Sky warriors: Fighting Falcon and MiG 35, two of the competitors for the Indian Air Force order

New Delhi, Feb. 12: India is set to liberalise its weapons purchase policy to bolster domestic defence manufacturers by opening more avenues for foreign investment, but anti-corruption crusaders fear the “offsets” programme to guide it would encourage underhand deals.

The government will come out with a revised Defence Procurement Policy by April, defence production secretary Pradeep Kumar said here today.

The defence ministry’s announcement that a new policy will be out has come at a time representatives of large global weapons manufacturers are assembling in Delhi for India’s arms trade fair, Defexpo, from February 16 to 19.

At the core of the changes this year is likely to be an offsets clause that will allow foreign suppliers to reinvest in the defence sector a part of the amounts for contracted acquisitions.

The revised DPP 2008 will guide, for example, the offsets programme for the biggest arms deal for which India has invited bids - an estimated $10.2 billion (Rs 42,000 crore) for 126 multi-role combat aircraft for the air force.

The six bidders for the IAF order - Lockheed Martin (F-16 Fighting Falcon), Boeing (F/A 18-E/F Superhornet), RSK Mig Corporation (MiG 35), Dassault Aviation (Rafale), Saab, Sweden, (JAS 39 Gripen); and a European consortium (Eurofighter Typhoon) - have to submit the technical bids for their aircraft by March 3. But they have until June 30 to state how they will plough back 50 per cent of the contracted amount as offsets into the Indian defence industry.

The policy will not, however, allow indirect offsets - which means a provision that will allow ploughing back funds into other sectors of industry apart from defence.

The defence ministry has set up a separate body - the Defence Offsets Facilitation Agency (Dofa) - to keep a watch over an estimated $6 billion in offsets that government officials expect in five years but industry is circumspect about.

The DPP 2008 is likely to permit “banking of defence offsets” that will allow suppliers to reinvest in defence projects not directly related to their contract.

For instance, the winner of the IAF order may not have to necessarily invest 50 per cent in the related business of servicing the order but may choose to put funds into other military projects for India.

Such policies have been implemented widely in Europe and have been studied by the Stockholm International Peace Research Institute and the Transparency International UK. In a 2004 study on defence offsets, the UK institute said offsets should be banned.

Transparency International’s views are not always ignored. A former navy chief heads it in India and, on its suggestion, has introduced a “no-bribery” clause in defence contracts. The institute says the practice of offsets is “very open to corruption” because original contracts do not specify how they should be used.

India opened its private industry for investment in the defence sector in 2001. But its growth has been tardy. The DPP 2008 will want to give it a fillip by encouraging - and this has defence public sector units worried - foreign contractors to negotiate offsets with private enterprises.