Dilution of Offset Policy

The government diluted the “offset” policy in defence procurement, reportedly in response to a Comptroller and Auditor General (CAG) of India’s report tabled in Parliament last month.

The move is a setback for augmenting domestic capabilities or for realising the goal of Atmanirbhar Bharat.

‘Offset’ policy:

The offset policy, introduced in 2005, mandates foreign suppliers to spend at least 30% of the contract value in India.
The 2005 policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru
The offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it
The policy was adopted on the recommendations of the Vijay Kelkar Committee.
Developing country buyers often lack an industrial base and research and development (R&D) facilities.
However, large buyers such as India seek to exercise their “buying power” to secure defence deals, not just the lowest price.

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Objectives:

Fostering the development of internationally competitive enterprises.
Augmenting capacity for Research, Design and Development related to defence products and services.
Encouraging development of synergistic sectors like civil aerospace, and internal security”.
Leverage capital acquisitions to develop Indian defence industry by fostering the development of internationally competitive enterprises domestically.
Partially compensating for a significant outflow of the country’s resources in the large purchase of foreign goods.

Issues with New Policy:

Misplaced Rationale
CAG Report
Impact of New Policy: The dilution means practically giving up the offset clause.
This would impact India’s prospects for boosting defence production and technological self-reliance.
Further, India has voluntarily given up a powerful instrument of bargaining to acquire scarce advanced technology.

Way Forward: