December 03, 2012
India’s defense ministry is under fire from the government’s chief comptroller for violations of the ministry’s own offset policy and the selection of ineligible offset partners.
A report tabled in Parliament on Nov. 29 by the Comptroller and Auditor General (CAG) notes that five out of 16 offset contracts worth 184 billion rupees ($3 billion) concluded in India’s defense sector between 2007 and 2011 were not in accordance with its defense procurement procedure, resulting in huge losses for the country’s defense firms.
Among five major offset contracts worth 34 billion rupees ($62 million) in which waivers were granted against the policy were the purchase of 10 C-17 military aircraft and eight P-8I submarine hunter aircraft from Boeing, six C-130J aircraft from Lockheed Martin and a contract signed with a Russian firm for the upgrade of MiG-29 fighter aircraft and Mi-17 helicopters, the CAG says.
“Despite India being one of the largest importers of defense hardware, the benefits of offsets could not be reaped to the extent envisaged due to lack of uniformity in interpretation of extant offset provisions,” the CAG report says.
The selection of Indian offset partners was “not valid” and the “monitoring mechanism” for the implementation of the offset policy was “weak,” the report adds. In some cases, the Indian offsets partners were actually 100% owned subsidiaries of the foreign vendor.
The current rules require any foreign vendor receiving an Indian defense deal worth more than 3 billion rupees ($53 million) to reinvest 30% of the value into the country’s industry.
“In two contracts, penalty charges of 30.6 million rupees viable on vendors on account of unfulfilled offset obligation had not been recovered from defaulting vendors including American Lockheed Martin (10.2 million rupees) and Israeli IAI for Harop systems (20.4 million rupees),” the report says.
The report says that the defense ministry allowed fulfillment of offset obligations through foreign direct investment by foreign vendors in specified Indian industries, but “there was lack of clarity [about the] type of foreign investment which would be eligible and [the] interpretation of provisions of the clause.”
India recently eased its offset rules to enable capacity building for a host of technologies, research and development, army and air force centers, naval aircraft yards and training in defense laboratories.