IASbhai Daily Editorial Hunt | 21st Oct 2020
When obstacles arise, you change your direction to reach your goal; you do not change your decision to get there. –Zig Ziglar
EDITORIAL HUNT #199 :“Defence Procurement Policy 2020 Analysis | UPSC”
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 dilution in defence, a flawed policy turn
As an episode in India’s aerospace industry shows, it can succeed if it is designed and executed correctly
SYLLABUS COVERED: GS 3: Defence
What is an offset policy? And how is it expected to boost domestic capabilities? . Critically examine the loopholes in defence procurement policy 2020 . -(GS 3)
- Diluted offset policy
- Conditions for a successful defence purchase
- HAL example
- DILUTION OF OFFSET POLICIES : The government diluted the “offset” policy in defence procurement recently, reportedly in response to a Comptroller and Auditor General (CAG) of India’s report .
- PAST EXPERIENCES : The experience with the procedure in the aerospace industry since 2005 seems to offer useful lessons in redesigning defence offsets.
- LEARNING FROM MISTAKES : There are few lessons can we draw from the aerospace industry.
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.
- INSTRUMENTS OF BARGAIN : Thus, India has voluntarily given up a powerful instrument of bargaining to acquire scarce advanced technology — a system that large and politically ambitious nations seek to exercise.
- RE-INVENT AND REXAMINE : India needs to re-conceive or re-imagine the offset clause in defence contracts.
- SELF-RELIANT INDIA : Stricter enforcement of the deals in national interest, and in order to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.
SOURCES: THE HINDU EDITORIAL HUNT | Defence Procurement Policy 2020 Analysis | UPSC