policy q&a The U.S.-India defense relationship has prospered in recent years. India s purchases of American military

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1 policy q&a July 2014 Produced by The National Bureau of Asian Research for the Senate India Caucus the u.s.-india defense relationship strengthening ties and overcoming challenges The U.S.-India defense relationship has prospered in recent years. India s purchases of American military equipment have increased dramatically from nearly zero a decade ago to around $9 billion today, making India one of the United States largest customers. Viewing defense ties as central to their strategic partnership, the United States and India in 2012 launched the Defense Trade and Technology Initiative (DTTI), which was championed on the U.S. side by then deputy secretary of defense Ashton Carter. Many believe that the new Indian government seated under Prime Minister Narendra Modi offers an opportunity to reinvigorate U.S.-India defense ties which had stagnated somewhat as a result of the slowing Indian economy and policy paralysis at India s center, as well as the December departure of Carter from the Pentagon. The United States has indicated that it wants to re-engage India on defense trade issues, with Secretary of Defense Chuck Hagel declaring at the Shangri-La Dialogue that he intends to play an active and very personal role in the relationship. He appointed Under Secretary of Defense for Acquisition, Technology, and Logistics Frank Kendall as the lead for the DTTI in late May, and the United States has since offered groundbreaking defense technologies to India. It remains to be seen whether the new government in New Delhi will address the policies on its end that have limited the scope of U.S.-India defense ties. To learn more about the potential trajectory of the U.S.-India defense relationship, NBR spoke with Pramit Pal Chaudhuri, foreign editor of the Hindustan Times. Mr. Pal Chaudhuri provides a perspective from New Delhi into what might be hindering this aspect of the strategic partnership from achieving its full potential, what reforms the new Modi government should implement to take U.S.-India defense ties to the next level, and how strong defense ties with the United States align with India s foreign policy goals. What might the new Modi government bring for the India-U.S. defense relationship? The most important development that the Modi government could bring to the table would be an economic turnaround, especially on the fiscal side. The Bharatiya Janata Party (BJP) has inherited a government wallowing in red ink: the fiscal deficit is probably closer to 7% of GDP if one excludes questionable accounting activities like backloading s++ubsidy payments and the temporary holdings from corporate tax disputes. This effects defense expenditure in two ways:

2 One, spending on defense was previously slashed due to a tight fiscal situation. The outgoing United Progressive Alliance government cut defense expenditures by 150 billion rupees (approximately $2.5 billion), ensuring that new defense purchases ground to a halt. A simple lack of money was one reason, though not the only one, for the government s failure to close the medium multirole combat aircraft (MMRCA) deal and repeatedly put off purchasing the M777 howitzer. Two, fiscal constraints and a general sense of economic malaise automatically restrict the strategic horizon of New Delhi. Talk of a 3-carrier blue water navy, a 39-squadron air force, a strike corps stationed on the Sino-Indian border, and, in general, expeditionary capability of any variety have been put on hold. Only when the economy starts to recover and government coffers are full can India begin to consider implementing a larger military vision that goes beyond static border defense and counterinsurgency operations at home. The United States and India saw huge strides in defense ties over the last decade, particularly in U.S. sales but also through opportunities like the Defense Trade and Technology Initiative (DTTI). How can they continue to strengthen bilateral relations in both these areas? While the overall defense relationship has blossomed, it is still overly dependent on high-level political decisions in both capitals and large, one-off purchases by India of products, notably in long- and medium-range airlift, where the United States is virtually the sole supplier. In other words, the defense relationship is far from being institutionalized. Buyer-supplier procedures are far from clear. U.S. firms are Only when the economy starts to recover and government coffers are full can India begin to consider implementing a larger military vision. Pramit Pal Chaudhuri is the Foreign Editor of the Hindustan Times, based in New Delhi, and has been with the paper since He previously wrote about international politics and economic issues for the Telegraph and the Statesman newspapers in Calcutta from 1985 to He is serving his second two-year term on the National Security Advisory Board to the Prime Minister of India. He served a previous term from 2011 to He is also a Senior Associate of the consultancy Rhodium Group in New York and a member of the Council of Emerging Markets in Washington, D.C., among other affiliations. Mr. Pal Chaudhuri graduated with a degree in history from Cornell University in He has lived in or traveled through more than 50 countries.

3 baffled by the tortuous and ever-changing Indian armsprocurement policy. The offset policy, which requires foreign suppliers of weapons to source a third of subcontracts or components indigenously, is considered a major obstacle to suppliers. Indians complain about the layers of regulatory clearances required by the United States. The list goes on. The DTTI, for example, was supposed to be the interface that would allow the Indo-U.S. defense relationship to move forward on two fronts, facilitating greater participation by the Indian private sector and coproduction/codevelopment involving both the U.S. and Indian defense industries. However, fiscal difficulties and the continuing dominance of India s state-owned defense firms have meant that the DTTI has been all theory and no praxis. There are indications that India might raise the FDI cap in defense from 26%. What might that mean for industry as well as for efforts to strengthen India s defense capabilities? I think it can be almost guaranteed that India will raise the FDI cap in defense to 49%. Modi has personally communicated his intention on that score and did so even before he was elected. The real debate in India is over whether to raise it to higher levels such as 74% or even 100% and, if so, under what circumstances. For example, higher levels of FDI could require complete technology transfers or manufacturing lines being set up in India. In terms of the defense industry, Modi has the following broad priorities: He seeks to promote an indigenous Indian defense industry, but one that is centered on the private sector rather than the largely ineffective state-owned defense firms. The idea would be to develop a domestic defense manufacturing and design capability for strategic reasons but also to reduce India s enormous arms-import bill. India s private sector has long argued it cannot move into the defense space without a number of preconditions. One of these is higher FDI limits to secure foreign technology, The greatest opportunity lies in the Modi government s determination to drastically reform the Indian defense sector. capital, and general know-how. India s private sector is divided on how much higher to take this limit. The Federation of Industry and Chambers of Commerce of India (FICCI) and the Confederation of Indian Industry (CII), for example, sparred over whether to go beyond the proposed 49% FDI limit before settling on that number. What are the biggest opportunities and obstacles right now in the bilateral defense relationship? The greatest opportunity lies in the Modi government s determination to drastically reform the Indian defense sector. The U.S. government and U.S. defense firms need to reach out to the Indian government, private sector, media, and think tanks to explain the benefits of greater and far-reaching reforms that would include more flexible offset policies, greater foreign investment, and a breakup of the present state-owned defense sector. The division between the two main Indian chambers of commerce, FICCI and CII, over the FDI limit is an example of how internally divided the Indian system can be when it comes to defense reform and foreign participation. Washington also needs to realize that the proposed reforms will open up the door to a whole host of other countries whose defense sectors are less entangled with red tape than the U.S. sector. Israel, France, Sweden, and Singapore are among the countries whose defense firms are already lining up Indian private-sector partners. The United States may have the world s best defense technology, but India does not really need anything of that sort of quality to address the challenges it faces from China and Pakistan its two

4 primary strategic adversaries both in terms of aerial weapons platforms and even in ground-attack devices. How do expanded defense ties with the United States fit within India s broader foreign policy goals? The greatest underlying problem facing the Indo-U.S. relationship is strategic distrust. While the two countries do not see each other as enemies and are unlikely to ever do so there are strong voices in New Delhi, both within and outside government, that question whether the United States is a dependable source of spare parts and military services in the event of an Indian conflict with either Pakistan or China. The U.S. relationship with Pakistan has been written about in great detail. In addition, the legacy of U.S. policy toward the Afghanistan-Pakistan region since 2002 has been a sense in India that (1) Washington at times came close to giving Islamabad veto power over the degree of Indian involvement in Afghanistan and (2) the United States remains uncertain about its overall South Asian strategy, most importantly in terms of accepting that it has an India strategy independent of its strategy toward Pakistan. This legacy does not contribute to confidence when it comes to purchasing major weapons systems that have a good chance of being used by India against Pakistan, since the continual supply of U.S. parts and support would be needed. The U.S. relationship with China has been far more damaging to India s confidence in the United States as a defense partner. The MMRCA bidding took place when the so-called G-2 policy was in full swing between the Obama administration and Beijing. Given that it was obvious that the parameters of the MMRCA contract actually changed over time, from being a single-engine replacement for the aging MiG-21 to a twin-engine air-superiority fighter capable of taking on China s air force, it ensured that there was no political interference from the pro-u.s. prime minister Manmohan Singh in favor of the U.S. bids. Uncertainty over the exact nature of the U.S.-China relationship continues to be a major hindrance to India s willingness to buy a major offensive weapons platform from the United States. This is especially true of U.S. fighter planes, which would be more likely to be used by India against China than against any other country. The question is often asked in Indian strategic circles: if there is a chance that China and the United States are moving to a sort of global partnership, why should India lock itself into a quarter-century of defense dependency on the United States? It does not help that many U.S. treaty allies in the Asia- Pacific notably Japan, Australia, and some Southeast Asian countries have expressed uncertainty about the long-term reliability of the United States as a security partner against China in light of Washington s tepid response to the present territorial disputes in the South China Sea and over the Senkaku/Diaoyu Islands. Do you have anything else to add? The new Modi government will begin to aggressively push for a role for the Indian private sector in defense production. This move will be strongly resisted by the Indian state-owned firms, which seek to preserve their present monopoly on defense production. Both sides will look to foreign partnerships to strengthen their hand in this major policy debate, as they seek the know-how to prove they are capable of providing the weaponry requested by the services. It is an excellent opportunity for foreign firms and governments to make the case for deeper reforms in the Indian defense sector. A subset of this change will be the beginnings of an Indian arms-export policy. Again, foreign partners will play a crucial role in this. The United States will be at a disadvantage because of its tight technology restrictions. Washington should look to find regulatory solutions to this issue, because otherwise India s fledgling arm-export industry will shy away from U.S. technology partners due to fears that complex end-user and third-party resale restrictions will inhibit the Indian

5 firms ability to export. Reducing paperwork would help. India s government is remarkably small in terms of its toplevel bureaucracy for example, it has only 900 diplomats, about the same number as New Zealand and lacks adequate capacity to handle the U.S. Department of Defense s myriad clearances and dotted lines. Defense relationships work best if the governments involved are confident in each other at a strategic level.. Defense relationships work best if the governments involved are confident in each other at a strategic level. As mentioned earlier, the United States needs to work to reassure India on the geopolitical front, especially regarding the long-term nature of U.S. policy in East Asia, where India has concerns about Washington possibly moving to a passive or neutral position regarding China s problems with its neighbors.. This interview was conducted by Sonia Luthra, Assistant Director for Outreach. ABOUT THE NATIONAL BUREAU OF ASIAN RESEARCH Founded in the legacy of Senator Henry M. Jackson, NBR provides Members of Congress and their staff with the highest quality Asia expertise through policy-relevant research and private and public briefings with our network of experts. NBR is a non-profit, non-partisan research institution headquartered in Seattle, Washington with a second office in Washington D.C. More information on NBR can be found at For information on NBR s programs on Capitol Hill, please contact Sonia Luthra, Assistant Director for Outreach, at NBRdc@nbr.org or (202) the national bureau of asian research seattle and washington, d.c. nbr@nbr.org, 1414 ne 42nd street, suite 300 seattle, washington usa phone , fax pennsylvania avenue nw, suite 305 washington, d.c usa phone , fax