BY : IANS

India's newly introduced offsets policy for defence purchases poses a challenge for America's defence vendors, even as they await an Indian Air Force (IAF) order for 126 combat aircraft in a deal valued at $10 billion, a senior US military officer said Saturday.

'It will be a challenge (for the manufacturers) to put together a comprehensive and acceptable offsets plan within the Defence Procurement Procedure (DPP),' Lt. Gen. Jeffrey Kohler, director of the US Defence Security Cooperation Agency, told reporters here.

The DPP enunciated last year lays down that 30 percent of all defence deals valued at over Rs.3 billion has to be reinvested in the country. It also contains a transfer of technology (ToT) clause and mandates licensed production in India of military hardware bought from abroad. In clearing the IAF order last month, the defence ministry raised the offsets requirement to 50 percent.

According to Kohler, the issue was not so much the percentages but whether this also included the ToT element.

'We estimate the offsets requirement in this order to be around $3 million. We suppose this includes the ToT element. If it doesn't, we'll have to figure out how to deal with this,' he maintained.

Every defence deal has two elements: the actual manufacture and the creation of infrastructure and ancillary industries for this manufacture. In the case of the IAF order, the offsets clause would relate to the $6 billion manufacturing element.

Kohler also indicated US manufacturers would have been happier if an indirect offsets clause enabling reinvestment in areas other than the defence sector had been in place rather than the existing direct offsets requirement.

'In one case, a (defence) manufacturer exported an entire automobile plant as an indirect offset. That helped to create huge numbers of jobs and contributed to economic growth.

'We've talked about that (with defence ministry officials) but we can't expect you to change your policies every six months or so. Still, some modifications are necessary as direct offsets add to costs,' Kohler maintained.

It was against this background that US aerospace majors Boeing and Lockheed Martin were awaiting the IAF request for proposal (RFP) for the new jets. Their aircraft are among the six in contention for the Indian order.

'We're waiting for the RFP to see what's in it. We have six months to respond and a year to present an offsets plan,' Kohler maintained.

Speaking to reporters at the Aero India international air show at Bangalore in February, US ambassador David Mulford had described the offsets clause as 'restrictive', while immediately adding that he was not suggesting any changes in the policy.

At the same time, he felt the clause would, at some time, need to be modified.

The defence ministry last month ruled out any immediate changes in the policy.

The RFP is likely to be sent out later this month for the Boeing F-18 Super Hornet, the Lockheed Martin F-16, the Swedish Gripen, the French Rafale, the Russian MiG-35 and a European consortium's Eurofighter.