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New Indian Procurement Rules Stress Offsets, Strategic Relationships

2005-08-03 In a decision that will have far-reaching implications for future military procurements, the Indian government has set new guidelines regarding acquisitions from other countries. The most controversial clause of the new guidelines, which came into force on July 1, pertains to the mandatory purchase of Indian defense equipment by any foreign vendor who wins a defense contract worth over $70 million.

In addition, the government has also incorporated a new clause stating that the lowest bidder for a program may not necessarily be the winner of a contract, as considerations of strategy and politics may also be taken into account. This clause will particularly affect the planned $9-billion purchase of 126 medium-range multirole combat aircraft for which the Indian Air Force has issued a request for information (RFI), with a formal request for proposals (RFP) expected in the next six months.

Non-Indian defense companies are skeptical about the new guidelines and are particularly confused about the operation of the offset clause. Under this rule, any defense contract with a foreign vendor will not become effective until after that vendor has concluded the offset contracts for the required value. Under the new guidelines, 30% of the total cost of any deal above $70 billion will be used as "offsets," which means that the foreign vendor will have to buy defense or other specified equipment from the Indian industry.

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