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India Starts to Rein in Defense Budget

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This article first appeared in Aviation Week & Space Technology.

India is trimming defense spending for its current fiscal year, which ends March 31, but Defense Minister A.K. Antony says spending on operational preparedness will not suffer.

And to underscore the assertion—and possibly allay the fears of Indian officials and Western contractors desperate for India's business—the country's air force chief insists that India finally will sign a long-awaited contract for 126 Dassault Rafale fighters by the middle of this year.

"The government is passing through a difficult phase," the defense chief says. "The recession is affecting us. There will be a cut in the capital and revenue budget. However, we will not cut the expenditure on operational preparedness."

For the current fiscal year, the Indian government has cut defense spending by about 5% from the allocated 1.93 trillion rupees ($38.6 billion), mainly due to the ongoing economic downturn.

Of the allocated 1.93 trillion rupees, 1.13 trillion have gone to revenue expenditures including salaries and pensions, and 795.79 billion were earmarked for modernizing the armed forces by acquiring new assets.

Several key acquisition plans are expected to be pushed into the next fiscal year.

The decision to prune capital acquisitions by 100 billion rupees comes at a time when India has announced several large defense acquisition projects, including the more than $20 billion effort to acquire 126 Dassault Rafales under the widely watched Medium Multi-Role Combat Aircraft (MMRCA) program, and a program to buy Apache and Chinook helicopters from Boeing.

"Some acquisitions due this fiscal [year] will be put off to next fiscal, as we have to tighten our belt to the extent possible for a better future," Antony says. "Budget cuts are not limited to our ministry but across ministries."

India's planned defense modernization will maintain its pace, "mainly because of the situation around us and the emerging volatile security scene," he adds. "The respective forces would decide their priorities."
Antony also says the criteria stated in the request for proposals for the MMRCAs will be final and non-negotiable for their licensed production with Hindustan Aeronautics Ltd. (HAL). Dassault reportedly had suggested reducing state-owned HAL's role in manufacturing the aircraft for the Indian air force.

"The deal is highest priority for us," Air Chief Marshal N.A.K. Browne says. "The project is very much on track."

Three French air force Rafales were at the Ninth Aero India exposition in Bengaluru last month: two performed demonstration flights and the other was on static display.

Browne concedes that some defense programs take years to clear the negotiation committee stage. "We hope it won't happen in the case of the MMRCA," he says. There are six or seven layers of bureaucratic approval before the MMRCA deal reaches the cabinet committee on security, which has final say on the procurement. In the meantime, HAL says it has begun advanced preparations to build a facility for assembling the Rafale fighters in India.

Nevertheless, India will take a "second look" at its policies on defense production and procurement to lessen reliance on imported weapons. Antony is urging defense forces to transform their approach of relying on imports to meet operational requirements and instead prioritize giving work to India's defense sector.

"Import should be the last resort, not the easiest resort. Indigenization of military hardware is the ultimate answer," Antony says. "The armed forces, government, defense organization and industry should come together so that India can achieve maximum indigenization in a reasonable time."

In a speech last month at the Carnegie Endowment for International Peace in Washington, Foreign Secretary Ranjan Mathai called for joint design and coproduction of weapons and defense capabilities with the U.S. His statements are a sign that New Delhi is increasingly interested in more than just utilizing traditional "offsets," i.e., local spending by Western defense companies, to build up its industry.

But Western companies have complained for years about India's bureaucratic restrictions and other issues that have hindered better cooperation. An audience member at Mathai's speech, identifying himself as a consultant for companies seeking to compete in the Indian market, complained of costs such as having to hire locals and establish offices in the country just to get started. Mathai professed not to know exactly what the person was referring to but said he thought foreign companies would want offices in India to do business there.

Some companies already take this approach. Thales says its joint ventures in India are structured to give the French conglomerate an edge when competing for defense contracts in the country. Eric Lenseigne, managing director for India, notes that in two recent joint ventures with Indian companies, Bharat Electronics Ltd. and Samtel, Thales has capped its stake at 26%, in line with India's foreign ownership laws for defense companies. But Lenseigne says this also means the work these Indian joint ventures do qualifies for offsets.

Local joint ventures are important for Thales because it is part of the Rafale International consortium, the preferred bidder for the MMRCA program. However, to clinch the deal, Rafale must find a way to meet India's 50% offset requirement. India normally requires 30% offset, but it was increased for the fighter competition.

Samtel already has a strong manufacturing capability in avionics system displays, Lenseigne says. With the Rafale fighter in mind, he says Thales and Samtel are discussing whether their joint venture can manufacture displays and airborne optronic sensors for combat aircraft.

The joint venture with Bharat Electronics, meanwhile, is being established to make civil and defense radars. The plan is to start producing Thales's GM60 ground- and vessel-based radar, Lenseigne says. India has issued many requests for information for ground-based radar for the army, he points out.

Lenseigne also sees an opportunity to integrate Thales airborne and surveillance radars into some of the aircraft being developed by HAL, including the Tejas light combat fighter.

As for further industrial cooperation with Indian companies, Lenseigne says, "we are looking at key industrial partnerships. We have identified five companies with which we want to establish privileged partnerships on a project-by-project basis."

Another reason to develop Indian aerospace manufacturing capabilities is to avoid controversies such as the alleged corruption surrounding the AW101 helicopter deal with Finmeccanica subsidiary AgustaWestland. In the $750 million helicopter deal, AgustaWestland has been accused of paying kickbacks worth €50 million ($67 million) to Indian officials to secure the sale of 12 AW101 VIP helicopters to the Indian air force.

India has taken delivery of three of the helicopters, with the remaining nine due to be delivered this year. But Indian authorities put the agreement on hold following the arrest of Finmeccanica Chairman and CEO Giuseppe Orsi by Italian investigators in February. Chief Operating Officer Alessandro Pansa is serving as interim Finmeccanica CEO and Daniele Romiti has been named to lead AgustaWestland, after CEO Bruno Spagnolini was placed under house arrest, too.

India's central bureau of investigation has begun its own probe into the deal, and the defense ministry has started the process of canceling the helicopter contract. AgustaWestland is denying any wrong-doing.
"We have to go to the root of all allegations [and do] whatever needs to be done to punish the guilty," Antony says.

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