The West Reaches Out to India

India’s Strategic Strengths

Buoyed by the positive signs of change and a sense that the Indian market will undergo a shift, many Western powers have already begun efforts to court India and gain a first mover advantage, write Dr May-Britt U Stumbaum and Garima Mohan

As the Modi government plans to reform key sectors of defence and infrastructure, and modernise India’s largely Soviet era weaponry, senior leaders from France, the UK and the United States have visited the country in quick succession. Defence deals have emerged as key discussion points in all visits. As part of the overall expectations of a wave of economic reforms under the new government, there are signs that the defence sector will be opened up to increasing Foreign Direct Investment (FDI) as well. Buoyed by the prospect of multi-billion dollar defence deals as India seeks to build its nascent arms industry, Western governments are rushing in and are hoping to cash in on the first mover advantage.

Modernising India’s Defence Sector

Even though the Indian defence industry is one of the largest and most broad based in the developing world, the need for modernisation of the sector has been a recurring concern. This is especially because the sector is plagued by a bureaucratic and non-competitive structure dominated by state owned companies, with several impediments to research and innovation, charges of corruption and nepotism, and a lack of accountability to the Indian military. In response to its drive for great power status, there is an increasing interest in building a state-of-the-art arms industry, reduce dependence of the country on arms imports and reform the defence industrial base. Under the Modi government, this call has received greater attention and trends show that the government is preparing to undertake significant reforms and open the nascent Indian defence industry to greater foreign investment.

It was signalled earlier this month that the government would liberalise the sector by permitting manufacturers to build more defence components without licenses, in effect making it easier for Indian firms to partner with foreign companies. In fact, the Commerce and Industry Minister Nirmala Sitharaman also stated that allowing FDI in this sector would not only help in increasing defence preparedness, but would also reduce import dependence, saving billions of dollars in foreign exchange. This becomes particularly important, since India spent almost $6 billion on weapons last year. In view of the dependence on Russia for defence imports, it is in India’s interest to diversify its base, a point that came in sharp relief with the controversy following Russia’s offer of Mi-35 attack helicopters to Pakistan.

The present regulations have put off many foreign investors, impeding technology transfers, the core interest for India. This is especially because under the current regulations, foreign firms can invest only up to 26 percent without committing to technology transfers. According to a Reuters report, the Department of Industrial Policy and Promotion (DIPP) circulated a discussion draft that would allow up to 100 percent FDI in state-of-the-art equipment. This document also recommends a cap of 49 percent for investments that do not involve technology transfer, and a 74 percent cap in cases where foreign investors are ready to share know-how. Encouraged by these signs of change and a sense that the Indian market will undergo a shift, many Western powers have already begun efforts to court India.

India Advances Ties with Continental Europe

The first in the string of foreign visits to the new Modi government was the French Foreign Minister Laurent Fabius, who prioritised defence deals, among other subjects. A core French interest was of course to get momentum going again on the stalled $15 billion deal to sell 126 Rafale fighter jets manufactured by Dassault Aviation, with India. The reasons for this delay were cost escalations and disagreements with India’s state run Hindustan Aeronautics Limited. There were reports that the deal would finally be closed with Fabius’s visit. Interestingly, he also met Arun Jaitley who holds the portfolios of Finance and Defence – and would decide when and how the deal goes through.

The other important issues which emerged with the French visit were the Modi government’s views on a nuclear liability law and its possible effect on French nuclear companies, as well as the stalled contract for two European Pressurised Nuclear Reactors. The issue of nuclear energy is mutually beneficial for both actors – as it would boost French nuclear commerce while contributing to India’s energy security needs. This is especially important for France since nuclear technology and expertise is one of its core exports, in the form of ‘grand contract’. From the Indian point of view, this would just not be a buyer-seller relationship, and would involve deeper profits in terms of technology transfers and exchange of know-how. For this, India even demanded greater ‘localisation’ of these plants and technical exposure for its personnel to facilitate such an exchange.

Other issues which emerged were – urban planning, climate change, anti-terrorism and people-to-people exchanges. On the Indian side, the interests clearly are on bolstering its military capabilities, energy security and strengthening its international profile. The visit was substantial, and given the keen French interest in terms of issues covered, it could lead to a deeper partnership on defence issues in the future. It will also advance India’s ties with continental Europe where France and Germany are key players.

UK Eyes Defence and Infrastructure Sectors

Given the slow progress on the Rafale deal, the UK seems hopeful on the fighter jets, especially since Eurofighter Typhoon was among the shortlisted companies. Beyond this, the focus of the visit of Chancellor Osborne and former Foreign Secretary Hague was to open up investment opportunities for UK firms in India’s defence and infrastructure sectors. They are the first senior figures from the British government to visit the Modi government. They also met External Affairs Minister Sushma Swaraj, Finance Minister Arun Jaitley as well as business groups and key investors.

Implications for the UK defence firms under the proposed reforms of the Modi government could include a possible sale of Eurofighter Typhoon jets built by the BAE systems, as an alternative to the French Dassault deal. It might even open the field for other players like the Germans. There might also be possible joint ventures of BAE with Indian companies as the government becomes more open to increasing foreign investment. Other key issues which emerged with the FICCI agenda and could be a way of cooperation in the future include information sharing and dissemination on nuclear safety, nuclear waste and radiation safety management.

McCain Woos India

Arizona Senator John McCain also endorsed the drive to modernise India’s armed forces on his visit to the country. He stated specifically that Washington should seek to bolster India’s economic as well as military rise. Given the US defence capabilities and technologies, this cooperation would benefit the Indian industry immensely, and would also create investment opportunities for US defence firms. Arizona is home to Boeing and Raytheon’s defence businesses, and a deal with India would be a win-win situation for all parties. In order to create closer ties, McCain also urged the US Congress to invite Modi to address a joint session –an honour reserved for only a few select foreign leaders. India needs the US to shore up its strategic position in the region, and for military modernisation. US government officials are pushing for the delayed sales of Boeing Apache and Chinook military transport helicopters. In fact according to IHS Jane’s, Washington dislodged Moscow as India’s top defence supplier last year.

Call for Cautious Optimism

Despite the initial enthusiasm displayed by potential investors as well as Western powers, it is important to note that the Indian government is yet to take a final call on increasing the FDI in key sectors such as defence, though in his maiden budget, Finance Minister Arun Jaitley proposed a hike in the FDI cap for the domestic defence industry from 26 percent to 49 percent to boost development of indigenous hardware. However, such an increase will not change the status quo. According to experts such as Lockheed Martin, which currently has a joint venture with Tata Advanced Systems, for higher intellectual property there will have to be a cap of over 50 percent for foreign investors to be in a position to share technology in which they have significant investments. Moreover, while there is increasing optimism, there are reasons to believe that this change will not take place overnight and will be a slow process. Already there are emerging pockets of resistance to such a planned reform within the Indian industry. The BJP, as well as the military establishment and AK Antony, the Defence Minister under the previous government have warned against a move for allowing higher foreign investment in defence. Bureaucratic inertia and the unwillingness of state owned enterprises in India might be another reason for the need for caution in this optimism.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.