Air Def Sys­tem May Fly in Mi­nus Off­set

Fi­nal talks for .₹ 39k-cr S-400 deal in March; no off­set clause for faster de­liv­ery

The Economic Times - - Pure Politics - Manu.Pubby@ times­

New Delhi: The de­fence min­istry may forego the off­set clause to speed up de­liv­er­ies of a Rus­sian air de­fence sys­tem de­signed to de­ter Pak­istani fight­ers and pro­vide a mis­sile shield for ma­jor cities, said peo­ple with knowl­edge of the mat­ter.

In­dia and Rus­sia will start fi­nal ne­go­ti­a­tions on the S 400 air de­fence sys­tem next month with the deal value pegged at .₹ 39,000 crore. The off­set clause, which fits in with the Make in In­dia pro­gramme, man­dates for­eign com­pa­nies to in­vest at least 30% of the con­tract value in the In­dian aero­space and de­fence sec­tors.

The S 400 is an ad­vanced air de­fence sys­tem that has al­ready been or­dered by China, which is likely to get its first de­liv­er­ies later this year. In­dia and Rus­sia be­gan talks af­ter the gov­ern­ment ac­cepted an air force pro­posal to pur­chase five fir­ing units of the sys­tem to pro­tect both the north­ern and east­ern bor­ders.

A top Rus­sian of­fi­cial told ET that off­sets could delay de­liv­er­ies by as much as two years. “As far as I have heard, there is no off­set pack­age for the pro­gramme. It is a strate­gic project and is very im­por­tant for the two coun­tries,” said Vik­tor N Kladov, direc­tor of in­ter­na­tional co­op­er­a­tion at Rostec, the Rus­sian state-owned com­pany that con­trols sales of the S 400 sys­tem. “It should not be played around with some off­set pack­ages.”

He said Rus­sia would com­ply if In­dia in­sisted on an off­set pack­age. But, he said, “It may delay de­liv­ery by one-two years and that is why a deal with no off­sets pack­age is the best choice.”

Ac­cord­ing to an­a­lysts, the off­set clause typ­i­cally adds 10-15% to the value of a con­tract on ac­count of the do­mes­tic in­vest­ment re­quired. Also, the non-com­pli­ance rate is very high as com­pa­nies find it dif­fi­cult to dis­charge the off­set within the rules.

Sources have told ET that while the de­fence min­istry has ap­proved the pur­chase of five fir­ing units of the S 400 sys­tem for an es­ti­mated .₹ 39,000 crore, two may be or­dered in the ini­tial phase. This could be in­creased based on per­for­mance, they said.

If the con­tract is signed within a year, de­liv­er­ies could start by 2019-20.

“One year for the con­tract plus an­other two years for de­liv­ery. That will be the time­frame,” Kladov said. “The In­dian side in­vited us for ne­go­ti­a­tions in March. So, if we start ne­go­ti­a­tions in March, it will take an­other year to pre­pare for the con­tract. I do hope it will hap­pen this year or maybe first half of next year.”

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