CAG says offset obligations under Rafale deal yet to be fulfilled; 'opening can of worms?' asks Congress' P Chidambaram

The Dassault Aviation is the manufacturer of the Rafale jets while MBDA supplied the missile systems for the aircraft

FP Staff September 24, 2020 16:48:08 IST
CAG says offset obligations under Rafale deal yet to be fulfilled; 'opening can of worms?' asks Congress' P Chidambaram

French aerospace major Dassault Aviation and European missile maker Matra BAE Dynamics Alenia (MBDA) are yet to fulfill] their offset obligations of offering high technology to India under the Rafale aircraft deal, the Comptroller and Auditor General said in a report released on Wednesday.

The Dassault Aviation is the manufacturer of the Rafale jets while the MBDA supplied the missile systems for the aircraft.

India had signed an inter-governmental agreement with France in September 2016 to procure 36 Rafale jets at a cost of Rs 59,000 crore, and the offset obligations were part of the contract.

In its report tabled in Parliament, the national auditor said the Dassault Aviation and the MBDA proposed in September 2015 to discharge 30 percent of their offset obligations by offering high technology to the Defence Research and Development Organisation (DRDO), but the two firms are yet to do it.

Congress leader P Chidambaram criticised the Centre over the CAG's report and asked whether it had "opened a can of worms".

"CAG finds that the vendors of the Rafale aircraft have not confirmed the transfer of technology under the offset contract.

"The offset obligations should have started on 23-9-2019 and the first annual commitment should have been completed by 23-9–2020, that is yesterday. Will the government say if that obligation was fulfilled? Is the CAG report the opening of a can of worms?" he said.

The Congress, then led by Rahul Gandhi, had targeted the Narendra Modi government over the Rafale deal in the run-up to the Lok Sabha election 2019, alleging corruption.

Meanwhile, under India's offset policy, foreign defense entities are mandated to spend at least 30 percent of the total contract value in India through the procurement of components or setting up research and development facilities.

The DRDO was looking for French technology for the indigenous development of an engine for the Light Combat Aircraft Tejas.

The CAG also painted a grim picture of the efficacy of India's offset policy saying it did not find a single case of foreign vendors transferring high technology to the Indian industry, adding the defense sector ranked 62nd out of 63 sectors receiving FDI.

Under India's offset policy, foreign defense entities are mandated to spend at least 30 percent of the total contract value in India through the procurement of components or setting up of research and development facilities.

The DRDO was looking for French technology for the indigenous development of an engine for the Light Combat Aircraft Tejas.

The CAG also painted a grim picture of the efficacy of India's offset policy saying it did not find a single case of foreign vendors transferring high technology to the Indian industry, adding defense sector ranked 62nd out of 63 sectors receiving FDI.

"DRDO wanted to obtain technical assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. To date, the vendor has not confirmed the transfer of this technology," according to a press release issued by CAG.

The offset norms are applicable to all capital purchases above Rs 300 crore made through imports. The offset obligations can be made through Foreign Direct Investment, free transfer of technology to Indian firms, and purchase of products manufactured by Indian firms.

The auditor said though the vendors failed to keep up their offset commitments, there was no effective means of penalising them.

"Non-fulfilment of offset obligations by the vendor especially when the contract period of the main procurement is over is a direct benefit to the vendor," it said.

The CAG said as the offset policy has not yielded the desired result, the defence ministry needs to review the policy and its implementation.

It needs to identify the constraints faced by the foreign suppliers as well as the Indian industry in leveraging the offsets, and find solutions to overcome these constraints," it said.

The CAG said 48 offset contracts were signed with foreign vendors from 2005 to March 2018 with a total value of Rs 66,427 crore, and Rs 19,223 crore worth of offsets should have been discharged by the vendors by December 2018.

But the amount discharged by them was only Rs 11,396 crore, which was only 59 percent of the commitment.

"Further, only 48 percent (Rs. 5,457 crore) of these offset claims submitted by the vendors were accepted by the Ministry. The rest were largely rejected as they were not compliant to the contractual conditions and the Defence Procurement Procedure."

It said the remaining offset commitments of about Rs 55,000 crore would be due to be completed by 2024.

"The rate at which the foreign vendors have been fulfilling their offset commitments was about Rs 1,300 crore per year. Given this situation, fulfilling the commitment of Rs 55,000 crore by the vendors in the next six years remains a major challenge," the CAG said.

The auditor found that of the total value of offsets, only 3.5 percent was contracted to be discharged through FDI with Indian Offsets Partners or IOPs, adding it did not find a single case where the foreign vendor had transferred high technology to the Indian industry.

"The defence sector is ranked 62nd out of the 63 sectors in India in terms of FDI. Similarly, there was hardly any equipment supplied 'in kind' to the Indian industry by the foreign vendor. Thus, the objectives of the offset policy remain largely unachieved," the report said.

The CAG said it undertook the performance audit of the offset policy after a decade of its rollout to assess the extent to which its objectives were met.

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