Sunil Mani | R Nagaraj

Defence Procurement Policy 2020 Analysis | UPSC

Sunil Mani is Director, Centre for Development Studies, Thiruvananthapuram. R Nagaraj is Professor (retired), Indira Gandhi Institute of Development Research, Mumbai.

OFFSET TIES UP THE END

• PROTECTIONISM : Most countries restricts trade in defence equipment and advanced technologies in order to safeguard national interest.
• COMMERCIAL INTERESTS : Yet, for commercial gains and for global technological recognition, governments and firms do like to expand the trade.
• BILATERAL AGREEMENTS : Negotiated bilateral sales between countries are a way out of the dilemma.

• PRICING THE PRODUCT : In such trade negotiations, the price of the product is one of the many other factors.
• GEOPOLITICS DECIDES CONTRACTS : Geopolitics and the technical knowhow involved in the equipment weigh-in considerably since the contracts are for the long term, with technological fixities.

A SUCCESSFUL COMPELLING DEFENCE PURCHASE

• It has the advantages of bulk purchase

• There is considerable “path dependency” in such choices.As rendering the decisions are difficult to reverse. 

INTERNATIONAL DEFENCE MARKETS

• PRIME CUSTOMERS : Developing country buyers often lack an industrial base and research and development (R&D) facilities (which take a long time to mature).
• BARGAINING STRENGTH : The price and the terms of the contract often reflect the government’s relative bargaining strength and also domestic political and economic considerations.
• PURCHASING POWER : Large buyers such as India seek to exercise their “buying power” to secure not just the lowest price.
• UPGRADING TO LEVEL TWO : Countries also try to acquire the technology to upgrade domestic production and build R&D capabilities.
• The offset clause — used globally — is the instrument for securing these goals.

A NUMBER OF CHANGES

• DAWN OF OFFSET CLAUSE : Initiated in 2005, the offset clause has a requirement of sourcing 30% of the value of the contract domestically.
• TWEAKING MAKE IN INDIA : Indigenisation of production, training Indian professionals in high-tech skills, for promoting domestic R&D. However, the policy has been tweaked many times since.

CAG REPORTS ON OFFSET POLICY

• CAG REPORT : According to the recent CAG report mentioned above, between 2007 and 2018, the government reportedly signed 46 offset contracts worth ₹66,427 crore of investments.
• POTENTIAL INVESTMENT : However, the realised investments were merely 8%, or worth ₹5,457 crore.
• VOID OFFSET DEALS : Reportedly, technology transfer agreements in the offsets were not implemented, failing to accomplish the stated policy objective.

• DUSK OF OFFSET CLAUSE : On September 28, state has diluted this policy further.

SETBACK FOR DEFENCE

• TYPE OF DEAL : Most defence deals are bilateral , or a single supplier deal (given the monopoly over the technology).
• GIVING UP OFFSET CLAUSE : The dilution means , sounding the death knell of India’s prospects for boosting defence production and technological self-reliance.
• COST ADVANTAGE : The State, however, has defended the decision by claiming a cost advantage.

• FORMULA : The higher cost of the agreement due to the offset clause would pay for itself by: it will reduce costs in the long term by indigenisation of production and the potential technology spill-overs for domestic industry.

SHORTLIVED IN AEROSPACE

• AEROSPACE INDUSTRY : The offset policy can, however, succeed, if it is designed and executed correctly, as a parallel episode in aerospace industry demonstrates.
• CIVILIAN AIRCRAFTS LEADERS : Despite the heft of Hindustan Aeronautics Limited, India is a lightweight in global civilian aircraft manufacturing, as the public sector giant mostly devotes itself to defence production.
• STALLED PROJECTS : The much-touted National Civil Aircraft Development (NCAD) project — to come up with an indigenously designed Regional Transport Aircraft (RTA) — has remained a non-starter from day one.
• INTRODUCTION OF OFFSET POLICY : However, with the introduction of the offset policy in 2005, things changed dramatically.

• AEROSPACE EXPORTS BOOM : As aerospace imports rose rapidly, so did the exports via the offsets, by a whopping 544% in 2007, compared to the previous year.
• MAJOR AEROSPACE EXPORTER : The offset clause enabled India to join the league of the world’s top 10 aerospace exporters; the only country without a major domestic aerospace firm.
• SHORT LIVED SUCCESS : Exports plummeted after the offset clause was relaxed, primarily when the threshold for the policy was raised from the hitherto ₹300 crore to ₹2000 crore, in 2016.
• VIBRANT AEROSPACE CLUSTER : The 2005 policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru.