On October 5, India and Russia signed a $5.4 billion dollar (Rs 40,000 crore) deal for the purchase of S-400 air defence missiles from Russia, the largest such deal between the two countries. The deal, inked during President Vladimir Putin’s visit for the 19th annual India-Russia summit with Prime Minister Narendra Modi, affirmed what both sides call a special strategic partnership. The five missile systems, to be delivered in the next two years, is the single largest defence deal since India started importing arms from the former Soviet Union in 1964. The deal affirms India’s willingness to continue its ties with Russia in the face of US sanctions. The Russian missile maker, Almaz-Antey, is one of the entities on the US ban list, the Countering America’s Adversaries Through Sanctions Act (CAATSA), which came into effect this January. The day after the deal was inked, a US state department spokesperson specifically referred to India’s S-400 buy to indicate the US had imposed sanctions on China for purchasing similar missiles from Russia. The waiver authority in CAATSA, the official said, was not country-specific and had strict criteria, evidently belying New Delhi’s hopes that it had got an exception clause for its Russian arms buys. “The waiver is narrow, intended to wean countries off Russian equipment and allows only for things such as spare parts for previously purchased equipment,” he said.
It remains to be seen how and when the US makes good its implicit threat of sanctions against India. South Block has worked out a financial arrangement bypassing the western banking system where India will pay for its arms purchases in rupees deposited in a branch of Russia’s Sberbank in Delhi, rather than in US dollars. Air Chief Marshal B.S. Dhanoa recently called the Rafale and the S-400s a ‘booster dose’ for the IAF whose fighter squadron numbers are rapidly shrinking.
The opposition Congress party on October 8 was quick to question the missing offsets in the S-400 deal. “Has the offset policy been cancelled?” party leader Manish Tewari asked on Twitter: ‘Will there be no more offsets? If so, what happens to the great Make in India?’
In the S-400 deal, the offsets would have been at least Rs 12,000 crore. An MoD spokesperson said there was no offset requirement in the Inter Governmental Agreement (IGA) between India and Russia for the missiles, which would make this move unusual but not exceptional. The MoD’s offset policy in the Defence Procurement Procedure (DPP) — which governs all arms purchases — mandates that the original equipment manufacturer (OEM) purchase products equal to at least 30 per cent of the value of a defence contract from within India. Offsets apply to all contracts over Rs 2,000 crore and aim to leverage arms buys to develop indigenous industry. The DPP, however, allows the government to waive the offsets in exceptional cases. Paragraph 2.3 of the Defence Offsets Guidelines says the ‘Defence Acquisition Council may consider partial or full waiver of the offset clause’ and Para 2.5 says offset provisions will not apply to ‘fast track purchases’.
The trouble is, this exception seems to be the rule when it comes to big-ticket Russian deals. The last two deals involving offsets were for the $660 million purchase of 80 Mi-17 1V medium lift helicopters in 2006 and the $865 million upgradation of its fleet of 52 MiG-29 aircraft.
There is no talk of offsets in the additional defence deals with Russia in the pipeline. These include deals worth over $5 billion for the joint production of Kamov Ka-226T light utility helicopters, four Krivak-class frigates and 48 Mi-17 V5 medium lift helicopters.
Western manufacturers get no such exemptions. Defence offsets worth $14 billion (Rs 1 lakh crore) will be discharged by 2028. Nearly a third of this figure,
Rs 30,000 crore, could come from offsets for the 36 Dassault Rafale fighter jets India is buying from France.
The Anil Ambani-owned Reliance Defence, one of Dassault’s offset partners, was in talks with Almaz-Antey when both countries began negotiating the S-400 purchase in 2015. No formal MoU was signed with the Russian concern. A Reliance Defence official said they only had an “understanding” with Almaz-Antey, which lapsed and was never pursued after the Russian government indicated they did not want offsets in the deal.