To make Prime Minister Narendra Modi’s ‘Make in India’ programme saleable for the defence sector, the government is considering tweaking the Defence Procurement Procedure.

The Centre may allow an option for those interested to migrate from their offset obligations to ‘buy and make’, an official source said.

New norms

Indications are that under the revised norms, the value of foreign direct investment (FDI) from the original equipment manufacturer and the eligible products being manufactured in India will be counted against the offset obligations. Offsets were introduced by the UPA erstwhile government in 2005 with the objective of developing a defence industrial base.

The offset obligation requires foreign companies selling defence equipment worth more than ₹300 crore to India to source 30 per cent of the value of a contract locally.

Policy failure

However, according to industry trackers, the offset policy has failed to deliver. Data indicates that of the 24 contracts signed between 2007 and 2013, total offset obligations were close to ₹30,000 crore. Sources said that 90 per cent of these contracts have under-performed their targets and annual offset obligations have remained unfulfilled.

In fact, the Ministry of Defence has imposed penalties on various original equipment manufacturers.

Another reason cited for offsets attracting the government’s attention is the higher costs that the Ministry ends up incurring on capital acquisitions with offset provisions.

In most cases it is seen that the negotiations and finalisation of offset contracts is taking longer than for the prime contract itself, the official added.

Increasing FDI in the defence sector is another key area for the Government.

Boost for sector

According to Department of Industrial Policy & Promotion (DIPP) Secretary Amitabh Kant, defence manufacturing is expected to provide business worth $250 billion in the next 7-8 years. “How quickly we can transform ourselves into a defence manufacturing country is a key challenge for India,” he said, speaking at a seminar organised by industry body Assocham on Monday. The Centre recently increased the FDI cap on the defence sector to 49 per cent from 26 per cent, and Kant said that for specific cases it could also be increased to 100 per cent.

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