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CAG criticises defence ministry’s offset policy in Rafale deal


The Comptroller and Auditor General (CAG) has criticised the defence ministry for its offset policy that has failed to generate the desired results. CAG has criticised the defence ministry as it has failed to ensure the fulfillment of offset obligations of the vendors in the Rafale deal.

In a report tabled in the Parliament on Wednesday, the CAG said that French aerospace major Dassault Aviation and European missile maker Matra BAE Dynamics Alenia (MBDA) are yet to fulfill their offset obligations of offering high technology to India under the Rafale aircraft deal.

Dassault Aviation is the manufacturer of the Rafale jets while the MBDA supplied the missile systems for the aircraft.

What is India’s offset policy?

Under India’s offset policy, foreign defence entities are mandated to spend at least 30 per cent of the total contract value in India. The expenditure could be done through the procurement of components or setting up of research and development facilities.

The offset norms are applicable to all capital purchases above Rs 300 crore made through imports. The offset obligations can be made through Foreign Direct Investment, free transfer of technology to Indian firms and purchase of products manufactured by Indian firms.

The CAG also painted a grim picture of the efficacy of India’s offset policy saying it did not find a single case of foreign vendors transferring high technology to the Indian industry, adding defence sector ranked 62nd out of 63 sectors receiving FDI.

The CAG said it undertook the performance audit of the offset policy after a decade of its rollout to assess the extent to which its objectives were met.

Offset obligations part of Rafale deal

India had signed an inter-governmental agreement with France in September 2016 to procure 36 Rafale jets at a cost of Rs 59,000 crore. Notably, the offset obligations were part of the contract.

CAG in its report said Dassault Aviation and MBDA proposed in September 2015 to discharge 30 per cent of their offset obligations by offering high technology to the Defence Research and Development Organisation (DRDO), but the two firms are yet to do it.

DRDO looking for French technology for Tejas

The DRDO was looking for French technology for the indigenous development of an engine for the Light Combat Aircraft Tejas.

“In the offset contract relating to 36 Medium Multi Role Combat Aircraft (MMRCA), the vendors M/s Dassault Aviation and M/s MBDA initially proposed to discharge 30 per cent of their offset obligation by offering high technology to DRDO,” the CAG said.

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The first batch of five Rafale jets arrived in India on July 29.

“DRDO wanted to obtain technical assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. Till date, the vendor has not confirmed the transfer of this technology,” CAG said in a press release.

48 offset contracts signed with foreign vendors

The CAG said 48 offset contracts were signed with foreign vendors from 2005 to March 2018 with a total value of Rs 66,427 crore. Rs 19,223 crore worth of offsets should have been discharged by the vendors by December 2018.

But the amount discharged by them was only Rs 11,396 crore, which was only 59 per cent of the commitment.

“Further, only 48 per cent (Rs 5,457 crore) of these offset claims submitted by the vendors were accepted by the ministry. The rest were largely rejected as they were not compliant to the contractual conditions and the Defence Procurement Procedure.”

It said the remaining offset commitments of about Rs 55,000 crore would be due to be completed by 2024.

“The rate at which the foreign vendors have been fulfilling their offset commitments was about Rs 1,300 crore per year. Given this situation, fulfilling the commitment of Rs 55,000 crore by the vendors in the next six years remains a major challenge,” the CAG said.

Defence ministry needs to review offset policy

The auditor said though the vendors failed to keep up their offset commitments, there was no effective means to penalise them.

“Non-fulfilment of offset obligations by the vendor especially when the contract period of the main procurement is over, is a direct benefit to the vendor,” it said.

The national auditor said as the offset policy has not yielded the desired result, the defence ministry needs to review the policy and its implementation.

It needs to identify the constraints faced by the foreign suppliers as well as the Indian industry in leveraging the offsets, and find solutions to overcome these constraints,” it said.


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