Indo-US Defence Industry Cooperation: A Prognosis

Introduction

Defence cooperation is a defining element in Indo-US strategic relations in the post-Cold War era. This is particularly manifested in visits of high level defence and military officials, regular exercises involving the militaries of both sides, and a booming deference trade that has reached more than US$15 billion in a matter of a decade. In one segment, however, where the cooperation is yet a takeoff in a meaningful manner is the defence industry. This commentary examines the defence industrial cooperation between India and the USA and identifies the reasons for lackluster relationship.

In examining the defence industrial cooperation between India and the USA, the commentary relies largely on the munitions items (as opposed to dual-use items), which are not only specific to exclusive defence use, but the transfer of which from one country to another requires an explicit government permission in the form of a license. Both New Delhi and Washington have such a public list, which are also harmonised with the munitions list of items of the Wassenaar Arrangement to which both are party. The American list is codified in the International Traffic in Arms Regulations (ITAR) and are found in the US Munitions List (USML). The transfer of the munitions items worth over certain value requires the US government permission unless the government decides to transfer on its own. The Indian list, published recently, forms Category 6 of the Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) list which is maintained by the Director General of Foreign Trade (DGFT) of the Ministry of Commerce and Industry, for the purpose of controlling India’s strategic trade.

Unlike in other sectors, cooperation in defence industry between India and the USA, or for that matter between any two counties requires government intervention. The degree of intervention however varies from case to case. Given this, the defence industry cooperation between India and the USA is examined in three broad categories. The first category deals with industrial cooperation forged at the behest of the governments of both the counties. Such cooperation typically arises out of a defence contract/agreement signed by both countries, requiring technology transfer, joint development and/or production. The second category deals with industry-to-industry cooperation because of the nature of the defence contracts. Such cooperation arises largely due to offset obligations on the part of the foreign suppliers of defence items. Offsets in general require the foreign suppliers to forge a degree of industrial cooperation with the buying countries. Though the obligation is caused by the government’s policy, the industrial cooperation is largely left to the industry to manage their affairs. The third category deals purely with the voluntary nature of industrial partnership between the two countries. The voluntary nature is primarily due to the globalisation of defence industry by which companies of one country seek investment and partners in other countries to gain market access and/or to sharpen their competitive edge. The government has some role to play in globalisation efforts by creating a conducive policy framework and facilitating ease of doing business to attract foreign manufactures.

Indo-US Defence Trade: Lacking the Industrial Punch

Indo-US defence trade has seen an unprecedented rise in the past decade or so, thanks to the watershed 2005 nuclear deal. The rise in trade is so much so that the USA has emerged as one of the top arms suppliers to India, replacing some of New Delhi’s traditional suppliers. During 2013–2014 and 2015–2016, the USA bagged 13 arms contracts worth ₹288.95 billion, and was way ahead of others, including Russia which has been the mainstay of India’s arms acquisition since the early 1960s. Since 2008, the USA has bagged more than US$15 billion arms deals that include C-17 Globemaster and C-130J transport planes, P-8I maritime reconnaissance aircraft, Harpoon missiles, Apache and Chinook helicopters and M777 ultra-light howitzers. The deal value is also likely to increase further with the USA accepting India’s request for purchase of Sea Guardian drones from the General Atomics and the Indian Defence Acquisition Council (DAC), the highest decision-making body of the Indian Ministry of Defence (MoD), clearing a proposal to buy 127 mm calibre guns from the US-based BAE System. Apart from this the US companies are also a strong contender for a number of mega on-going procurement deals that include 157 fighter aircrafts for the Indian Air Force and Navy, and 234 naval utility helicopters.

The increase in the defence trade notwithstanding, the industrial aspects of the trade are conspicuous by its absence. Except for the M777 ultra-light howitzers gun, in which India has some industrial benefits, all other signed arms procurement contracts are more of one-way trade, by which India simply buys off-the-shelf US arms without any arrangement to locally produce them. Even in the gun, the Indian industrial benefits are largely restricted to assembly, integration and test (AIT), which is a kind of complete knocked down/semi knocked down (CKD/SKD) form of license production. Suffice to add that India has some of the advanced form of license production agreements with many of its traditional arms supplies, including with Russia, the UK and France whose products—such as fighters, advanced trainers and submarines—Indian companies are producing from the raw material stage (supposed to be the highest form of licensed production).

Cooperative Projects

In an attempt to change the buyer–supplier dynamics to a more collaborative relationship, both the USA and India have taken few steps in recent past. The beginning of the potential expansive industrial cooperation was made by the USA by according India the ‘friendly foreign country’ (FFC) status apart from designating New Delhi as a Major Defence Partner (MDP). Between the FFC and MDP, the former is relevant from the point of view of industrial cooperation, as it opens up the US regulations—particularly those under the Title 10 US Code (USC) 2350a and Title 22 USC 2767—enabling Washington to collaborate with New Delhi in defence and security-related projects. As per the Section 2350a, India as a FFC is allowed to engage in cooperative research and development (R&D) projects that are intended to improve the conventional defence capabilities of either of country. Section 2767, on the other hand, allows Indian entities to enter into cooperative projects with the US counterparts, with the further explicit provisions that allow concurrent production of the jointly developed product in either country; besides permitting the US government to procure the said developed item from the Indian collaborators.

Consequent to the changes in the US regulations, both the Washington and New Delhi have agreed to pursue a number of cooperative projects including few ones under the much talked about Defence Trade and Technology Initiative (DTTI), which was established in 2012 between the US Department of Defence (DoD) and Indian MoD, as a means to bypass the bureaucratic obstacles, and harness the industrial and technological capabilities of both the countries for defence-related joint development/production. Under the initiative, both the countries have launched seven joint working groups to explore project of mutual interests that include aircraft carrier; intelligence, surveillance and reconnaissance; chemical–biological protection with jet engines; and air and naval systems. By August 2015, two government-to-government science and technology projects—Mobile Electric Hybrid Power Source and Next Generation Protective Ensemble for Chemical and Biological Protection—worth nearly US$2 million have been signed.

The announcement of several cooperative projects notwithstanding, not much progress seems to have been made. Part of the reason is that several projects under consideration, especially during the initial phase of the DTTI, were selected through a top-down approach by either side based on the assumption of what one side assumed to be useful. Though the approach has now been changed to jointly identifying projects based on discussions starting at the lower level, only time will tell how much progress can be made in the future. For any progress to be made, the Indian entities will have to perforce play their fair share of role. However, at the moment, most Indian industry players do not have capacity to undertake the kind of R&D and precision manufacturing required for high-technology defence items. In such a situation, the usefulness of cooperative projects remains doubtful.

Offsets: The Unfulfilled Objectives

Since 2005, the Indian MoD has enunciated an offset policy as part of its Defence Procurement Procedures (DPP), a manual used for defence capital acquisition for the armed forces. The objectives of the policy are to leverage India’s huge arms import for strengthening the domestic defence and aerospace industry. The offset provision stipulates minimum 30 per cent flow back of the import value of arms to the Indian entities. The flow back is permitted through several avenues including technology transfer and FDI in Indian JVs, which were visualised to transform Indian defence industrial base. Till December 2017, the MoD has signed 42 offset contracts (27 belong to the Indian Air Force, 11 to Navy and four to Army). The total offset obligations amount to US$11.2 billion, of which nearly US$4.5 billion is accounted for by the US defence companies. An examination of the evidence available in the public domain, however, shows that most of the offset with the US companies are in the areas other than munitions items. A 2012 audit report of the Comptroller and Auditor General of India (CAG) goes a large extent to prove this. The report notes that that offset programmes of Boeing and Lockheed Martin, two biggest offset providers, included such programmes as Transonic Wind Tunnel (TWT) test facility; weapon, maintenance and flying training simulators; safety, reliability and airworthiness seminars; fire finder classrooms; metallurgy and hydraulic lab facilities; composite manufacturing assembly/tooling; and aero-structures tool and processes, which hardly need munitions license from the US government. In some cases, the offset execution proposal offered by the US companies had no value addition by the Indian companies. The only exception to this is the Lockheed Martin’s proposal for its JV with Tata—Lockheed Martin Aerostructures Limited (TLMAL)—for the manufacture of empennage and centre wing beam assemblies for C-130J series aircraft for end-use by the US defence.

The major reason for no meaningful defence technology being supplied through offsets is the inherent weakness of the Indian offset policy. Unlike some other countries which stipulate what they want through offset, the Indian policy gives complete freedom to the foreign companies to choose what they want to offer through offsets. For obvious reasons, the foreign companies, including from the USA, have chosen not to deal with pure defence items through offsets.

Voluntary Cooperation

To facilitate industry-to-industry cooperation, both the US and Indian governments have taken certain steps. On its side, India has opened up its defence industry sector to foreign participation and revised its DPP to facilitate, among others, greater investment and technology from partner countries, including the USA. The FDI cap, which was 26 per cent for a long time, has been increased to 49 per cent under the automatic route and beyond 49 per cent and up to 100 per cent through government approval route. The revised DPP has simplified the crucial ‘Make’ procedures under which developmental projects would be awarded to the Indian industry which are also permitted to acquire foreign technology up to a limit. However, the progress on both the fronts are poor, to say the least. Suffice to say that not a single ‘Make’ project has been awarded so far to the Indian entities, thus liming the possibility of any technology transfer to them. Total FDI inflows into the defence industry has hardly increased since the liberalisation, with the total amount flowing into sector so far amounting to ₹2.55 billion.

It is to be noted that pursuant to the defence industry liberalisation, the Indian TATA group has in particular formed several JVs with the US companies such as Boeing, Lockheed Martin and Sikorsky for manufacture of aircraft parts. However, except for the TAML’s empennage manufacturing (refereed to earlier) which can be categorised as munitions item, none other items of manufacture can be called as pure defence items.

The USA, on its part, has followed twin-approaches to facilitate voluntary defence industrial cooperation. One, the US government, reflecting the wider strategic relationship between the two countries, has taken a favourable approach in granting license for munitions items to Indian entities. Two, it has allowed companies from other countries, including India to participate in the certain high-tech government projects. However, in both the fronts, the India companies are yet to show any inclination, indicating either their industrial/technological backwardness or the gross disinterest. A survey of munitions items for Indian companies throw few names, prominent of them being the Precision Electronics, which got a munitions license to manufacture defence-specific electronics.

The Indian companies’ general lack of interest in the US government projects can be seen in the participation of international companies in projects awarded by the Technical Support Working Group (TSWG) of the US government’s Combating Terrorism Technical Support Office. Though these projects of the TSWG require only the innovative use of existing technologies (as opposed to innovative technologies), none of the Indian companies figure in the Group’s international partners, which presently consists entities from Singapore, Israel, Canada and the UK.

Conclusion

The defence industrial cooperation is a clear missing link in an otherwise booming defence and security relationship between India and the USA. The one-way defence trade is not only out of sync with India’s traditional demand for technology transfer and license production, but is also contrary to ‘Make in India’ initiative of the present Modi government. It is, therefore, imperative for India in particular to find an industrial solution to its increasing yet skewed defence trade relationship with the USA. Besides demanding industrial benefits from all possible defence deals with the USA in the future, New Delhi has to do a few more things to deepen the industry-to-industry cooperation with the USA. Among others, it has to use its offset policy carefully to facilitate greater defence-specific technology transfers for its industry; and at the same time lay a strong foundation for a robust in-house industrial base which can receive and absorb all such transfers. Without a strong defence industrial base on its own, it will be futile for India to ask for cooperation with the USA which is supposed to be the superpower in military technology.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.