Was Defence Minister AK Antony party to his ministry’s decision to waive rules in favour of US aerospace major Boeing to escape its obligation to plough back $1.74 billion as offset into the Indian defence and aerospace industry? India’s Comptroller and Auditor General (CAG) has put the defence ministry on the mat over the $4.1-billion deal with Boeing to supply 10 C-17 Globemaster heavy lift cargo planes for the Indian Air Force (IAF) and eight P-8I Poseidon long-range maritime reconnaissance aircraft for the Indian Navy.
The defence offset policy mandates that a foreign vendor who wins any Indian defence contract worth over Rs 300 crore ($55 million) should plough back at least 30 per cent of the deal back into India. The P8-I deal worth $2.1 billion was signed in January 2009 and it was to bring $641 million as offset to India, while the C-17 deal worth $4.1 billion was signed in June 2011, providing for at least $1.1 billion in offset.
India was listed as the top weapons importer by the Stockholm International Peace Research Institute in 2011—$12 billion, the same year in which it emerged as the third largest buyer of American weaponry ($4.5 billion). Future deals with the US include a payout of $3.5 billion.
In spite of spending Rs 20,000 crore annually on defence research, domestic organisations such as HAL, DRDO and the Ordnance Factories Board are yet to produce a significant world-class weapon— the annual defence research budget is Rs 5,000 crore. Since 2007, India has inked 17 defence deals that entailed offsets, which have brought $4.27 billion back into the country.
When the CAG examined 16 of the contracts worth Rs 18,444.56 crore ($3.4 billion) signed by India since July 2005, it found gaping holes in the policy implementation for several of the deals—including Boeing’s—whose contracts should have fetched India Rs 5,543.33 crore (over $1 billion) as offset. These include deals with Russia’s RAC MiG for the MiG-29 combat fleet upgrade contract signed in 2008; Russia’s Rosoboronexport for Mi-17V5 medium lift helicopters inked in 2008, and the 2009 contract for six C-130J special operations transport aircraft from American major Lockheed Martin.
In defence deals, the offset is given in three different formats; direct purchase of equipment from India by the foreign vendor; direct investment as JVs with Indian defence companies and R&D services. However, CAG found that the defence ministry violated the offset criteria on many deals.
For the C-17s , Boeing agreed set up a Transonic Wind Tunnel (TWT) test facility—a key aerospace technology that India lacks—through Direct Foreign Investment (DFI) worth $195 million (Rs 874.22 crore). The noted, however, that the offer could not be classified under any of the above three categories, and hence violated the offset policy.
The CAG report noted: “As the TWT test facility was a DFI in kind, the offset was allowed by the Antony-headed Defence Acquisition Council (DAC) even as it was not an eligible offset, though this was done on the basis of Technical Offset Evaluation Committee (TOEC) recommendation, the decision was taken without the mandatory certification by Defence Offset Facilitation Agency (DOFA).”
The defence ministry, in its response in April 2012 to the CAG, noted that the offset credit for investment by Boeing was accepted by the DAC on February 21, 2011 and that the Cabinet Committee on Security (CCS) had also accorded the approval in principle to set up of the facility at DRDO. CAG questioned this.
“The reply is silent on whether specific waiver of the Raksha Mantri was sought for the breach of the DPP provisions,” the CAG noted. “It (waiver) is also not acceptable because the DAC, in the same meeting had maintained that investment in kind through non-equity route was not permissible for offset and only purchase of goods and services by OEM from IOP would so qualify.”