Fulfillment of offset obligations in defense deals falls short by 18%

MP Kunwar Danish Ali said this huge money could revive MSME sector and create a lot of jobs

MP Kunwar Danish Ali said this huge money could revive MSME sector and create a lot of jobs

The total offset commitment by foreign defense companies to be fulfilled in India for various defense deals during the last 15 years, was $6.83 billion till August 01, 2022 of which they fulfilled offset claims worth 82.13% or about $5.61 billion, the Defense Ministry informed Parliament. . Expressing concern over the shortfall, MP Kunwar Danish Ali who raised this question said this “huge money could revive the MSME (Micro, Small and Medium Enterprises) sector and create a lot of jobs.”

“Total 15 companies have missed the first deadline set for implementation of their defense offset commitment. Further details being strategic and sensitive in nature, cannot be disclosed,” Minister of State for Defense Ajay Bhatt said in a written reply in the Lok Sabha, on Friday. “For unfulfilled offset obligations, penalty as applicable has been imposed on the defaulting vendors as per the governing Defense Offset Guidelines.”

Further, in genuine cases, re-phasing of offset obligations has been allowed to enable vendors to discharge the pending offset obligations, Mr. Bhatt stated, detailing the steps taken by the Defense Ministry to prevent default or delay in implementation of offset commitments by vendors.

High-end technology

Defense offset policy was promulgated under Defense Procurement Procedure (DPP) 2005 with the objective that it would bring in high-end technology into the country and build the domestic defense industry. Under offset clause, a foreign company which wins a defense deal is supposed to invest back a part of the contract value in the country thus developing skills and bringing in technology while also generating employment.

“It’s so unfortunate that Government is not seriously implementing defense offset agreements with various foreign companies worth $6.83 billion. This huge money could revive the MSME sector and create a lot of jobs. I will demand a short duration discussion in the next session of Parliament,” Mr. Ali said on Twitter, on Saturday.

As per DPP 2006, offset value has been fixed at 30% of defense deals above ₹300 crore which was revised to ₹2000 crore in DPP 2016 for full import deals. The first offset contract was signed in 2007.

Offset guidelines revised

In Defense Acquisition Procedure 2020, the Government has removed the requirement of offset clause in Inter Governmental Agreements like the Rafale deal. The offset guidelines have also been revised in DPP 2020 wherein preference will now be given to manufacture of complete defense products over components and various multipliers have been added to give incentive in discharge of offsets.

Auditing the offset deals till March 2018, the Comptroller and Auditor General (CAG) in its report tabled in Parliament in September 2020 had stated that 46 offset contracts were signed for ₹66,427 crore and till December 2018, ₹19,223 crore worth of offsets should have been discharged. “However, the vendors have claimed discharge of only ₹11,396 crore, 59%, of the offsets,” the report had stated.

Further, the Ministry has accepted only ₹5,457 crore or 48% of these offset claims while the rest were pending or rejected due to various deficiencies, the report had noted and the remaining offset commitments of about ₹55,000 crore would be due to be completed by 2024, but the rate of offset discharge has been about ₹1,300 crore per year. “Given this situation, fulfilling the commitment of ₹55,000 crore by the vendors in the next six years remains a major challenge,” the report added.

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