New defence purchase policy soon

The government is set to revise the defence purchase policy unveiled two years ago, according to sources in the Defence Ministry.

The policy governs purchases worth over Rs. 40,000 crores being made by the armed forces every year. The altered policy is likely to be announced within the next couple of months after a few issues are sorted out.

Bowing to demands from Western arms suppliers, particularly aviation companies bidding for a $10 billion contract, the biggest change will be in the offset clause of the 2006 Defence Purchase Policy. The clause makes it mandatory for all foreign companies winning defence contracts to source 30 per cent of the value of the contract from India.

Cleared by the Department of Policy Promotion in the Ministry of Industry, the revised offset policy proposes to allow banking of offsets and include transfer of technology (ToT) in offsets.

Under banking, a company sourcing parts for the civilian sector from India can include this amount in its offset contribution for defence equipment.

In case of ToT, if a company says it has transferred technology, the Ministry will examine past precedents, set a value and include the amount in the offset obligation.

At present, only direct offsets are allowed which means there is no allowance either for ToT or banking. The system has so far worked well and is much less complicated. The first direct offset contract has already been signed with an Israeli company which has agreed to source components for radars to be supplied to the armed forces from two Indian companies. India will also soon sign a $1 billion contract for upgrading MiG-29s in which the company has agreed to meet offset obligations amounting to over $300 millions. Other impending contracts such as refuelling tankers for the Navy also has the direct offset obligation.

However, Western companies, especially from the aviation sector, were unhappy with the clause. This was particularly so because in the multi-billion contract for 126 fighter jets the offset percentage has been raised from the usual 30 per cent to 50 per cent.

In other words, business worth Rs. 21,000 crore of the estimated Rs. 42,000 crore contract must be generated in India. Officials are reconciled to bargaining on the value of the ToT after interacting with major aviation companies such as Lockheed Martin, Boeing and Rafael.

The other change in offset policy is to exempt software and services from licence requirements. But some issues remain to be resolved. Software service companies that will be exempted are not going to be listed on the MoD website.

News Source : Samachar