Prelims level : Defence Mains level : GS-III Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management
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Why in News?

The Cabinet Committee on Security (CCS) gave exceptional and unprecedented waivers to

  • The twin-engine Rafale combat jet is designed from the beginning as a multi-role fighter for air-to-air and air-to-ground attack is nuclear-capable and its on-board Electronic Warfare (EW) systems can also perform reconnaissance and radar jamming roles.
  • Officials say that due to national security reasons, there is a confidentiality clause in the Rafale deal which bars the buyer and seller from talking about the pricing, making it impossible for any government to reveal any detail about the defence deals.

What are offset agreements?

  • Offsets are kind of a quid pro quo between countries and defence companies. Basically, since a government spends a large part of its budget buying equipment from these companies, it asks these companies to invest a portion of the deal amount in their countries. The clause allows for economic growth of the country in the process of completing the deal. While some offset clauses may ask for investments, others may impose terms like onboarding of local suppliers in the process.

Two key issues of offset waivers

  • The waivers concerned two key issues — the provisions to be made in the offset contracts for arbitration (Article 9) and access to books of accounts of the industrial suppliers (Article 12).

0% offsets in first three years

  • According to the offset schedule, the two private French companies will discharge 0% of the value of the total offsets for ‘Make in India’ in the first three years and 4% in the fourth year. No less than 57% of the value of total offset obligations will be discharged in the seventh year.

French reluctance to mention ‘offsets

  • The INT report reveals that the French negotiators were initially “not ready to mention the word ‘offsets’ in the IGA” but upon insistence by the Indian side, they “relented and added ‘Make in India’ initiative through Offsets at Article 12 of the IGA”. It was only after extended discussions that the two industrial suppliers agreed to provide their offset offer “as per the format specified in DPP-2013”.

Subject to France’s blocking statute

  • There is France’s controversial blocking statute which criminalises the communication of economic, commercial, industrial, financial, or technical documents or information to foreign individuals or foreign legal entities. The blocking statute remains in place and can be invoked if needed.

Offsets are made for controversy

  • Although the practice is often criticised for being trade-distorting, non-transparent, and riddled with corruption and has been generally prohibited by the World Trade Organisation (with an exception made for protection of the essential interests of a country’s national security), offsets are increasingly in vogue in the defence sector.
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