Mains Paper 3: Indian Economy| Investment models
From UPSC perspective, the following things are important:
Prelims level: Offset Partnership
Mains level: The newscard discusses flaws in India’s defence procurement policy , which is indirectly hampering Make in India policy and provides scope for crony capitalism to persist.
Row over Rafale
- The Defence Procurement Procedure, 2016, (DPP) recognizes the need to ensure that procurement is undertaken in a manner that takes India closer to the goal of developing a world-class domestic defence and aerospace industry.
- However, the offset requirements under the DPP are not helping it achieve this goal.
- The recent Rafale controversy is the symptom of a larger underlying problem in decision-making, transparency and consistency of public policy.
Offsets guidelines in the DPP
- Offsets are a portion of a contracted price with a foreign supplier that must be re-invested in the Indian defence sector, or against which the government can purchase technology.
- Some good intentions inform the DPP and its offsets regime, such as the need for public-private partnership, encouraging startups and direct investment, and flexibility for foreign suppliers.
- However, when it comes to the details, things look different.
Procurement Policy of India
- Under Indian law, government procurement is treated as distribution of endowments by the state and, hence, must be fair, transparent and equitable.
- There can be no favouritism or nepotism in the award of public contracts.
Biggest Policy Loophole
- Offsets are financed by Indian taxpayers, but the award of contracts by foreign suppliers is not subject to public procurement safeguards.
- The DPP even seems to indicate that the foreign supplier has complete discretion on choice of the Indian offset partner (IOP).
- This would permit the Indian government to avoid public procurement rules when taxpayer money is routed through a foreign supplier towards “offsets”.
An Open to Abuse Policy?
- Such a policy was the government’s argument during the Rafale controversy.
- It is openly falsehood for the government to require foreign suppliers to have IOPs and yet not have a say in the choice of offset partner or its investments.
- If this were true, the offset regime would be inherently open to abuse by the foreign supplier.
DPP norms for selecting Offset
- The DPP provides the government with extensive control over selection of the offset partner.
- For instance, it has the power to bar any entity from becoming an offset partner.
- The government also retains the power to evaluate offset proposals received in response to procurement tenders and conclude offset contracts.
- The DPP also provides that all offset proposals will be approved by the Union minister of defence, regardless of their value.
- During the period of the contract, any change in the Indian offset partner also requires government approval.
Are the offset guidelines satisfactory?
- From the above norms it is unlikely that the government has nothing to do with the selection of Indian offset partners. Neither would this be desirable.
- The intention is to create a free, open and competitive market, and yet at the same time, ensure that Indian taxpayers money not taken for a granted.
They are not, because:
- Defence procurement should be subject to transparent processes that ensure that Indian companies, big and small, compete on a level playing field.
- The selection of a large (and failing) conglomerate with no prior experience, as is the case with Rafale, would not have been possible if the government had directly procured under a sophisticated award process.
- If it is not possible or desirable under a direct procurement regime, it is difficult to argue that it is desirable under an offsets regime.
- While the procurement policy recognizes the need for domestic private partnership, it does not mandate a fair and diverse procurement process for offsets.
- Given the large contract values involved, this makes it likely that foreign suppliers will partner with just one or two large industrial groups to discharge their offset obligations.
- The definition of IOP is flawed. IOPs are defined as Indian enterprises engaged in making eligible products and/or services.
- If the objective is to build a domestic defence sector, the focus should instead be on direct investments.
- In other sectors where India has succeeded, foreign technology and know-how has followed investments, irrespective of ownership.
More Transparency is the need of Hour
- Indian ownership does not necessarily contribute to the growth of a sector, as much as investments within Indian shores.
- Focussing on investments will ensure that companies of all sizes, including foreign companies who wish to manufacture in India, are permitted to grow and flourish.
- For this, regulations that restrict foreign investments in the defence sector require a dose of reform.
- More importantly, transparency is essential in procurement contracts.
- In the interest of fairness, foreign suppliers should be free to invest in India, yet at the same time, offset investments/procurement must be subject to safeguards.
- Without substantive reforms in the DPP, there are likely to be more controversies and perceptions of crony capitalism.
- What is worse, the substantial amount of taxpayer’s money meant for the development of an indigenous defence sector might not find its way back.