Minister of State for Defence, MM Pallam Raju, tells Business Standard that the defence offsets policy could be merged into the national offsets policy some day
by Ajai Shukla
Business Standard, 10th Jan 11
Minister of State for Defence M M Pallam Raju talks to Ajai Shukla about the Ministry of Defence’s (MoD’s) new Defence Procurement Procedure of 2011 (DPP-2011), released on Thursday, which now permits arms vendors to discharge defence offset liabilities through investment in civil aviation and internal security. Edited excerpts:
Q. Given that defence offsets were specifically aimed at stimulating Indian defence industry, why dilute that aim by permitting arms vendors to discharge their offset liabilities in non-defence fields like civil aviation?
No, no, I don’t think there is any dilution at all. There is a lot of overlap in technologies and components between civil aviation and military needs. So (civil aviation) has been opened up so that defence offset requirements can be fulfilled.
Q. And defence offsets can now be discharged through setting up training simulators for civil airliner pilots?
I think training is a very vital aspect and it is a justifiable area for inclusion in offsets. I think there is a shortage of training facilities. We have clarified that it is only simulation equipment and not for the infrastructure that offset credits will be given.
Q. According to DPP-2011, even the design of civil airliner components and engines, which Indian IT engineering companies are already doing will now be counted as defence offsets?
I think these are critical aspects and there is a huge overlap in these areas between civil and military needs and I think it is justified.
Q. Given that the Ministry of Civil Aviation has its own offset requirements connected with the purchase of airliners, there will now be two parallel sets of offsets running in the sphere of civil aviation. Given that the defence offsets policy is no longer confined to defence production, have you thought about merging defence offsets into the national offsets policy?
The purchases (of civil airliners) have been huge and, therefore, offsets on those purchases are also justified. But I don’t think we can say that indirect offsets have been allowed. Merging the defence offsets into the national offset policy requires some more thought.
Q. So, the possibility of merging the defence offsets policy into the national offsets policy remains on the table?
Yes, of course.
Q. DPP-2011 is silent on several key amendments that are being considered to the offset policy, including permitting transfer of technology (ToT) as an offset, incorporating offset multipliers, and allowing vendors to bank offsets for a greater period of time. Instead, the MoD has referred these issues to an internal committee.
Like every year, we are revisiting the offsets policy and a high-level committee has been formed and they are taking inputs from the industry. We are waiting for results (of earlier offset contracts) to appear and be analysed. We don’t want to be too anxious for change, but we will definitely tweak the offset policy wherever necessary to include best practices in offsets.
Q. There remains a major unresolved debate within the MoD, about whether the Department of Defence Production should handle offsets, or the Acquisitions Wing. Each of them wants to pass offsets to the other, apparently because of apprehension about the policy. Who will manage offsets within the MoD?
We set up the Defence Offsets Facilitation Agency (DOFA) under the Department of Defence Production, but that was to facilitate vendors. The question is who should actually manage the offsets. I think it depends upon the area of responsibility that you are entrusting to these two wings. I think the inputs from both these departments are needed.
Q. A new Defence Production Policy is also being released, we believe, on the 13th of January?
The Defence Production Policy will be coming out very shortly. There is a lot of clarity in this policy about a large number of issues that the private sector has been asking for.
Q. Has the MoD completely killed off the Kelkar Committee proposal to identify Raksha Udyog Ratnas (RuRs) from within the private sectors, which could compete for defence contracts on equal terms with the defence PSUs (DPSUs)?
It is under examination. But whether you call private companies as RuRs or not, the will to bring the private sector into defence production is certainly there. The objection to nominating RuRs from within the private sector was that smaller companies projected that the nomination of RuRs should not be based on the size of the company, but on the capability of the company. We did not want to exclude the smaller companies.
Q. Has the MoD conclusively rejected the enhancement of FDI in general from 26 to 49 per cent, or to 74 per cent as recommended by the Ministry of Commerce & Industry? Foreign arms vendors argue that giving them greater stakes in the company will allow them to bring in more advanced technology.
For now the FDI cap will remain at 26 per cent. But we do not believe that the level of FDI permitted should not be confused with the level of technology that is being brought into the country. The intention is to bring in a higher level of technology, and I think the percentage of FDI is irrelevant.
Q. And what about the IPR? Would it have to remain with India?
I wouldn’t be too worried about the IPR. Of course, I would like it to remain with India, but if the vendor is charging a royalty and he is limiting his FDI, that should suit his purpose