Defence Ministry planning major changes in defence procurement; seeks to link offsets policy with 'Make in India'

NEW DELHI: The defence ministry is planning major changes in the way it procures military equipment,seeking to link the offsets policy with Prime Minister Narendra Modi’s ‘ Make in India’ campaign after foreign suppliers repeatedly failed to meet the stringent conditions and ended up blocking investments of several hundred million dollars in the sector.

The ministry is finalising a “directed offsets” policy that will require foreign companies to set up manufacturing bases in India, officials said.

They added that the move stems from an acknowledgement that the stringent offsets policy that requires foreign firms to invest at least 30 per cent of the contract value in India has not spurred domestic manufacturing to the extent desired while the overseas suppliers have accumulated over $35 million in fines over the past few years. Foreign firms were able to invest just $676 million in India between 2008 and 2014 against the mandated $1.3 billion.

Outlining the new offsets policy, Defence Secretary RK Mathur said that the government is considering a directed offsets policy,as per which the foreign vendor will be mandated to manufacture a part of the system being procured under the Make in India programme.This will be initially applicable to large contracts that involve the procurement of major platforms.

“For example, if I am buying Sukhoi, I would link it up with‘Make in India’ procedure and say that the Sukhoi manufacturing company must invest in India, with Indian companies, to manufacture the spare parts or components of Sukhoi itself, "Mathur explained to a Parliament panel. The 36-Rafale fighters deal with France will be the first major programme that is likely to follow the new policy. The ministry is likely to insist that at least 30 per cent of the value of the contract be used to set up manufacturing units in India. As reported, one option is to order a larger number of Rafale fighters with an Indian joint venture partner.

Under the original offsets policy,the winning vendor had the liberty to choose its partners to discharge the offset obligations and very often ended up investing in unrelated projects – such as a wind tunnel facility as an offset for the purchase of a military transport aircraft. By taking the power of directing the incoming investments to a particular area, the ministry will have the authority to get the particular technology that it requires.

Experts believe that the existing policy has not enabled Indian companies to unleash their potential in the global market. “A limited number of Indian companies have indeed become apart of the global supply chain of OEMs(original equipment manufacturers) and can now boast of world-class infrastructure and credentials. However the impact of the offset policy has not been to the desired depth and width,” said Ankur Gupta of E&YIndia.