India is preparing a revolution in the arms market

Other News Materials 18 February 2008 11:46 (UTC +04:00)

(RIA Novosti correspondent in India Yevgeny Bezeka) - All participants in the DEFEXPO-2008 that opens in Delhi on February 16 are bound to see the beginnings of a revolution in the Indian military-industrial complex. This revolution is bound to acquire global dimensions because India is in the top ten in spending on arms - in 2007-2012 it will buy $30 billion worth of weapons.

The revolution is rooted in India's reluctance to depend on foreign weapons. It wants not only to be militarily sufficient but also to become a world center for the production and exports of arms spare parts.

Indian private companies that have not been prominent in the defense industry will play a key role in pursuing this goal. Only recently, they were not awarded any government defense orders, but now they will be encouraged to make friends with foreign partners in order to carry them out.

The new line is reflected in the DEFEXPO's official goal - to become a site for contacts of foreign producers with Indian industrialists with a view to setting up joint ventures.

Indian private companies have become much stronger in the last 17 years since the Indian market was opened to foreigners. They are irritated that a lion's share of government orders is awarded to foreigners and state-run companies.

The Indian defense industry does not always cope with its goals. Therefore, the government has promised to give a bigger share of multi-billion defense orders to domestic private companies.

The latter's advent to the strategic defense industry that accounts for about 2.5% of the GDP should resolve two tasks - encourage competition with state-owned companies and increase its adoption capacity - new orders of foreign weapons will bring in huge investment.

The Indian government has required that foreign companies should invest no less than 30% of the contract's value into the local defense industry. This applies to all deals worth more than three billion rupees (about $770 million). This figure has been raised to 50% on the eve of a mega tender for the supply of the Indian air force with 126 fighters to the tune of more than $10 billion.

One third from $30 billion is $10 billion. This is the amount of investment that India will have to digest in the next few years. Indian defense ministry officials admit that state-owned companies will not be able to swallow that much.

For the time being, private companies are kept at a certain distance - they do not have a chance to receive a defense order if the share of foreign capital exceeds 26%. Moreover, unlike state-owned companies, they have pay 30% import duties for foreign spare parts.

But this situation may change any time. First, analysts expect an increase in the 26% limit on foreign capital. In other words, investors or arms suppliers will set up in India a joint venture that will carry out the orders they have received - but on the spot rather than abroad.

Second, the government is about to complete a list of private companies that will receive equal rights with state-run firms. It is rumored that the list will include such industrial giants as Larsen& Toubro, and companies belonging to Godrej, Tata, and Mahindra& Mahindra.

However, Defense Secretary Shri Pradeep Kumar admitted last week that approval of this list was being delayed because of resistance on behalf of some state-owned companies.

But the government has already promised help to foreign firms that are rushing around with bags of money in the search of local partners. There is no doubt that they will implement the new requirements and receive licenses.

Some private companies have been working for the defense industry. Larsen& Tourbo, for one, is building a secret nuclear-powered submarine for India, and is prepared to assemble aircraft under license that is, to do what the state-owned Hindustan Aeronautics Limited (HAL) is now doing.

Larsen& Toubro and Strategic Electronics Division from the Tata Power Corporation are carrying out a defense ministry order for the production multiple launch rocket systems. The tractor-building company Mahindra& Mahindra has built an armored cross-country vehicle in just two years.

The Defense Research & Development Organization (DRDO) is going to acquire a new role of a scientific center. It will also be the main distributor of orders to private companies.

To sum up, those companies that want to sell arms to India should take into account its new requirements. The forthcoming revolutionary changes will call for a new approach and more flexibility. Indian partners in the arms market should learn how to come to terms with the local players, develop production lines, find the best ways of implementing offset commitments, and respect the higher ambitions of their Indian partners.

Russia that has an impressive display at the shows enjoys obvious advantages in this respect because India has been testing its new policy primarily in cooperation with Moscow. But this alone does not guarantee Russia's victories at all tenders for defense orders.

The opinions expressed in this article are the author's and do not necessarily represent those of Trend.