even here, there are pitfalls, as a noted expert in India’s defence acquisition regime, Major General Mrinal Suman (retd), pointed out in an article in the USI Journal of think tank United Services Institute put it way back in 2007:
“Offset banking is a highly complex affair needing elaborate organisational setup with a dedicated expert agency. Unless handled with due care and caution, there is a likelihood of the country being taken in by clued-up vendors. Instead of economic gains, India may get saddled with infructuous and wasteful activities. Besides, it may give rise to unscrupulous dealings with consequent trading of charges. India must, therefore, tread warily and exercise due caution while considering introduction of offset banking.”
Fifteen years down the line, the situation remains much the same.
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