Defence Procurement Policy 2020 Analysis | UPSC

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IASbhai Daily Editorial Hunt | 21st Oct 2020

When obstacles arise, you change your direction to reach your goal; you do not change your decision to get there. –Zig Ziglar

Dear Aspirants
IASbhai Editorial Hunt is an initiative to dilute major Editorials of leading Newspapers in India which are most relevant to UPSC preparation –‘THE HINDU, LIVEMINT , INDIAN EXPRESS’ and help millions of readers who find difficulty in answer writing and making notes everyday. Here we choose two editorials on daily basis and analyse them with respect to UPSC MAINS 2020-21.

EDITORIAL HUNT #199 :“Defence Procurement Policy 2020 Analysis | UPSC

Defence Procurement Policy 2020 Analysis | UPSCDefence Procurement Policy 2020 Analysis | UPSC

Sunil Mani | R Nagaraj
Defence Procurement Policy 2020 Analysis | UPSC

Sunil Mani is Director, Centre for Development Studies, Thiruvananthapuram. R Nagaraj is Professor (retired), Indira Gandhi Institute of Development Research, Mumbai.

      HEADLINES:

Offset dilution in defence, a flawed policy turn

      CENTRAL THEME:

As an episode in India’s aerospace industry shows, it can succeed if it is designed and executed correctly

SYLLABUS COVERED: GS 3: Defence

      MAINS QUESTION:

What is an offset policy? And how is it expected to boost domestic capabilities? . Critically examine the loopholes in defence procurement policy 2020 . -(GS 3)

      LEARNING: 

  • Diluted offset policy
  • Conditions for a successful defence purchase
  • HAL example

      INTRODUCTION: 

  • DILUTION OF OFFSET POLICIES : The government diluted the “offset” policy in defence procurement recently, reportedly in response to a Comptroller and Auditor General (CAG) of India’s report .

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

  • PAST EXPERIENCES : The experience with the procedure in the aerospace industry since 2005 seems to offer useful lessons in redesigning defence offsets.
  • LEARNING FROM MISTAKES : There are few lessons can we draw from the aerospace industry.

      BODY: 

OFFSET TIES UP THE END

  • PROTECTIONISM : Most countries restricts trade in defence equipment and advanced technologies in order to safeguard national interest.
  • COMMERCIAL INTERESTS : Yet, for commercial gains and for global technological recognition, governments and firms do like to expand the trade.
  • BILATERAL AGREEMENTS : Negotiated bilateral sales between countries are a way out of the dilemma.

Soft credit often sweetens the deals, with restrictions imposed on use, modification and resale of such equipment and technologies and to protect the proprietary knowledge .

  • PRICING THE PRODUCT : In such trade negotiations, the price of the product is one of the many other factors.
  • GEOPOLITICS DECIDES CONTRACTS : Geopolitics and the technical knowhow involved in the equipment weigh-in considerably since the contracts are for the long term, with technological fixities.

A SUCCESSFUL COMPELLING DEFENCE PURCHASE

  • It has the advantages of bulk purchase

The deal will minimise the dependence on the supplier for spares and upgrades.

  • There is considerable “path dependency” in such choices.As rendering the decisions are difficult to reverse. 

INTERNATIONAL DEFENCE MARKETS

  • PRIME CUSTOMERS : Developing country buyers often lack an industrial base and research and development (R&D) facilities (which take a long time to mature).
  • BARGAINING STRENGTH : The price and the terms of the contract often reflect the government’s relative bargaining strength and also domestic political and economic considerations.
  • PURCHASING POWER : Large buyers such as India seek to exercise their “buying power” to secure not just the lowest price.
  • UPGRADING TO LEVEL TWO : Countries also try to acquire the technology to upgrade domestic production and build R&D capabilities.
  • The offset clause — used globally — is the instrument for securing these goals.

A NUMBER OF CHANGES

The Defence Ministry had signed 52 offset contracts worth $12 billion via Indian offset partners, or domestic firms.

  • DAWN OF OFFSET CLAUSE : Initiated in 2005, the offset clause has a requirement of sourcing 30% of the value of the contract domestically.
  • TWEAKING MAKE IN INDIA : Indigenisation of production, training Indian professionals in high-tech skills, for promoting domestic R&D. However, the policy has been tweaked many times since.

CAG REPORTS ON OFFSET POLICY

  • CAG REPORT : According to the recent CAG report mentioned above, between 2007 and 2018, the government reportedly signed 46 offset contracts worth ₹66,427 crore of investments.
  • POTENTIAL INVESTMENT : However, the realised investments were merely 8%, or worth ₹5,457 crore.
  • VOID OFFSET DEALS : Reportedly, technology transfer agreements in the offsets were not implemented, failing to accomplish the stated policy objective.

We are unable to verify the claim as the government has not put in place an automatic monitoring system for offset contracts, as initially promised.-CAG

  • DUSK OF OFFSET CLAUSE : On September 28, state has diluted this policy further.

SETBACK FOR DEFENCE

  • TYPE OF DEAL : Most defence deals are bilateral , or a single supplier deal (given the monopoly over the technology).
  • GIVING UP OFFSET CLAUSE : The dilution means , sounding the death knell of India’s prospects for boosting defence production and technological self-reliance.
  • COST ADVANTAGE : The State, however, has defended the decision by claiming a cost advantage.

It is a lamentable excuse for the reported policy failure. Price is but one of many factors in such deals.

  • FORMULA : The higher cost of the agreement due to the offset clause would pay for itself by: it will reduce costs in the long term by indigenisation of production and the potential technology spill-overs for domestic industry.

SHORTLIVED IN AEROSPACE

  • AEROSPACE INDUSTRY : The offset policy can, however, succeed, if it is designed and executed correctly, as a parallel episode in aerospace industry demonstrates.
  • CIVILIAN AIRCRAFTS LEADERS : Despite the heft of Hindustan Aeronautics Limited, India is a lightweight in global civilian aircraft manufacturing, as the public sector giant mostly devotes itself to defence production.
  • STALLED PROJECTS : The much-touted National Civil Aircraft Development (NCAD) project — to come up with an indigenously designed Regional Transport Aircraft (RTA) — has remained a non-starter from day one.
  • INTRODUCTION OF OFFSET POLICY : However, with the introduction of the offset policy in 2005, things changed dramatically.

For contracts valued at ₹300 crore or more, 30% of it will result in offsets, implemented through Indian offset partners.

  • AEROSPACE EXPORTS BOOM : As aerospace imports rose rapidly, so did the exports via the offsets, by a whopping 544% in 2007, compared to the previous year.
  • MAJOR AEROSPACE EXPORTER : The offset clause enabled India to join the league of the world’s top 10 aerospace exporters; the only country without a major domestic aerospace firm.
  • SHORT LIVED SUCCESS : Exports plummeted after the offset clause was relaxed, primarily when the threshold for the policy was raised from the hitherto ₹300 crore to ₹2000 crore, in 2016.
  • VIBRANT AEROSPACE CLUSTER : The 2005 policy helped promote a vibrant aerospace cluster, mostly micro, small and medium enterprises (MSMEs) around Bengaluru.

      IASbhai Windup: 

AIDING SELF-RELIANCE

  • INSTRUMENTS OF BARGAIN : Thus, India has voluntarily given up a powerful instrument of bargaining to acquire scarce advanced technology — a system that large and politically ambitious nations seek to exercise.
  • RE-INVENT AND REXAMINE : India needs to re-conceive or re-imagine the offset clause in defence contracts.
  • SELF-RELIANT INDIA : Stricter enforcement of the deals in national interest, and in order to aim for ‘Atma Nirbhar Bharat Abhiyaan’, or a self-reliant India.
       SOURCES:   THE HINDU EDITORIAL HUNT | Defence Procurement Policy 2020 Analysis | UPSC

 

TRENDING NOW : Important The Hindu Editorials 

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