Frustrated global arms vendors write to Ministry of Defence - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 8 September 2010

Frustrated global arms vendors write to Ministry of Defence

A copy of the first page of the letter that six foreign defence and aerospace industry associations have jointly written to India's Ministry of Defence, suggesting policy reforms

By Ajai Shukla
Business Standard, 9th Sept 10

Frustrated by the Ministry of Defence’s cold-shouldering of suggestions and requests from overseas arms companies, a large chunk of the international defence industry --- usually fiercely competitive --- has joined hands to demand from Defence Minister AK Antony a better structured and more supplier-friendly defence procurement policy. Amongst the demands: an enhanced FDI ceiling of 74%; allowing dual-use technologies as offsets; and the creation of an offsets authority to bring in predictability and transparency.

The letter to Antony, which Business Standard has reviewed, was signed on 25th August by the heads of six defence and aerospace bodies that represent almost every major US, British, German, French and Canadian arms corporation. They point out in unusually frank terms that “the current offset polices have effectively hindered our Member Companies ability to play a full role” in selling India defence equipment, as a result of which “the [Indian] MoD may not be able to benefit” from the best defence systems on offer. The letter urges that, “(p)rocesses must be open, fair and transparent, and time is of the essence.”

This approach comes as the MoD revises procedures for procuring an expected US $100 billion worth of foreign military equipment over the next decade. The new Defence Procurement Procedure of 2010 (DPP-2010) is anticipated this month. It will supersede the currently valid DPP-2008.

The letter --- which is also copied to Antony’s deputy, MM Pallam Raju, and the MoD’s top two civil servants, Pradeep Kumar and RK Singh --- bears the letterheads of the USIBC; the US AIA (Aerospace Industries Association); the British ADS (Aerospace, Defence and Security); French aerospace body GIFAS; German aerospace body BDLI; and Canadian aerospace body AIAC. Israeli and Russian companies are conspicuously absent from this initiative.

The letter urges the following specific policy reforms:

• Enhancing the current 26% ceiling on foreign direct investment (FDI) in defence. The letter states that accepting the Ministry of Commerce’s proposal to enhance FDI to 74% would “bolster confidence” and enable “robust investment in… technology transfer”.
• It suggests allowing dual-use technologies and high-tech civilian projects to be counted as defence offsets. This, the letter argues, would create a high-tech, civilian industry, that would build dual-use products to feed the defence industry. The current offset policy mandates only direct offsets, i.e. products that are directly used in defence systems.
• The MoD should offer multipliers for offsets in key sectors where the MoD most wants technology transfers. For example, if the MoD wants radar technology, it could specify an offset multiplier of 2. A company that transferred radar technology worth $1 million would get $2 million in offset credits. The current policy treats all offsets equally.
• The creation within the MoD of an empowered and adequately staffed permanent “offset authority”. Currently, “there is still ambiguity in how offset contracts will be approved, validated, discharged and measured.”
• Capping financial penalties in defence cooperation, in order to “not deter competition for defence contracts.” The letter points out that “(u)nlimited financial liability inhibits industrial defence cooperation.”

MoD sources say that the ministry is deliberating its response to this letter, but it does not take kindly to suggestions from foreign vendors. In 2007, the US India Business Council (USIBC) --- also an influential signatory to this letter --- had sent the MoD a letter suggesting the adoption of “international best practices” in offsets. The MoD did not respond. MoD officials told Business Standard, off the record, that best practices elsewhere do not necessarily suit India.

The MoD’s current offset policy mandates that foreign vendors that are awarded defence contracts above Rs 300 crores must plough back at least 30% of the value of the contract into Indian defence production or R&D.

Demands from MoD

• Raising FDI limit from 26%
• Allowing offsets outside defence
• Use of offset multipliers
• An empowered offset authority in MoD
• Capping financial penalties


  1. FDI should be raised a maximum of 49 % , in 26 % fdi india may not gain much high end tech transfer .

  2. not only MoD but india's private sector will be against these steps too.

    they are opposing more than 49% FDI, concerned that there may not be transfer of relevant technology etc.

    i usually don't make comments like the following one, because i understand that defense is a necessary field .
    but it makes me wonder whether we have completely messed up our priorities. we have 100 billion $ for defense procurement but not 20 billion $ to overhaul our public distribution system. we will prefer to let the grains rot because apparently we don't have money to distribute food to the poor.

  3. Agree with NJS. Offset should be raised to 49%. But offsets should not be allowed outside defence. This would beat the whole point of offsets, which is to develop the indian defence industry.

    Sly americans! I only hope anthony is not that stupid, but seeing his track record, it wouldnt be a surprise.

  4. Why should our country, which has no problems with buying military equippment from 100% foreign owned companies, have problems with procuring the same equippment from a company with a 51% or 74% FDI?

  5. It seems that impressed by the immense futuristic defense import needs of India, almost all the arm suppliers of west have formed a conglomerate, which behaves like a trade union.

    I do not know if any one of them have ever demanded some such thing from Paki or may be that was never required.

    Anyhow, in some manner such activities may go against the basic principles of free market and free competition.

    I suspect that this may be some Israeli and Russian brainchild as they are going to be the ultimate beneficiaries in-spite of them not being technically superior to the west.

  6. that crazy man antony would just sit on the letter and then blackilst the firms. what else has that useless man done in the last 6 years?

  7. Look at irony of this. US India Business Council is a signatory to this letter. Where were they when Pentagon or foggy bottom did not facilitate necessary approvals for Tejas Naval Version consultancy. Americans cannot be trusted should only be used just as they use everyone else.

  8. Just look at how the issue of Offsets in MoD procurements are being dealt with and one could get a fair idea of how serious is the MoD regarding offsets. Isn’t it a shame on MoD that foreign vendors have to suggest how to conduct our house in order? I feel that we should have a sincere and honest approach and have an offset policy which is best suited for our defence industry. Then put in place a system that strengthens the way how it is implemented right from its execution to monitoring to its final completion. I feel that a single window to deal with all offset related issues with professionals instead of amateurs at the helm of affairs is the need of the hour. Would our highly qualified think tank of MoD wake up to this offset reality before we get ruled once again by these foreigners!!!

  9. It's an open secret that for all AK Antony's hype about being 'Mr.Clean' and Congress speeches about transparency the Indian MoD and its procurement processes are among the slowest, most bureacracy-ridden and most corrupt in the world.

    The people who actually know what they need(namely the armed forces) have practically no power to procure anything and must kowtow to countless unwanted 'defence' babus and netas who don't give a lick about their needs, more about things like bribes, scams and defence PSU union votes. Deals are put off indefinitely, cancelled, re-tendered or finally approved at grossly inflated bribe-adjusted prices(like the recent $100 million Su-30MKIs) and thus our own politicians deal more damage to our soldiers than sanctions or Pakistani aggression.

    In a fair world AK Antony, Pallam Raju and their Commie crew(called the MoD) would be fired and court-martialled for treasonous behavoir years ago. But there's no way the great Manmohanji will do a thing: if he doesn't care about scams in telecom, cricket, agriculture, mining and so on why would this great Congress government do anything for defence?


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