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February 15, 2013 5:57 pm
No one could blame Giuseppe Orsi for wishing that AgustaWestland, the helicopter company he once headed, had never won its lucrative contract to sell 12 high-tech aircraft to the Indian air force.
Mr Orsi went on to become chairman and chief executive of AgustaWestland’s parent, Finmeccanica, the Italian defence and industrial group. But he was arrested and jailed on Tuesday after being accused of corruption over the €560m contract signed three years ago to sell the helicopters to India.
The arrest of Mr Orsi, who denies the bribery allegations, has exposed only one of several personal dangers and financial risks facing international arms manufacturers selling their wares to India as it modernises its armed forces and cements its position as the world’s biggest weapons importer.
Yet the action by Italian police – two days after the end of Aero India, the biennial arms show in Bangalore – has not slowed the lobbying efforts of governments and manufacturers.
On Thursday, François Hollande, French president, was in New Delhi to reinforce the France-India “strategic partnership”, in part by pushing for the conclusion of a $20bn deal for the sale of 126 Rafale fighter jets to India by Dassault. The two governments also finished negotiations on a $6bn joint venture to make short-range surface-to-air missiles.
Next week, David Cameron, the UK prime minister, will visit India for the second time in less than three years to support British companies, including defence suppliers keen to sell everything from artillery to naval sonar systems.
The AgustaWestland contract was far from the largest arms deal negotiated in recent years. Indeed, it hardly counts as a defence deal, even if the helicopters were to be fitted with systems to warn of approaching missiles. Most of them were to carry the prime minister and other VIPs on trips around the country.
The helicopter purchase in 2010 was, however, one of a series of deals mooted, negotiated and in some cases finally signed over the past decade to replace India’s ageing (and mostly Russian) military equipment. That is a lot of equipment. India’s army of more than 1.1m and its air force are among the world’s biggest, and the country has 45 warships and submarines under construction – which industry executives say is the largest naval building programme of any nation today.
In conventional warfare, India is more than a match for Pakistan but defence experts say it would struggle in any conflict with China. “Army equipment is straight out of the Soviet era,” says one foreign military analyst in India. “In terms of warfare it would be best placed in a military museum.”
According to the Stockholm International Peace Research Institute, which monitors the global arms trade, India overtook China to become the biggest arms-importing nation in 2010. In 2011, India’s military expenditure, excluding nuclear weapons, was $44.28bn. It imported $3.58bn of arms – most of them still Russian.
India’s military requirements and its ability to pay for them have inevitably attracted the attention of defence companies from the US, Europe and Israel, including Boeing and BAE Systems, over the past five years.
Boeing is selling heavy military transport aircraft to India and is in talks to provide Apache attack and Chinook transport helicopters. EADS is the preferred bidder to sell refuelling tankers. Eurocopter and others are trying to win a long-delayed Indian order for 197 light reconnaissance and surveillance helicopters. A deal is close for the replacement of Swedish-made Bofors artillery from the 1980s. The list of multibillion-dollar deals is long.
Over the next decade, says Sipri, India plans to spend $150bn modernising, upgrading and maintaining its military equipment.
IHS Jane’s, the defence analysts, predicted this month that India would surpass France, Japan and the UK to become the fourth-biggest defence spender in the world by 2020 after the US, China and Russia. Over the next five years, the Indian defence budget would rise to more than $55bn.
By the time of the AgustaWestland deal three years ago, the cold war was only a memory and India had been befriended by the US. New Delhi was starting to worry about the increasing military and economic might of China, the neighbour and rival against which it lost a brief war in 1962. At the same time, India’s economy generated healthy revenues for arms procurement, growing at more than 9 per cent a year.
Yet for every jubilant executive from Boeing or Dassault, there are two or three frustrated representatives from other companies waiting in vain for years to seal contracts.
There are three main obstacles to international arms deals in India today: a sudden shortage of money for procurement this year and next; India’s attempt to promote its domestic arms industry; and a history of corruption scandals.
First, the money. India’s economy has abruptly and unexpectedly deteriorated over the past two years, with growth falling to 5 per cent annually and the Congress-led coalition government of Manmohan Singh imposing spending cuts to curb the budget and current account deficits.
Palaniappan Chidambaram, finance minister and a possible future prime minister of the world’s largest democracy, said this month that national security depended on human resources, science and technology, and money. Of these, money was the most important.
“If we do not have sustained high growth over a long period of time, we will be, forever, an undernourished, undereducated, underprovided and underperforming nation,” he said. “We will also be constrained in our ability to defend national security against both external and internal threats.”
Uday Bhaskar, an Indian defence analyst, predicts a lean year ahead: “He’s made it very clear there’s no money in the kitty, so I think all these capital acquisitions are on hold.”
The second difficulty facing foreign defence companies is the need to fulfil Indian demands that technology be transferred, that equipment be manufactured at least partly in India and that sellers make substantial “offset” investments or purchases in exchange for contracts.
Even by the government’s own admission, however, half of the equipment produced by Indian companies is obsolete. Locally made ammunition is often of such poor quality that it is rejected by the Indian army and risks damaging new guns.
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Nuclear-armed India has a successful space programme and regularly announces new achievements in military technology. At the Bangalore air show, a senior defence industry official announced that work had begun on a long-range missile called the Agni VI capable of delivering multiple nuclear warheads to different targets. Last month, India demonstrated what it said was the successful test of a submarine-launched ballistic missile.
For all the government’s high-tech boasts and its insistence on local production, there is scant capacity to produce advanced conventional equipment. “Everybody’s worried about it. The government’s worried about it,” says Rumel Dahiya, a retired brigadier who is deputy director-general of the Institute for Defence Studies and Analyses.
Such shortcomings were brutally exposed in a confidential cable written by Timothy Roemer, then US ambassador to New Delhi, denigrating Bangalore-based Hindustan Aeronautics Ltd (HAL) – the domestic partner with which most foreign aircraft sellers, including Dassault and BAE, are obliged to work.
“The potential for HAL to successfully partner with US firms on a truly advanced aircraft remains untested and suspect,” he wrote in the 2010 cable, released by WikiLeaks. India’s aviation industry was “two to three decades” behind the west’s, he said.
Lastly, public outrage against decades of corruption in public procurement and official campaigns against corrupt practices have dramatically slowed the decision-making process for both civilian and military projects, according to Indian and foreign business leaders.
“The whole procurement system has been in a mess,” says C. Raja Mohan, foreign policy analyst at the Observer Research Foundation. “Ever since Bofors [a corruption case over the purchase of artillery in the 1980s that was eventually dropped] the fear of being charged has slowed things down and made bureaucrats afraid.”
India has banned middlemen in arms sales, and in 2005 it appointed A.K. Antony, the current defence minister, to present an image of probity. But the government did not introduce an efficient system for procurement to replace what went before. “It’s a saintly policy, but not an effective one ... The whole thing is in a deep, deep crisis,” says Mr Raja Mohan.
Three of the 12 AgustaWestland helicopters have already been delivered but the defence ministry said this week after Mr Orsi was arrested that it would suspend all further payments and might cancel the contract, demand full repayment, blacklist Finmeccanica and take criminal action.
It was in August 1999 that the Indian air force first proposed replacing its old, Soviet-made Mi-8 VIP helicopters because they could not fly at night, in bad weather or at high altitudes. If the AgustaWestland case proves anything, it is that the modernisation of India’s armed forces will be a long, slow process that will take decades rather than years.
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