India Removes Offset Clause For Government-To-Government Arms Deals

India has decided to forego the offset clause from inter-government and single vendor deals for procurement of military equipment, days after foreign firms including Dassault Aviation were called out for not meeting obligations of domestic investment undertaken at the time of securing the deals.

The Indian Ministry of Defense has reportedly cited failure to achieve the desired objective of bringing advanced technology to India through foreign vendors, as the reason for its decision.

Key aspects of the DAP 2020 include enhanced requirements for local content in defence production projects as well as greater emphasis on local preference in procurement decisions as well as new provisions for trial procedures, leasing, and the procurement of information and communications technologies (ICT).

While speaking after the unveiling of new Defence Acquisition Procedure (DAP) 2020 in New Delhi, Apurva Chandra, Special Secretary and Director General (Acquisition) said, “We have made changes in offset guidelines. From now on, there would be no offset clause in government-to-government, inter-government and single vendor defence deals.”

The move puts an end to India’s 2005 policy in which a foreign vendor required to invest at least 30% of the contract value (applicable for deals above $400 million or INR 300 Crore) in India. There are several ways for foreign manufacturers to meet their offset obligations – Foreign Direct Investment (FDI), offering free ToT to Indian firms and purchasing products manufactured by Indian firms.

In a report dated September 23, Comptroller and Auditor General (CAG) said Dassault Aviation and MBDA have not yet delivered transfer of technology (ToT) to build engines to power indigenous Light Combat Aircraft (LCA) Tejas, in return for the mammoth Rafale deal signed in 2016.

The $81 billion Rafale deal for 36 flyaway Rafale jets has 50% offset clause to be discharged by the four French partners — Dassault Aviation, MBDA, Safran and Thales. Dassault has set up a joint venture with Anil Ambani’s Reliance Defence — Dassault Reliance Aerospace Limited — to manufacture components for the former’s civil jets. Offset obligations of the vendor were to start from September 23, 2019 and the first annual commitment was expected to be completed in a year’s time.

The CAG report revealed that from 2005 till March 2018, 46 offset contracts were signed with foreign vendors totalling nearly $90 billion (INR 66,427 Crore). “Under these contracts, by December 2018, INR 19,223 crore ($26 billion) worth of offsets should have been discharged by the vendors. However, the offsets claimed to have been discharged by them was only INR 11,396 crore ($15.4 billion), which was only 59% of the commitment,” the auditor noted.

Further, only 48% (INR 5,457 crore or $7.4 billion) of these offset claims submitted by the vendors were accepted by the ministry. The rest were reportedly rejected as they were not compliant to the contractual conditions and the MoD’s Defence Procurement Procedure.

The new defence offset guidelines put less emphasis on technology transfers and more on facilitating industrial collaboration between foreign original equipment manufacturers (OEMs) and their local partners. The MoD said the 2020 offset guidelines have also removed related obligations in procurements that are framed by government-to-government agreements such as those through the US Foreign Military Sale (FMS) mechanism.

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