NEW DELHI: The Defence Ministry is set to sign the first two offset agreements with foreign companies under the new defence procurement policy. The success with the first two cases of the new offset clause could make it difficult to accede to the American request to make changes in the offset clause, Ministry officials said.

Under the offset clause, all foreign vendors must compulsorily source one-third of the price of all defence equipment worth over Rs.300 crore from India.

The first test case for this clause is for the import of medium portable radars. The winner of the contract, Elta of Israel, has agreed to meet the conditions of the policy in letter. It will buy components worth one-third of the value of the contract from an Indian company. The runner up, the French company Thales, too was prepared to source one-thirds of the quoted price from India.

The second import contract, where the offset policy will be implemented, is for a fleet tanker for the Navy. Both foreign companies competing to supply the tanker have agreed to meet the "direct offset" clause.

On the other hand, the U.S. companies do not want offsets to be only `direct' in nature. They want offsets to be spread over an entire sector and not restricted to just the military side. Eyeing a multi-billion dollar contract for fighter aircraft, Boeing wants the offset to be extended to the civil aviation sector.

In other words, Indian companies supplying components to passenger aircraft should also be counted as offset for the fighter aircraft contract. In turn, Boeing promises to pass on expertise in the high-end and complex areas in the aerospace industry to Indian companies. At an India-U.S. defence meeting, India was told that the policy should also revise its "positive" inclination towards public sector companies for offset contracts.

On the other hand, analysts point to the relatively small size of the first two offset deals as compared to the fighter aircraft contract. For the radars, the final price was about Rs.900 crore of which about Rs.300 crore worth of components would be purchased from Indian companies. For the fleet tanker, the estimated price is Rs.400 crore. One-third of this value would be just Rs.130 crore.

In comparison, the fighter aircraft deal is much bigger. Offsets would not be less than Rs.5,000 crore to Rs.7,000 crore of very high-tech equipment and systems integration work. Besides, Elta did not break new ground in sourcing from India. It was sourcing microwave tubes, the mainstay of radars, for long from the same Indian company. It has also placed orders for components from Larsen & Toubro.

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