The Trajectory of US-India Defense Trade
By Benjamin Schwartz, Director, Aerospace and Defense
There is extraordinary growth potential in U.S.-India defense trade, but significant impediments will need to be overcome for this potential to be fully realized. The opportunity is as clear as the growth trajectory that has taken U.S.-Indian defense trade from a mere $200 million in 2000 to over $15 billion. India was the world’s fourth largest defense spender at $51 billion in 2016, is in critical need of recapitalization of Soviet origin military equipment, and remains highly reliant on defense imports from foreign partners.
In considering U.S.-India defense trade, it’s important to recall that the U.S.-India defense relationship is a young relationship. The first Defense Framework Agreement was not signed until 1995. And in truth, this agreement had limited effect because of India’s nuclear test and the sanctions imposed by the U.S. Congress in 1998. Concrete steps towards cooperation weren’t firmly set until the second Defense Framework Agreement in 2005. It was only around that time that defense cooperation in armaments became possible through agreements on information exchange and research, testing and evaluation. That is only some twelve years ago. By comparison it took decades to attain the level of cooperation that the United States currently enjoys with NATO allies and close partners like Israel and Singapore. This makes the following fact remarkable: today, and prospectively the backbone of India’s strategic and theater transport fleet, its heavy attack and heavy lift helicopter capability, its naval rotary anti-submarine warfare platforms, and its long-range maritime patrol aircraft will all be US-origin equipment. And for the first time the Indian government is in detailed negotiations with the U.S. government over the possible sale and establishment of a U.S. fighter aircraft manufacturing line in India.
The growth in U.S.-India defense trade tracks the growing convergence of American and Indian defense interests. At the international geo-strategic level, this convergence is occurring primarily because of the shifting balance of power in Asia caused by the growth of Chinese military power. China’s military expansion has the potential to destabilize the regional security order that has underwritten unprecedented economic growth since the World War II. This reality has made a strong Indian military – a military that can resist external coercion – an important interest of the United States. This is not the only reason that a strong Indian military is a security imperative for the United States. America and India share common cultural links, such as America’s large Indian Diaspora that recently saw five members elected to the U.S. Congress, and common English language. Both countries also embrace democratic political systems. India plays an important role as a global security provider through humanitarian military operations – like disaster relief in Nepal and through peacekeeping. But these factors have existed for decades, the key difference between now and when the U.S. imposed sanctions in 1998 is China’s military rise, which is pushing the Indian and U.S. defense systems closer together. Executive Delegation to Aero India 2017 36 However, this isn’t enough to result in significant bilateral cooperation. For that to occur there needs to be alignment at the political level as well. With respect to the United States, both a Republican administration (that of George W. Bush with the landmark Civil-Nuclear Deal) and a Democratic administration (that of Barack Obama with the Defense Technology and Trade Initiative) took important steps to expand the defense relationship. In India, PM Modi’s leadership has brought greater U.S.-Indian military cooperation. First, the BJP’s political platform is more amenable to affiliating India with the United States in the context of defense and security than the positions of past Indian governments. PM Modi has made “Make in India” a centerpiece of his political platform and building India’s defense industrial base is central to this effort. India will need foreign joint partnerships and investment to fix this problem and American defense firms are especially well-suited to this task. Reflecting this convergence of political interests, in 2016 India was granted “Major Defense Partner” status by both President Obama and the Republican controlled U.S. Congress and India signed one of the defense “foundational agreements” governing joint military logistical support.
One of the Obama administration’s final acts was to change U.S. export control regulations to allow Indian companies to receive many military related goods as validated end users without a license. There is significant uncertainty over the direction that the Trump administration will take the U.S.-India relationship but the underlying political imperatives for defense cooperation remain. While there is clearly an alignment of interests at the political level and at the geostrategic level, this isn’t sufficient to produce results. For that to occur there also has to be an alignment at the bureaucratic level - the working level. Both American and Indian leaders struggle with compelling their large and complex bureaucracies to implement their visions of cooperation. The U.S. and Indian systems are not designed to work together. This is the central challenge.
Challenges and Impediments
One of the most significant challenges to expanding U.S.-Indian defense trade is the fact that Americans and Indians are neither treaty allies nor partners in combat. The United States and India are not yet engaged in the kind of combined military planning that allows the advocates to win the debate when it comes to sensitive technology transfers. A related challenge is one of trust and information security. Increasing cyber threats from countries that seek to steal military technology compounds these challenges to information security. In India’s non-alignment culture, this is often characterized as a choice between sovereignty and dependency, but countries like Singapore have found a way to maintain their full sovereignty while making the commitments necessary to cooperate with the United States on advanced technology. India has not taken these necessary steps. One of the challenges for the United States is the fact that U.S. law has not yet adapted to the proliferation/theft of defense technology by foreign competitors. American export control laws and the policies for managing defense technology transfers were written at a time when U.S. industry controlled a much larger share of global defense technology. While American firms maintain a sizeable technological edge, foreign countries now possess the designs for state of the art defense systems like Unmanned Aerial Vehicles (UAVs) and Night Vision Devices and are building the industrial capacity to sell them on the global market.
The designation of India as Executive Delegation to Aero India 2017 37 a “Major Defense Partner” and the passage of Section 1292 of the 2017 National Defense Authorization Act which directs the U.S. government to prioritize defense trade with India are positive developments that auger well for evolution of U.S. policy. However, much will depend on the individuals appointed by the Trump administration to oversee defense trade policy and south Asian policy. As recognized by PM Modi and numerous Indian officials, the bureaucratic structure of the Indian acquisition system is another significant challenge. India’s defense industrial base consists of nine Defence Public Sector Undertakings (DPSUs), 39+ Ordnance Factories (OFs) and approximately 50 Research and Development labs under Defence Research and Development Organization (DRDO). While defense equipment manufacturing was opened to the private sector in 2001-02 and more than 150 companies have been issued industrial licenses for some 222 Letters of Intent, the DPSUs and OFs contribute about 90% of the total domestic defense manufacturing output. In keeping with a public sector lead development approach, the Indian MoD is accustomed to co-producing defense systems with foreign governments through Intergovernmental Agreements. New Delhi has always insisted on significant license production in the hope of acquiring technology transfer that could eventually aid in developing either indigenous capabilities or even substitutes for these foreign products. This vision, unfortunately, has never come to pass. And it is a vision made even more difficult to achieve today given the development costs of major weapon platforms in the face of India’s relatively limited procurement budget.
Recently, under the Defense Trade and Technology Initiative (DTTI), the U.S. government has tried and struggled to promote co-production and co-development of defense systems by private companies. These companies require a solid business case for this kind of work; the foundation of which is likely to be major cost or technological benefits or guarantees that the government of India will procure products through sole-source arrangements. However, the Indian MoD does not have a history or acquisition system accustomed to promoting this kind of private sector lead growth. Under Minister of Defence Parrikar, the MoD has publically committed to implementing a new “Strategic Partnership” model of acquisition to complete a revision of the Indian Defence Procurement Procedure published in 2016. According to MoD officials, this model would have Indian companies designated as “strategic partners” – effectively sole source monopolies – for specific major weapons systems. These Indian companies would then select a major foreign OEM with which to partner, which in turn would be reviewed and approved by the MoD. If implemented, this would reflect a major change in Indian procurement and demonstrate that the Modi government is willing to risk opening itself to politically charged accusations of non-competitive defense acquisition practices in return for the benefits of reforming a failed acquisition system. This would also create a third option for American companies besides the successful FMS approach and the challenging DCS route for sales in India. The Defense Technology and Trade Initiative (DTTI) In 2012, the U.S. and Indian governments launched a major effort to overcome these challenges through the Defense Technology and Trade Initiative, which aims to ensure that the only limitations in defense cooperation “should be due to our independent strategic decisions” rather than because of “bureaucratic obstacles or inefficient procedures.”
Towards that end, in September 2012 the Government of India provided a list of impediments that they identified in the U.S. system, including the categorization of India in the USG system for technology transfer, DRDO’s inclusion on the U.S. “entity list,” and the 90-day Request for Proposal timelines, among others. In turn, the U.S. took action that increased transparency about technology release processes and in concert with export reform, moved less sensitive items from the U.S. Munitions List to the Department of Commerce’ dual-use export authority. The average export license processing time dropped dramatically to 29 days, license denials were reduced to less than one percent of Indian licenses, and the State Department amended Letters of Offer and Acceptance to negate the necessity of Technical Assistance Agreements. As part of DTTI, the U.S. government also prepositioned release decision for over thirty cooperative programs and expedited official review processes. DRDO was also dropped from the problematic “entities list”. Today, India is the only country that DoD has deemed significant enough to warrant a “Rapid Reaction Cell” located in the Pentagon. The amount of time that the senior American defense officials have devoted to India is also unprecedented. Since mid-2014, the U.S. Undersecretary of Defense for Acquisition, Technology and Logistics and the Secretary of Defense Production have co-chaired four formal meetings. This comes in addition to numerous engagements at the three star levels in Washington and New Delhi.
In January 2015, President Obama and Prime Minister Modi committed to pursuing four DTTI “pathfinder” projects and two cooperative activities. The intergovernmental project agreements for the Marine Corps’ Mobile Electric Hybrid Power Sources and the U.S. Army’s “Next Generation Protective Ensemble were completed in record time. And today, the Aircraft Carrier Cooperation Working Group and the Jet Engine Technology Working Group are making real progress.
During 2016, both governments announced the creation of additional DTTI working groups on Naval, Air and Land systems, including on Future Vertical Lift and on advanced technology for combat vehicles. The biggest challenge for DTTI has been bringing in the private sector. The two business-tobusiness “pathfinder projects” announced in January 2014 have failed to become a reality. Despite PM Modi’s public position that India will not be able to generate a robust defense industrial base without unleashing the creativity and innovation found in the private sector, DoD-MoD engagement under DTTI appears to be structured around the notion that “Make in India” must translate exclusively as “Make in DRDO.” This is a problem for both the Indian military and for U.S. defense companies. It is a problem for the Indian military because DRDO is incentivized to conduct research and development that may win its scientists academic acclaim but that don’t necessarily produce needed low end military capabilities. The Indian military would benefit far more from dependable aircraft, more naval platforms, and reliable maintenance and logistics systems than from the most expensive and latest state of art technology, but by its mandate DRDO is less incentivized to provide this kind of military capability. This has hurt the Indian military. And while DRDO will remain an essential player in bilateral defense relations, the absence of the private sector also hurt U.S.-Indian defense cooperation. DRDO steers senior USG and MoD defense conferences to focus on “crown jewel” defense technology rather than concentrating on realistic and mutually beneficial defense cooperation. This severely limits the scope of U.S.-Indian military defense trade opportunities.
What to Look For in the Year Ahead
•Defense Foundational Agreements: Does India sign a bilateral defense agreements that govern communications security? After 13 years, Delhi signed the logistics agreement, which was more important symbolically than practically. A communications security agreement would open up new possibilities in Global Positioning System (GPS) gear, advanced UAVs, and state-of-the-art guidance for the Advanced Medium Range Air-to-Air Missile (AMRAAM) that will soon equip IAF fighters.
• Indian Procurement of a “no fail” U.S. origin system: India’s purchases of U.S. origin systems have been limited to capabilities that are militarily important, but not of vital “no fail” consequence for Indian war plans. Many believe this is because of lingering concerns about American reliability. If this trend were bucked by the purchase of systems like fighter aircraft – such as F-16s or F-18s – it would signify a major shift in the scope and tenor of U.S.-India defense relations.
• Institutionalization of DTTI or DTTI-like cooperation: Will this initiative survive the reorganization of the Office of the Secretary of Defense under Secretary of Defense Mattis?
• DTTI Direct Commercial Sales: Do private sector co-production/co-development projects emerge as part of DTTI? The two industry-to-industry “pathfinder projects” that Modi and Obama committed to pursuing in 2015 did not materialize, but the new working groups announced in 2016 may stimulate new pipelines into DTTI for the private sector.
• Major Acquisition Reform: Minister Parrikar has said that the MoD is considering established a new acquisition agency staffed by professional acquisition executives, moving defense offset management outside of the MoD, and completing the “strategic partnerships” model. If any of this becomes a reality it would demonstrate a serious commitment to positive reform.