India looks to leverage its market clout

Livemint, April 06, 2012
Under proposed policy, all govt imports worth more than a minimum threshold will become liable to offsets

New Delhi: Recognizing that it is emerging as one of the largest importers of arms, nuclear equipment, and oil and gas, the government is considering an overarching policy that would leverage this clout to buy technology and long-term energy resources from countries that win supply orders from India.

To be called the National Policy on Offset, it will extend to all government imports, including by the departments of defence, space, oil and gas, telecom, and atomic energy.

Offsets are counter-trade obligations that have to be fulfilled by vendors from a particular country selling equipment or commodities to another country. Typically, they do this by generating business in the buying country worth a certain percentage of the deal value.

Offset obligations can also be fulfilled by the seller country by committing cheaper long-term supplies of strategically important commodities, including energy resources, up to a certain value in lieu of equipment or goods bought. In effect, in such a transaction, the payment is made partly with goods and services instead of money.

At present, only equipment procured by the defence ministry is covered by an offset obligation policy. In other cases, the offset agreements are entered into on an ad hoc basis and not through any policy guideline.

India’s imports in strategic sectors such as defence have swelled in recent years. A March report by the Stockholm International Peace Research Institute said India had become the largest importer of arms in the world between 2007 and 2011. India’s defence imports surged 38% to touch $12.7 billion (Rs64,770 crore today). The country’s oil imports in April-February were valued at $132.56 billion, a 41% increase over the year-ago period. India’s trade deficit in April-February was $166.7 billion.

Crisil Ltd chief economist D.K. Joshi cautioned that India should not look at the proposed offset policy as a measure to reduce its widening trade deficit. “Such a policy may help in the long run, but it cannot be a substitute for improving our export competitiveness,” he said.

Mint has reviewed a copy of a draft note on the proposed National Policy on Offset that was sent by the commerce ministry to various government departments earlier this week.

Under the proposed national policy, all procurements worth more than a minimum threshold will become liable to offsets. This minimum threshold could vary between Rs500 crore and Rs1,000 crore, and the offset obligation could amount to at least 30% of the contract value. Such contracts could also relate to sectors such as information technology (IT), biotechnology, health, research and development, and infrastructure.

Under current defence purchase procedures, India imposes counter-trade obligations on foreign vendors that are awarded contracts worth more than Rs300 crore by way of transfer of critical technologies and production of components in India.

On Monday, India announced new guidelines on defence offsets, the most significant of which was to include transfer of technology.

Mint had reported in September that a committee of secretaries had been discussing linking fertilizer purchases to defence offsets, something the commerce ministry note confirms.

“Offsets should be encouraged primarily to secure India’s energy security, agriculture/food security, apart from getting access to the high-end technologies. In addition, the offset could be used for collaboration, co-production, co-development, etc.,” the note said.

Offsets would be governed by a so-called National Offsets Authority (NOA)—a nodal nine-member monitoring and regulatory agency to be headed by the cabinet secretary. The other members would include secretaries to departments, including commerce, external affairs, finance and defence. NOA will be assisted by a six-member Offset Negotiating and Monitoring Committee and a director general of offset programmes.

Vinod Dhall, chairman of the committee on public procurement, said the objective of the exercise is laudable. However, Dhall said the committee had recommended that the offset policy should be linked to allowing a higher level of foreign investment in sectors such as defence to make it more effective and to ensure a higher level of competition.

“Otherwise, a handful of Indian companies will dominate such procurements,” he said.

Pradeep Mehta, secretary general of Jaipur-based consumer advocacy group CUTS International, said that though the move was a sensible one, it should be part of the proposed public procurement policy.

The government had earlier considered such a national policy on three occasions—in 2002, 2006 and 2009.

All such departments that buy goods from foreign vendors will be required to provide advance information to NOA at least one-two years before the procurement. The government will also allow banking of offset credits for a few years after the execution of contracts.

Participation in the offset programme is also being kept open to private sector enterprises and public-private partnership firms, although it won’t be made mandatory for them under the proposal.

The proposed policy will also allow indirect offsets covering investments in IT, biotechnology, research and development, communications, infrastructure, and health, among others.

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