The Comptroller and Auditor General of India (CAG), criticised the government for poor application of the offset policy in the parliament. In the report, CAG has strongly criticised the policies of the Defence Ministry for offsets. The deal with France for 36 Rafale jets made by Dassault Aviation was the main highlight of the report.

Under the offset policy, a certain percentage of the deal value with foreign firms should flow into India as Foreign Direct Investment (FDI). The FDI would eventually include technology transfer, local manufacturing of advanced components and creating jobs.

The CAG, Shri Girish Chandra Murmu, referred to the Defence Research and Development Organisation (DRDO) in the report, “In the offset of four contracts relating to 36 Medium Multi-Role Combat Aircraft (MMRCA), the vendors Dassault Aviation and MBDA initially proposed (September 2015) to discharge 30 per cent of their offset obligation by offering high technology to DRDO.”

Under the offset policy, the foreign defence entities were mandated to spend at least 30 percent of the total contract value in India through procurement of components, transfer of technologies or setting up of research and development facilities, for all contracts worth more than ?300 crores.

He also said, “The (Defence) Ministry needs to review the policy and its implementation. It needs to identify the constraints faced by the foreign suppliers as well as the Indian industry in leveraging the offsets, and find solutions to overcome these constraints.”

The Dassault Aviation has said that it will meet its offset obligation. Saying that has abated in the last few months due to the pandemic. India’s deal with France for 36 Rafale jets is worth Rs. 58,000 crore. According to the offset policy, the component of the deal was 50 percent. Since three decades, the DRDO has been involved in the Light Combat Aircraft (LCA) programme.

The CAG also noted in the parliament that technology transfer has been a particular failure, as “90 per cent of the investment by the vendors was in the form of direct purchase of goods and services from the Indian industry”. He also mentioned, “of the total value of offsets only 3.5 per cent was contracted to be discharged through FDI”.

The CAG also pointed out that he did not find “a single case where the foreign vendor had transferred high technology to the Indian industry”.

In a response to this, the Defence Ministry of India introduced a new policy on September 28, 2020. The policy significantly aims for the attainment of arms and military platforms for the armed forces.

The officials in a meeting said that the Defence Acquisition Procedure (DAP) announced by Defence Minister Rajnath Sigh will uplift the circumstances. As it will provide for allowing the three forces to take on lease military equipment, hardware and platforms like helicopters, simulators and transport planes as per operational requirements as it could be a cheaper option than their procurement.

The Director-General of Acquisition in Defence Ministry, Apurva Chandra said, “Offsets will not be applicable in single vendor, government-to-government and IGA (inter-government agreement) deals as per DAP 2020.” She also added that the offset policy will remain in force contracts involving competitive bidding.

Removing offset restrictions for contracts under the three categories is likely to result in a reduction of cost of acquisition as the defence firms used to factor in funds required to fulfil offset conditions. The categories including Buy (Indian Indigenously Designed, Developed and Manufactured), Make I – with 70 percent initial government funding, Make II — industry-funded, Production Agency in Design and Development, and Strategic Partner model will be exclusively reserved for Indian vendors with ownership and control by resident Indian citizens with up to 49 per cent maximum FDI.

The Defence Acquisition Procedure (DAP)

The main aim of the DAP is to ensure timely procurement of military equipment, systems and platforms as required by the Armed Forces in terms of performance, capabilities and quality standards, through optimum utilisation of allocated budgetary resources.

The government issued draft of the DAP 2020 mentions that the procedure will provide for the highest degree of probity, public accountability, transparency, fair competition and a level playing field. In addition, self-reliance in defence equipment production and acquisition will be steadfastly pursued as a focus of the DAP with an ultimate aim to develop India as a global defence manufacturing hub.

The DAP has several new things compared to the Defence Procurement Policy of 2016. It has a dedicated chapter to buy weapons and platforms designed by DRDO, ordinance factories and Defence PSUs. The DAP will come into effect from October 1, 2020.

The defence minister, Rajnath Singh tweeted that the DAP has also included provisions to encourage foreign direct investment (FDI) to establish manufacturing hubs both for import substitution and exports while protecting the interests of the Indian domestic industry.

Apurva Chandra confirmed that a new chapter for leasing has also been introduced in the DAP. While India has leased military equipment in the past, it has generally been through the government-to-government route, but “now they will be more open”.

In a new Make III category indigenously manufactured defence equipment and platforms or spares and assemblies intend to enable import substitution. The DAP 2020 will also serve price variation in long-term projects.

Chandra also said that Services Qualitative Requirement, which defines the capabilities sought for any equipment, weapon or platform, will now include a comparative analysis for products available within the country and internationally, and making them “more realistic”.

The government has also tried to rationalise the trial and testing procedures. With the new offset guidelines, the government hopes to bring down the defence procurement timelines.

The Long Term Integrated Perspective Plan has now been re-designated as Integrated Capability Development Plan (ICDP) and will cover a period of ten years, instead of 15 years earlier.

The DAP has also been carefully drafted to work closely with the “Atmanirbhar Bharat’ (Self-reliant India) vision of Prime Minister Narendra Modi. This has been done to empower the Indian domestic industry through “Make in India” projects. The main aim of the project is to turn the country into a global manufacturing hub.