Deal to see Indian defense spending soar

Posted in India | 16-May-07 | Author: Siddharth Srivastava| Source: Asia Times

Siddharth Srivastava is WSN Editor India.
NEW DELHI - In the past few years, India has emerged as one of the world's biggest importers of military armament. And the South Asian country is just gathering steam.

Indian defense officials, who generally prefer not to be identified, have said that the Indian Air Force (IAF) should float within two months a long-delayed global tender for 126 multi-role combat jets in a deal believed to be worth close to US$10 billion.

"There are certain procedural issues that need to be resolved before we float a request for proposal [RFP] for the aircraft," said an official. "This should happen in a month or two."

There are also indications that the Defense Ministry could fast-track the process by issuing an RFQ (request for quotation) instead of an RFP for the fighter-jet contract.

India's import of military hardware and software will reach $30 billion within the next five years, the Associated Chambers of Commerce and Industry (Assocham) said in a recent study, "Private Sector Participation in Defense".

The big deals include the 126 fighter jets, a variety of helicopters and long-range maritime spy aircraft. In the past three years, India spent as much as $10.5 billion, making it the largest arms importer in the developing world.

Big purchases include Israeli Phalcon radars in 2004 for $1.1 billion, and six French Scorpene diesel attack submarines for $3.5 billion in 2005.

The study has also recommended outsourcing for many defense activities to the domestic private sector. "The target of achieving 70% self-reliance in defense production 10 years ago has fallen short of the target by 40 [percentage points], as only 30% of defense production has become self-reliant until now," Assocham said.

Nations lobby for fighter-jet contract
The race for the IAF order is seen to be between the US F-16 and F/A-18 Super Hornet and Swedish, French and Russian fighter jets. Intensive lobbying is in progress.

Swedish Foreign Minister Carl Bildt recently visited India and met with Prime Minister Manmohan Singh, Defense Minister A K Antony and External Affairs Minister Pranab Mukherjee. An agreement was signed to deepen defense ties. Discussions centered on a new contract for Swedish SWS Bofors 155-millimeter guns for the army and the JAS 39 Gripen fighter aircraft by Saab Avionics for the IAF.

Sweden, being a member of the 45-Nation Nuclear Suppliers Group, has adopted a flexible approach toward the India-US nuclear deal.

It is well known that Washington, with President George W Bush at the forefront of such efforts, is keen to leverage the deal that will allow India to access international nuclear-power technology, to enable the US to garner several defense contracts with India. Bush recently called Manmohan to assure him about the nuclear pact.

Communication at the highest level is an indication of the comfort level that the two countries now enjoy. It also makes it that much more difficult for any other nation in a competing business position.

The US is said to be looking at defense deals worth $30 billion over the next few years. In military aviation, the Indian armed forces are looking to seal deals for more than 500 aircraft, helicopters and unmanned aerial vehicles.

Among nations involved in arms deals with India, factors such as state-of-the-art technology, geostrategy and slush funds come into play. In a clear indication of behind-the-scenes dealings, an Austrian firm recently told the Indian Supreme Court that Russian armaments manufacturer Kazan Helicopters paid Rs290 million (more than $7 million) in kickbacks to swing a Rs1.8 billion deal to supply 16 Mi-17 helicopters.

Israel has overtaken France, the United Kingdom and other countries to become the second-largest defense supplier to India, with the value of its military arsenal close to $1 billion each year for the past three years.

Russia has managed to retain its position as India's biggest defense partner, notching more than $1.5 billion a year because of the deeply entrenched relations between the two countries. But the US, the latest to join the fray, could well make things difficult for the established players.

India and the US inked a 10-year defense agreement in June 2005, "the New Framework for the US-India Defense Relationship", signed by then defense chiefs Donald Rumsfeld and Pranab Mukherjee.

However, it could be at least five years before jet-fighter price negotiations are concluded and another five years before the first of the new aircraft start arriving, experts say.

The IAF is also procuring 40 Sukhoi multi-role jets from Russia as a stopgap measure.

The problem areas
The inability of the private sector to meet expectations is a cause for worry, according to Assocham. As far back as 2001, 26% foreign direct investment (FDI) was allowed in the defense sector.

The government has ruled out allowing multinational armament companies to go in for indirect offsets (investments in non-defense sectors such as the high-profit information technology industry) in defense deals worth more than Rs3 billion ($73 million). The bulk of the offsets business will be in the aerospace sector.

"Any company vying for supplying defense weapons to India will have to invest 30% of the order in Indian public- and private-sector companies," Indian Defense Secretary Shekhar Dutt said last week.

India signed its first offset contract of more than $5 million under the new rules in March last year when it purchased Israeli Elta medium-powered ground radars. The company placed orders from private Indian companies Larsen and Toubro and Astra Microwave of Hyderabad.

To take advantage of offsets in aerospace, Bharat Forge Ltd, already a global player in the auto-components sector, is setting up a Rs3.5 billion Center for Advanced Manufacturing in Pune, Maharashtra state. The plant is scheduled to commence production next April.

However, despite the broad picture provided by the Assocham study, defense procurement continues to be mired in delays.

The Parliamentary Standing Committee on Defense recently said that the formalities of several deals should be completed by September. These include 197 helicopters for an estimated $700 million for which US firms Textron and Eurocopter are bidding. Though the initial formalities have been completed, the deal has yet to be cleared.

The decision to procure 400 upgraded towed 155mm guns at an estimated $3 billion is on hold despite an unprecedented four performance trials.

"Failure to complete major armament deals is leading to a cut in the acquisition budget,' observed the committee. "There is a need to allocate more funds for new schemes."

Siddharth Srivastava is a New Delhi-based journalist.