Delhi's Defense Spending Spree

As India upgrades its arsenal, U.S. military contractors hope to cash in

5 min read

Ever the global iconoclast, India has reacted positively to the policies of U.S. President George W. Bush. It supports the global war on terror, likes Bush's free-market philosophy, and appreciates his administration's efforts to relax rules governing cooperation in nuclear energy. Thus, while the United States has seen its relations with many countries deteriorate since 2001, its relations with India have achieved unprecedented warmth.

As a result, India is suddenly a hot market for U.S. corporations peddling aerospace and defense wares--though some in India have expressed serious concerns about whether New Delhi's enthusiasm for American military hardware is really in the subcontinent's long-term interest.

With a five-year defense modernization budget in excess of US $30 billion, India is being courted by arms exporters like never before. ”Today, nobody buys [defense equipment] like India buys. And it will continue to be one of the world's principal weapon buyers,” says Rahul Bedi, a Jane's Defence Weekly analyst in New Delhi.

Historically, India has relied on Russia for its military hardware needs, though in recent years it has imported equipment from the UK, France, and Israel, too. All along, largely for political reasons, U.S. contractors could not find a foothold in India. But now the U.S. defense industry is working closely with the Pentagon and the U.S.-India Business Council (USIBC), in Washington, D.C., to ensure that it tops the shopper's list.

”After the enormous growth [of the] U.S.-India strategic and defense relationship over the last three to four years, we want to make a breakthrough in defense sales,” the U.S. ambassador to India, David Mulford, said at the international Aero India 2007 air show, held in Bangalore in February.

India's enormous defense requirements include 126 multirole combat aircraft, a deal worth about $7.5 billion; eight long-range maritime patrol aircraft, worth at least $1 billion; 197 light utility helicopters, worth $600 million; and some tactical transport aircraft (Lockheed Martin Corp. is supplying six C-130J planes to the Indian air force). The prize catch is the multirole fighter, for which Boeing and Lockheed are contenders, along with Dassault of France, MiG of Russia, Saab of Sweden, and Eurofighter, a consortium of European manufacturers.

Lockheed says it is prepared to transfer technology and manufacturing capability to India in connection with potential aircraft programs, such as the multirole combat aircraft program, for which Hindustan Aeronautics is the designated company. It may work with Hindustan Aeronautics on a joint F-16 program, adapting the famously successful fighter to Indian needs [see photo, "Tata at Controls"].

Boeing, which is in the race to provide the multirole fighter with its F/Aâ''18 Super Hornet, has also offered to coproduce the plane in India--which would make India the only country to manufacture the fighter plane outside the United States.

”India is the largest fighter deal since the beginning of the 1990s. It represents one of Boeing's largest potential growth markets for defense products in Asia,” says Mark Kronenberg, Boeing vice president of integrated defense systems for Asia-Pacific.

Not wanting to be left in the dust, European companies are also making attractive offers. The Eurofighter group, for example, has invited India to partner with its four member countries--Britain, Germany, Italy, and Spain--on the aircraft, intended to be Europe's next, and perhaps last ever, manned fighter plane.

India encourages, and in some instances requires, local participation in defense deals and technology transfer. To that end, Lockheed Martin set up the India Innovation Growth Program as a two-year project to prepare Indian companies to launch early-stage technologies in the global marketplace. Lockheed's Indian partner in the program, the Federation of Indian Chambers of Commerce and Industries, plans to jointly administer it with the IC2 Institute at the University of Texas, Austin.

Meanwhile, Northrop Grumman Corp. signed with Bharat Electronics of Bangalore to explore coproducing defense and aerospace electronics. Katie Gray, vice president of the F-16 program at Northrop's Electronic Systems, says the company has identified close to 50 Indian companies it wants to work with. Among other things, Northrop is trying to sell its Hawkeye 2000 airborne early-warning and battle-management system to the Indian navy.

Raytheon Co. is set to collaborate with Tata Power Co. in strategic electronics, and Boeing has inaugurated a five-year program with the Indian Institute of Science, in Bangalore, to design a ”wing of the future.”

Defense contractors seeking Indian business are bound by an offset clause introduced in a 2006 Indian government regulation, the Defense Procurement Policy. It applies to all Indian weapons imports exceeding $66 million in value, and says the foreign vendor has to buy from Indian suppliers technologies, services, or components worth at least 30 percent of the contract value.

The foreign firms can fulfill that offset obligation in three ways: purchase military items or services available in India, invest in Indian companies doing defense research and development, or directly invest in the Indian defense sector, up to 26 percent of the contract value.

Indian defense officials consider the offsets a device that will augment their military's technological base. ”Offsets provide an excellent opportunity for the Indian industry; both public and private enterprises should make use of them,” says K.P. Singh, the Defense Ministry's secretary for production.

The procurement policy makes clear that the better a vendor's offsets proposal, the better its chances will be of clinching a defense contract. Although the U.S. Defense Department opposes such offset requirements on principle, in practice it is letting the USIBC engage Indian partners to define offsets that suit American bidders.

”We have encouraged the broadening of the definition of offsets to include indirect offsets, so other areas of India's economy may gain from the massive investments that are sure to flow from aerospace and defense contracts,” says Nikhil Khanna, director of policy advocacy at USIBC in Washington. The advocacy group is seeking credit for technology transfer, limitation of liability, and the ability to ”bank” the value of current projects as offsets for future defense contracts. New Delhi, Khanna says, is considering the suggestions.

India's Ministry of Defense seems open to such ideas, at least up to a point. ”If there is scope for improvement, we will adjust and make minor changes to the policy,” A.K. Antony, India's defense minister, said at the air show. ”Our mind is open.”

The new relationship between the Indian and U.S. defense worlds is not without pitfalls for both sides. ”The U.S. industry will have to deal with painful Indian bureaucracy and infamous defense procurement procedures that stretch to several years,” says Bedi, of Jane's. A complication peculiar to India is that the country lacks a common defense chief--the army, air force, and navy are separate fiefdoms, an arrangement that has its dangers for India itself.

”I don't see any focus” in India's spending plans, comments Andrew Brookes, an aerospace analyst at the International Institute for Strategic Studies, in London. ”Why does India want these aircraft? Neither Pakistan nor China will invade India. What is the game plan?”

Bedi, expressing similar concerns, complains that ”India is putting together an ad hoc arsenal, with no perspective on what the security scenario will be like in 2020.”

Brookes wonders, too, whether India's new openness to U.S. contractors is to the subcontinent's benefit. ”It might make political sense to go for the American equipment, but it does not make logistical or business sense,” he says. India already has a multiplicity of airplanes in its arsenal, and Brooks says it shouldn't add U.S. airplanes and weaponry to it. He says it is ”very difficult to manage both Russian and American equipment.”

Such views may have merit, but it's not likely that the U.S. contractors will let that get in the way of sales. Not only is India an alluring market for military hardware, commercial aircraft exports are doing well, too. Boeing logged Indian orders for 101 airliners in 2005, valued at more than $15 billion, and for 30 planes last year. Airbus, the European manufacturer, and Boeing reckon the Indian market will be worth $100 billion in the next two decades.

Airbus hired Infosys Technologies, in Bangalore, to design part of the superjumbo A380's wings, and the company is working with Tata Consultancy Services, in Mumbai, to design cockpit software. HCL Infosystems, headquartered in Noida, just outside New Delhi, is working on the collision avoidance and zero-visibility landing software that Boeing plans to incorporate into its 787 Dreamliner.

Altogether, taking both the defense and civil sectors into account, India's aerospace engineering services are expected to be a $3 billion industry by 2020, says M. Ashok Kumar, executive vice president of global business development at HCL, citing a National Association of Software and Service Companies--Booz Allen Hamilton report. Kumar says defense manufacturing outsourced to India will amount to at least an additional $2 billion.

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