Explained: What are defence offsets?

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News: The Defence Acquisition Procedure, 2020 has removed the clause for offsets for certain kinds of defence contracts.

Facts:

Offset:

  • It is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it.
  • According to Comptroller and Auditor General (CAG), offset has three objectives:
  • partially compensating for a significant outflow of a buyer country’s resources in a large purchase of foreign goods
  • facilitating induction of technology
  • adding capacities and capabilities of domestic industry.

Background of Defence Offset Policy in India:

  • The defence offset policy was adopted on the recommendations of the Vijay Kelkar Committee in 2005.
  • The first offset contract was signed in 2007.

Ways in which foreign vendor can fulfil its offset obligations

  • Direct purchase of, or executing export orders for, eligible products manufactured by, or services provided by Indian enterprises
  • Foreign Direct Investment in joint ventures with Indian enterprises (equity investment) for eligible products and services
  • Investment in ‘kind’ in terms of transfer of technology (TOT) to Indian enterprises, through joint ventures or through the non-equity route for eligible products and services
  • Investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route for manufacture and/or maintenance of products and services
  • Provision of equipment and/or TOT to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products, and provision of eligible services.
  • Technology acquisition by DRDO in areas of high technology.

What changes after Defence Acquisition Procedure, 2020?

  • Government-to-government agreements (G2G), ab initio single vendor contracts or inter-governmental agreements (IGA) will not have offset clauses.
  • All other international deals that are competitive, and have multiple vendors vying for it, will continue to have a 30% offset clause.