Within days of the country’s auditor general pulling up the French firm Dassault for not meeting its contractual obligation in the Rafale deal to reinvest in India, the MoD has decided to scrap the offset clause in all inter-government and single vendor defence deals.

With the offset clause, as in the case of procurement of 36 Rafale jets from France, the manufacturer Dassault was mandated to invest 30 per cent of the contract amount in the Indian defence sector. In the Rafale deal, which was worth Rs 59,000 crore, the offset clause was 50 per cent.

Speaking after unveiling of new Defence Acquisition Procedure, Apurva Chandra, Special Secretary and Director General (Acquisition), said, "We have made changes in offset guidelines. From now on, there would be no offset clause in government-to-government, inter-government and single vendor defence deals."

Chandra said that in other deals, however, there would be an offset clause. He said that after scrapping of the offset guidelines, preference would be given to manufacture of complete defence products over components.

The country's financial watchdog Comptroller, in an audit report tabled recently in Parliament, flagged concerns that foreign vendors made various offset commitments to qualify for the main supply contract but later were not earnest about fulfilling these commitments.

In the Rafale deal, it was proposed that Dassault Aviation will discharge 30 per cent of their offset obligation by offering high technology to DRDO.

DRDO wanted to obtain Technical Assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. However, till date the vendor has not confirmed the transfer of this technology, the CAG had stated in the report.

In 2005, India adopted the Offset Policy for purchases of defence platforms. This meant that for all purchases above Rs 300 crore made through imports, the foreign vendor was required to invest at least 30 per cent of the value of the purchase in India. This investment was to be made in the Indian defence and aerospace sector. Various avenues were available to the vendor to discharge these offset obligations.

This included Foreign Direct Investment, offering of free Transfer of Technology to Indian firms and purchase of eligible products manufactured by Indian firms (exports). For the discharge of these offsets, the foreign vendor had to select an Indian firm as a partner (Indian Offsets Partner or IOPs).

The objective of the offset policy was to develop the Indian defence industry so as to achieve self-reliance and reduce dependence on imports.

From 2005 till March 2018, 46 offset contracts had been signed with foreign vendors, valued at Rs 66,427 crore.