Analysis: India's defense reform -- Part 1

By INDRAJIT BASU, UPI Correspondent   |   Aug. 18, 2008 at 1:36 PM
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KOLKATA, India, Aug. 18 (UPI) -- India's new Defense Procurement Procedure, unveiled early this month, like its predecessor focuses on vitalizing India's indigenous defense capabilities and moving away from the decades-old practice of importing almost all its defense requirements.

However, in the attempt to make the country's defense procurement process more transparent in the murky world of arms deals, the new procedures seem to unwittingly favor foreign vendors.

From promising foreign vendors brownie points for the money they would pump in for setting up bases in India, to shutting middlemen out of defense deals, to making the country's defense procurement "more investor-friendly," the new policy, which takes effect Sept. 1, offers everything to make it easy for foreign investors to participate in India's defense procurement, experts say.

For instance, the rules have been revised to include offset credit banking, a key request of foreign vendors. This means that money a foreign vendor may pump in to set up a manufacturing base in India would be considered as an investment, satisfying the offset clause in the new policy.

In its bid to modernize the local defense equipment industry, India in 2005 introduced the "Offset Policy," which is basically a counter-obligation that India places on foreign vendors for buying defense equipment from them. It states that foreign vendors must invest at least 30 percent of all deals they bag from the government.

This can take any form, including setting up a manufacturing base or training facilities, sourcing components, sharing technology or making use of information technology services from India-based global service providers.

Under the new procedure, investments made in India by foreign vendors before bagging a deal would be treated as banked offset credits for the tenders to be floated within two and a half years from the date of investment.

Moreover, if a vendor should create more offsets than his obligations under a particular contract, the surplus offset credits could be banked as well and would remain valid for another two years following the closure of the first contract.

"This (new offset credit banking facility) enables foreign industry and their Indian offset partner to have long-term arrangements to discharge offsets and will thus enhance the capacity of the Indian industry to absorb offsets," said Defense Minister A.K. Antony.

According to Laxman Behera, a fellow at the Institute for Defense Studies and Analyses, offset credit banking is "perhaps the most significant aspect of the new DPP that provides the opportunity to a foreign vendor to partner with the Indian industry and, more importantly, facilitates them to do business with the private sector."

But if permitting foreign vendors to bank offsets toward a future contract liability is a "sweetener," the real music to foreign ears is that there is no place for middlemen anymore in India's defense deals.

After all, from the Bofors gun deal and the HDW submarine deals of the mid-1980s to the scandal regarding the purchase of Barak missile systems from Israel that surfaced in 2001 and still remains unresolved, scandals, kickbacks and controversies have become hallmarks of India's defense procurements. These scandals have been primarily a result of the existence of hundreds of shady middlemen and facilitators who grease the corridors of power.

In fact, lately defense deals, and thus indirectly foreign vendors, have suffered due to these scandals. For instance, succumbing to the pressures of the opposition, the Indian government had to scrap almost $1 billion worth of defense deals in 2007 after years of trials and negotiations.

"We have learned a lot of lessons from the past, and we don't want to repeat the mistakes. That is why every now and then, we are trying to improve the Defense Procurement Policies," said Antony. "We are very clear that we will not allow middlemen in defense deals."


(Part 2: India's $50 billion procurement market)

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