India-US defence ties: Two steps forward, one step back

This past decade has seen US-India ties go beyond the narrative of a convergence between the world’s oldest and greatest democracies. Nowhere is this more apparent than in the defence sectors ever since Indian Prime Minister Narendra Modi took office in 2014.

After a gradual easing of foreign direct investment and ownership rules in the 1990s, US giants like McDonalds slowly made their presence felt via the franchise and joint venture avenues.

Fast forward to 2015, FDI norms in pertinent sectors (specifically construction, real estate, and defence) were eased to 49 per cent following the nationally dominant Bharatiya Janata Party's defeat in the Bihar Assembly elections in November 2015.

Also read: Why Modi is pushing India closer to US

Such an expansion has been largely gradual, but recently the government made a leap to allowing 100 per cent FDI in some defence initiatives.

In the United States, this was seen as clear proof that the Senate India Caucus’ lobbying paid off. The Caucus co-chairs Mark Warner (a Democratic senator from Virginia) and John Cornyn (a Republican senator from Texas) have long extolled the virtues of US – India defence and commercial ties.

The 2012 initiation of the Defence Technology and Trade Initiative (DTII) furthered the conversation on bilateral cooperation, indicating that the United States acknowledged India’s emerging regional and global leadership. Plus, with increasing bilateral interaction on defence, India spent $14 billion on US military aircrafts such as C-130s, C-17 transport planes, the P-8 Poseidon maritime reconnaissance aircraft, and various heavy-lift helicopters.

In cumulation, these deals and others have turned India into the second largest US weapons buyer after Saudi Arabia. Consequently, joint partnership and co-development of Indian defence capacity for drones and advanced missile systems is being explored.

Nine years after the 1991 liberalisation, trade between the two nations equaled just $19 billion. The 2008 ratification of the US-India civil nuclear agreement planted the seeds for additional commercial links.

Also read: FDI reforms at last: Kudos to Modi sarkar

US investment in India totaled $8 billion and today stands at $28 billion; equity investment has skyrocketed from $7 billion to $12 billion as well. Meanwhile, India's seven per cent growth rate keeps its economy attractive.

With trade already amounting to such numbers, the newly permissive FDI regime in select sectors will evoke greater interest from US aviation, technology, and defence stalwarts.

Although critics decry these radical reforms as tactics to divert attention away from the alleged ousting of Reserve Bank of India chief Raghuram Rajan, there is merit to the initiative.

However, full FDI allowance is only a foot in the door. 

In 2015, Lockheed lost to France’s Dassault Aviation on the eventually scrapped ministry of defence facilitated medium multi-role combat tender. Yet, they are still eager to capitalise on the Make In India initiative by prospectively manufacturing F-16s and F/A 18s in India.

Although Lockheed’s endeavours along with those of other original equipment manufacturers are noble, the new FDI standards do not nullify the stifling effects of a tactfully amended stipulation and the state-owned defence establishment.

Previously, foreign equity ownership exceeding 49 per cent was acceptable only if the government felt the external Original Equipment Manufacturer (OEM) bought access to "state of the art" technology.

While that condition has been done away with, a government statement claims "investment beyond 49 per cent has now been permitted through government approval route in cases resulting in access to 'modern' technology."

Also read: Thanks to Modi, a new symphony in India-US defence partnership

The word "modern" is no less subjective than "state of the art". Hence, this open-ended wording paves the way for the political/bureaucratic machinery to tamper with permissions and play favourites.

These macro-level reforms in the form of full 100 per cent equity lenience and craftily reworded clauses are not enough for companies to fully impart their core technologies.

Instead, they only propagate rhetoric of a blossoming US-India friendship that is supposed to yield jobs, technical know-how, and a robust defence-manufacturing ecosystem for the latter. 

Such provisions only enable ministry of defence officials and the Defence Research and Development Organisation (DRDO) to solidify their control on defence procurement.

This excessive state control over defence enterprises [known in India as Defence Public Sector Undertakings (DPSU)] has always fueled cronyism resulting in corruption scandals like the AgustaWestland chopper scam.

Furthermore,the MOD-DRDO-DPSU trifecta also sheds light on India’s pervasive civil-military relations schism that relaxed FDI norms cannot veil.

After 1947, the military’s input into defence policy was scarce due to then Prime Minister Jawaharlal Nehru’s distrust of the armed forces. This Nehruvian legacy continues till this day.

Last year in July, the military rejected the Raven mini-unmanned aerial vehicle on the grounds that it would soon be outdated. About a month later, it was announced that US-based AeroVironment and Bangalore-based Dynamatic to co-develop an improved version of the Raven called the Cheel.

Earlier this year, Business Standard defence columnist Ajai Shukla wrote:

"Dynamatic is also eyeing the homeland security market, for which it signed a 'teaming agreement' in 2013 with AeroVironment to co-develop the Cheel, though there are no orders on hand from India’s security forces. Company executives lament the slowness in inducting UAVs, which they point out would have been able to locate the terrorists who attacked Pathankot Air Base earlier this month."

Since the primary entity that evaluates defence technologies is not in sync with the military, even DTTI projects may not always achieve their timely potential.

Plus, the internal commercial landscape is not exactly conducive to setting up shop and technology transfer. The delays in registering intellectual property, stringent domestic price controls on land acquisition, and government scrutiny with contracts cannot be overlooked.

Even if Lockheed does eventually construct F-16 facilities in India, they might either import crucial components or sub-assemblies from their American plants.

Thus, 100 per cent foreign ownership is not enough incentive for Lockheed to transfer technology to a country that seeks self-sufficiency in its defence sector.

Yes, the liberal foreign ownership restrictions are a step in the right direction. But will US-India defence engagement be mutually beneficial considering the latter’s domestic political economy?