To speed up deliveries, Russia's S-400 Air Defence System may come without offset package

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 Rs 39,000 crore. The offset clause, which fits in with the Make in India programme, mandates foreign companies to invest at least 30 per cent 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 per cent 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 Rs.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."

China will likely get the system this year itself after signing up to be the first export customer. Designed to counter a variety of threats from hypersonic cruise missiles to unmanned aerial vehicles (UAVs), airborne early warning aircraft, stealth fighters and even precision-guided munitions, the S 400 is the latest in a range of air defence systems that have posed a formidable threat to western aircraft across the world.

economictimes