DAP 2020: Offset clause and Rafale-like deals

Context:

• The new Defence Acquisition Procedure (DAP) 2020 has been released.

Current status:

• Among the other changes in the DAP 2020, the Defence Ministry has removed the offset clause requirement in Inter-Governmental Agreements (IGA).
• From now on, there will be no offset clause in government-to-government, single vendor and IGAs.
• However, all other international deals that are competitive, and have multiple vendors vying for it, will continue to have a 30% offset clause.
• Also, a new category for leasing of military equipment has been introduced.
• Defence procurement policy will not be retrospective and ongoing deals will not be impacted.

What is “offset clause”?

• Offset is an obligation by an international player to boost India’s domestic defence industry if India decides to buy defence equipment from it.
• Since defence contracts are costly, the government wants part of that money either to benefit the Indian industry or to enable India to gain in terms of technology. It is meant to improve domestic defence manufacturing.
• Under the offset clause, foreign companies are required to invest part of their deal value in the country.
• An offset provision in a contract makes it obligatory on the supplier to either “reverse purchase, execute export orders or invest in local industry or in research and development” in the buyer’s domestic industry.
• The Comptroller and Auditor General (CAG) defined offsets as a “mechanism generally established with the triple objectives of:

(a) Partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods.

(b) Facilitating induction of technology.

(c) Adding capacities and capabilities of domestic industry.

When was the policy introduced?

• The concept of offset clause in defence deals was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
• The Sixth Standing Committee on Defence (2005-06) had recommended in its report that modalities for implementation of offset contracts should be worked out.
• The first offset contract was signed in 2007.
• The government stated the “objective for defence offsets” for the first time in 2012.

 Why was the clause removed?

• It has been removed in order to bring down the additional costs in the defence contracts.
• Vendors would load extra costs in the contract to balance the costs, and doing away with the offsets could bring down the costs in such contracts.
• Also, there are administrative costs involved in discharging offset obligations, which the vendors pay.

What are the concerns raised by CAG?

• The CAG has been critical of the entire policy.
• Auditing the offset deals till March 2018, the CAG said that 46 offset contracts were signed. 66,427 crore, and till December 2018, ?19,223 crore worth of offsets should have been discharged.
• However, vendors have claimed the discharge of only 59% of the offsets.
• The Ministry has accepted only 48% of these offset claims, while the rest are pending or have been rejected due to various deficiencies.
• The remaining offset commitments of about? 55,000 crore would be due for completion by 2024, the fulfilment of which remains a major challenge.
• As in the case of the Rafale deal, according to CAG, in many cases, it was found that the foreign vendors made various offset commitments to qualify for the main supply contract, but later were not earnest about fulfilling these commitments.