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DEFENCE-SECURITY

The Knotty Matter Of Defence Offsets

It is time the defence offset policy is subjected to dispassionate cost-benefit analysis.

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The draft Defence Procurement Procedure (DPP) 2020, released by the Ministry of Defence (MoD) on March 20, exempted foreign vendors from discharging offset obligation in all ‘Buy (Global)’ cases exceeding Rs 2,000 crore other than those processed on the single-vendor basis under specific Inter-governmental Agreements (IGAs), including the Foreign Military Sales (FMS) programme of the US Government (USG).

The FMS programme is administered through a standing framework devised by the USG under which individual deals are finalised between the MoD and the Defence Security Cooperation Agency (DSCA) of the USG, which in turn enters into specific contracts with the US companies for supplying the equipment to India. The offset contract in all such cases is, however, negotiated by the MoD directly with the US company supplying the equipment through FMS, as the USG does not take any responsibility for offsets as a matter of policy.

Many thought this exemption was an oversight as the draft DPP 2020 also contained thoroughly revamped offset guidelines which seemed unnecessary if the non-exempted category of foreign contracts was to be narrowed down by excluding inter-governmental deals from its purview. It turns out that the exemption was not the result of an oversight.


The exemption has been retained, along with the revamped guidelines, as a part of the revised draft DPP 2020, rechristened as Defence Acquisition Procedure (DAP) 2020 and released by the MoD on July 27. The changes proposed in the offset guidelines require a fresh look, both on conceptual and empirical grounds, as the new regime is likely to yield diminishing returns.

The offset requirement was introduced in 2005 in a very rudimentary form based on the recommendations of the Kelkar Committee, but it was only in August 2012 that the objectives of the offset policy were defined for the first time. These were later incorporated in DPP 2013 and have continued unchanged since then.

The objectives of the current policy seek “to leverage capital acquisitions to develop Indian defence industry by


(i) fostering the development of internationally competitive enterprises,
(ii) augmenting capacity for Research, Design and Development related to defence products and services and
(iii) encouraging the development of synergistic sectors like civil aerospace, and internal security”.

These objectives have been tweaked in DAP 2020 by deleting the word ‘services’ from the second objective and the third objective altogether.

This seems to suggest that the deleted objectives have either been met or the MoD considers it futile to pursue these objectives through offsets. Neither of these inferences is correct.

Of 54 offset contracts signed till October 31, 2019, as many as 32 related to procurement programmes of the Indian Air Force (IAF), followed by 15 of the Indian Navy (IN) and seven of the Indian Army (IA).

Considering that 60 per cent of the offset contracts related to the IAF, manufacturing and services at least in the civil aerospace sector should have shown considerable progress for the MoD to conclude that this sector does not need any further incentivisation. But there is no evidence of that. The only alternative explanation is that these sectors are not viewed as priority sectors any more for reasons that remain unexplained.


The main issue, however, is not about the tweaking of the objectives of the offset policy but the need to continue with it in view of its past performance and the prospects of the Indian industry benefitting from it in future. It is unimaginable that the MoD’s sub-committee which has proposed the changes would not have considered these factors but it is possible that it did not contemplate recommending discontinuation of the policy as it was not a part of its terms of reference.

Be that as it may, there is a case for dispensing with the policy, especially in its proposed form, before it becomes a part of DAP 2020. The main reason for suggesting this is the likely reduction in the offset business for the Indian companies, which has anyway already shrunk with the threshold for foreign contracts entailing offset obligation being raised from Rs 300 crore to Rs 2,000 crore in 2016.

Several foreign contracts processed in the recent past have been only through the IGA/FMS route. This includes mega deals not only with the US and France but also with Russia. According to a July 2016 article, 70 per cent of the deals at that point of time were through IGAs.

There is no denying that the MoD has been more comfortable with such deals, most of which are on a single-source basis. This has also proved to be a faster way of concluding complex contracts.

Consequently, with the formalisation of the proposed exemption, coupled with the high threshold for effectuating the offset clause, and growing emphasis on procurement of equipment from the Indian companies which do not attract offsets, the number of foreign contracts entailing offset obligation would inevitably come down very significantly.

It would also prompt major exporters of arms to India to formulate schemes similar to the FMS, or nudge the MoD to go in for deals through IGAs to save their defence industry from executing offset contracts in India, which has never been easy for them, not least because of the complex process of changing offset partners, rephasing offset implementation schedule, addressing audit observations on offset claims, and delay in earning offset credits. No wonder then that the pace of execution of the offset contracts has been slow.

To put it in perspective, the cumulative value of 54 offset contracts signed till October 31, 2019, was US$ 11.80 billion with the period of performance of the longest offset contract stretching up to 2024.

However, as on that date, the prime vendors were required to discharge offset obligation worth US$ 3.6 billion only, against which the value of the obligation actually discharged by them stood at US$ 1.68 billion, resulting in the imposition of penalties to the tune of US$ 38.19 million. This is not indicative of the success of the offset policy, which seems to be focussed more on enforcing, rather than facilitating, execution of the offset contracts.

According to a study carried out by the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) for the MoD, as on October 31, 2019, the offset obligation was being discharged by 171 Indian Offset Partners (IOPs). However, till that date, approximately 87 per cent of the total offset obligation had been discharged by only 15 IOPs, with the top five accounting for 51.76 per cent and the top 10 accounting for 76 per cent of the total business done till then.


Further, according to the same study, more than 90 per cent of the offset obligation was being discharged by the prime vendors through direct purchase of products and services from the IOPs.

Whatever be the reason – and it is arguable if the proposed changes address them – there has been no transfer of modern technology or state-of-the-art equipment to the Indian companies, or critical technologies to the Defence Research and Development Organisation (DRDO), or much foreign direct investment (FDI) in the Indian defence companies, all of which were permissible avenues for discharging the offset obligation.

With the offset business being garnered by a handful of Indian companies and prime vendors shying away from transfer of technology and equipment or even FDI, it is hard to argue that the policy has served its stated objectives and strengthened the defence industrial base in India in the last 15 years since it was introduced. The situation is further muddied by the difficulties faced by the prime vendors in executing the offset contracts and avoidable controls exercised by the MoD on them.

In the circumstances, it is important to reconsider the decision to continue with the policy, also keeping in mind that there is a cost attached to discharging the offset obligation which is indirectly borne by the MoD as a part of the overall value of the contract. To put it differently, the MoD is incurring extra cost without the returns being palpably commensurate with this investment.

Policies have to be dynamic and if the offset policy has not served its purpose – or served it only to a limited extent – in the last 15 years, despite continuous modifications, it is unlikely to produce spectacular results with its applicability anyway being restricted to fewer offset contracts. It is time the need for its continuation is subjected to dispassionate cost-benefit analysis.

Disclaimer: The facts and opinions expressed in this article are strictly the personal opinions of the author. League of India does not assume any responsibility or liability for the accuracy, completeness, suitability, or validity of any information in this article.

Originally published by the Manohar Parrikar Institute for Defence Studies and Analyses (www.idsa.inhere.

Amit Cowshish

Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and a former Distinguished Fellow, Institute for Defence Studies and Analyses (IDSA), New Delhi.

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DEFENCE-SECURITY

India-China Border Faceoff “An Unprecedented Situation”: EAM Jaishankar

Foreign Minister also called for the need and understanding to accommodate each other’s rise.

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NEW DELHI: External Affairs Minister Dr S Jaishankar has said that the months-long border standoff between India and China is one facet of a larger phenomenon for which both countries have to sit down and find a solution.

Speaking at the World Economic Forum Development Impact Summit today, Dr Jaishankar termed the India-China border faceoff as an unprecedented situation. Foreign Minister also called for the need and understanding to accommodate each other’s rise.

He said that the countries have common as well as nationally centred interests and the process of adjusting to these while both are raising is one of the big issues in the diplomacy of both countries.


Dr S Jaishankar stressed upon respecting mutual agreements and points of consensus and said that deviations from these destabilise the world order.

Replying to a question on how the ties between the two Asian giants will move forward, Jaishankar said it is important for India and China to understand the need to accommodate each other’s rise.

“We are going through, in a sense, an unprecedented situation. But if one looks at it from a somewhat longer-term, I would say this is one facet of a larger phenomenon for which both India and China have to sit down and find a solution.”


The remarks by Jaishankar on the four-and-a-half-month long border standoff are his first after he and Chinese Foreign Minister Wang Yi reached a five-point agreement to resolve the issue at their meeting on the sidelines of a Shanghai Cooperation Organisation (SCO) conclave in Moscow on September 10.

During the meeting, India and China agreed on a five-point plan for resolving the prolonged border faceoff in eastern Ladakh that included abiding by all existing agreements and protocol on management of the frontier, maintaining peace and tranquillity and avoiding any action that could escalate matters.

This week, India and China agreed to stop sending more troops to the frontline, refrain from unilaterally changing the situation on the ground and avoid taking any actions that may further complicate matters.

The announcement of the decisions was made by the Indian and Chinese army in a joint statement, a day after the sixth round of Corps commander-level talks that lasted for 14-hours, in what is seen as an attempt to create an environment to resolve the over four-month-long border standoff.

However, there appeared to be no forward movement in disengagement of troops from the multiple friction points on the Line of Actual Control(LAC).


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DEFENCE-SECURITY

The Nation Can Count On Us: Army Chief After Two-Day Visit To Leh-Ladakh

“The nation can count on us,” said General Naravane after 2-day visit to Leh-Ladakh.

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LEH (Ladakh UT): The Indian Army Chief General Naravane arrived at Leh on Thursday and proceeded to forward areas to undertake a firsthand assessment of the situation along the Line of Actual Control. He interacted with soldiers and local commanders deployed in difficult high altitude forward areas.

Also Read: After IAF Chief, IA General MM Naravane Reviews Situation Along LAC In Ladakh

The Army Chief appreciated the high morale and standards of professionalism exhibited by the units in safeguarding territorial integrity.


“The nation can count on us,” said General Naravane after 2-day visit to Leh-Ladakh.

The Chief of Army Staff (COAS) interacted with soldiers and local commanders deployed in difficult High Altitude forward areas. He appreciated their high morale and standards of professionalism exhibited by the units in safeguarding own territorial integrity. The COAS urged all ranks to remain vigilant and maintain a high order of operational readiness,” the Army release said.

Later, at Leh, General Officer Commanding-in-Chief, Northern Command Lieutenant General YK Joshi and General Officer Commanding, Fire and Fury Corps Lieutenant General Harinder Singh briefed him on the state of operational preparedness and on the logistics arrangements for the sustenance of forces in winters.

General Naravane expressed satisfaction at the efforts being made to ensure operational effectiveness and capability enhancement of the forces.


Tensions flared in eastern Ladakh after the PLA unsuccessfully attempted to occupy Indian territory in the Southern Bank of Pangong lake four days back when the two sides were engaged in diplomatic and military talks to resolve the festering border row.

India occupied a number of strategic heights on the southern bank of Pangong lake and strengthened its presence in Finger 2 and Finger 3 areas in the region to thwart any Chinese actions.

Beijing has strongly objected to India’s move.

Indian Air Force Too Fully Prepared:

On Thursday, IAF Chief Air Chief Marshal R.K.S. Bhadauria also made a visit at the bases in the Eastern Air Command, where he was apprised of the readiness state and operational preparedness of the combat units by the respective air officers commanding.


The Indian Air Force has deployed frontline fighters and attack helicopters, in the eastern Ladakh sector to tackle any hostile situation. From its frontline fighters like Su-30MKI to MiG-29, the IAF has also deployed newly inducted Apache attack helicopters and Chinook strategic heavy-lift choppers.

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DEFENCE-SECURITY

After IAF Chief, IA General MM Naravane Reviews Situation Along LAC In Ladakh

Gen Naravane visited forward post yesterday and took stock of preparedness from with officers, JCOs.

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LADAKH (Indian UT): Chief of Army Staff General Manoj Naravane has said that the situation at the Line of Actual Control in eastern Ladakh is sensitive and tense. However, he said, the morale of our Jawans is high and they are ready to deal with all challenges.

Speaking to a News Agency, he said, keeping in view of the situation, we have taken precautionary deployment for our own safety and security, so that our security and integrity remains safeguarded.

Gen Naravane visited forward post yesterday and interacted with officers, JCOs and took stock of preparedness.


The Army Chief said, “the Jawans are highly motivated and are fully prepared to deal with any situation that may arise. General Naravane praised the Jawans that our officers and men are the finest in the world and will make not only the Army but also the nation proud“.

He said, “for the last two to three months, the situation has been tense but India continuously has been engaging with China both at the military and diplomatic levels and will continue in the future also“.

General Naravane expressed confidence in resolving the differences through the medium of talks. At the same time, he assured that the status quo has not changed and we are able to safeguard the country’s interests.


Yesterday:

With the continuing tensions between Indian and Chinese Armies in Ladakh along the Line of Actual Control (LAC), Indian Air Force chief RKS Bhadauria visited frontline air bases in Eastern Air Command (EAC) on Wednesday and reviewed the operational preparedness of the combat units.

He also interacted with air warriors serving in these units during the course of his visit.

“Air Chief Marshal RKS Bhadauria, Chief of the Air Staff (CAS) visited frontline air bases in Eastern Air Command (EAC) on September 2, 2020. On arrival at the bases in Eastern Air Command the CAS was received by respective Air Officers Commanding who apprised him of the readiness state and operational preparedness of the combat units under their command,” an official release said.

The visits of Bhadauria and Naravane come at a time when Indian troops have thwarted the Chinese Army’s attempts to transgress into areas in Ladakh.


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