Friday, 29 June 2012

India backs Afghanistan’s pitch for foreign investment

By Ajai Shukla
Business Standard, 29th June 12

The slick cityscape graphic playing on the screens --- depicting sailboats catching the wind on a grass-lined canal; and broad, orderly roads lined by glass and steel buildings --- was a world away from the grim, gritty reality of Kabul today. But this was the future envisaged by the Afghan government today at the Delhi Investment Summit on Afghanistan, the first concerted attempt to lure foreign investors to that country.

For a decade now, starting from the 2002 Tokyo Donors’ Conference held in the wake of the Taliban’s ouster from Kabul, the international community has passed the hat around for the expenses of running a country with practically no source of income. Next month, the hat will be passed around again at Tokyo to meet the commitments of last month’s NATO conference in Chicago, where the international community pledged its support for another decade.

But after 2024, Afghanistan might well have to pay its own bills. And to get its economy rolling, Kabul is flaunting its natural resources, its hardworking people, and a strategic geography that makes it a land bridge between south and central Asia.

India is playing an anchor role in supporting Kabul’s outreach. New Delhi policymakers worry that the drawdown of NATO forces by 2014 would leave, in the words of Foreign Minister SM Krishna today, “a political or security vacuum that will be filled by extremists once again.”

New Delhi believes that only a rejuvenated economy and accelerated job creation can stave off serious instability, even civil war. Said Krishna, while inaugurating today’s summit: “Let the grey suits of company executives take the place of olive green or desert brown fatigues of soldiers; and CEOs, the place of generals.”

But there was clear apprehension amongst the approximately 150 Indian, 85 Afghan, and 70 foreign companies and organisations at the summit, that Afghanistan’s troubled security landscape is hardly congenial for business investments.

Each of the four senior Afghan ministers who spoke tried to allay those fears, arguing that a minimum level of security already existed, which would greatly improve once the domestic economy picked up steam.

“I would like to assure you that most parts of Afghanistan are stable and secure. Almost everywhere the level of security is well above that which is needed for economic development to occur.  We are well underway towards creating a virtuous cycle in which growth strengthens stability and the increased security leads to further growth,” said Anwar-ul-Haq Ahady, the Afghan Minister for Commerce and Industry.

Said Afghan foreign minister, Zalmai Rassoul: “While it is true that there are certain areas in Afghanistan where the security situation is not ideal, we should remember that these areas represent a small part of the country.”

Besides security, Afghan ministers talked up Afghanistan’s business climate, where Kabul has created a “liberal, legal regulatory regime.” Investors would benefit from a financial investment law based on “international best practices”, the lowest tax rates in the region, 100% foreign ownership of companies and cheap and plentiful labour.

However, corruption remains an investor concern. Afghanistan has consistently scored low on the World Bank’s Doing Business Indicator (DBI). It is also at No.2 in the corruption index of Transparency International.

India has provided Kabul with $2 billion in development aid, making it Afghanistan’s biggest regional donor. Private sector investment, however, has been low at just $25 million, of which only 16% has been in the job-creating manufacturing sector. This is set to change; last year, a seven-company, SAIL-led consortium, named Afisco (Afghan Iron and Steel Consortium) won a contract to develop Afghanistan’s Hajigak iron ore deposits. This is expected to generate $12-14 billion worth of investment, including the setting up of a steel plant, a coal-fired power plant and a hundreds of kilometres of railway lines.

The extraction of minerals is a key element of Afghanistan’s plan for self-sufficiency. Minister for Mines, Wahidullah Shahrani said that revenues from mining would comprise 45% of Afghanistan’s GDP by 2025.

Besides mining, Afghan officials made a plug for investment in the sectors of power transmission; hydroelectric power generation; infrastructure development, agri-based industry; education and healthcare.

According to the World Bank, Afghanistan’s economy will grow at 4.9% annually between now and 2025; this could increase to almost 7% with enhanced progress in agriculture and resources.

Indian foreign ministry officials say that the outcome of the Delhi Investment Summit would play a role in the outcome of the Tokyo Donors’ Conference on July 8th, where Kabul will present an economic roadmap, entitled “Path to Self Reliance”.

Thursday, 28 June 2012

Photos of the INS Vikramaditya (nee Gorshkov) on sea trials

The Future Infantry Combat Vehicle (FICV): Private sector awaits MoD decision on Rs 50,000 crore contract

The SEP infantry combat vehicle developed by BAE Systems' Swedish arm for potential users. The FICV will be larger, more lethal and able to swim, something that no contemporary ICV does other than the Indian Army's BMP-2

By Ajai Shukla
Business Standard, 28th June 12

Last week, the MoD flagged off India’s first competitive development of a major military system, the high tech Tactical Communications System. Now all eyes are on the second, with the MoD finalizing the two winners in the four-cornered contest to develop a Future Infantry Combat Vehicle (FICV) for the army. While figures are tentative, this is by far India’s biggest-ever land systems contract, the Rs 50-60,000 crore production of 2600 FICVs to replace the army’s venerable Russian BMP-2.

Of the four contestants that submitted proposals to the MoD in Oct 2010 --- Tata Motors; the Mahindra Group; L&T; and the MoD-owned Ordnance Factory Board (OFB) --- the MoD will select two as “Development Agencies,” or DAs, who will each design and build a prototype of the futuristic vehicle. The better one will be selected as the final FICV design, which will go into production.

The MoD is pursuing this project under the “Make” procedure of the Defence Procurement Procedure of 2008 (DPP-2008), under which Indian vendors develop major defence platforms. The MoD funds 80% of the cost of developing a prototype that must be at least 30% indigenous; the Indian DAs pays the remaining 20%.

The FICV will be a tracked, lightly armoured, off-road vehicle that can zoom over sand dunes or across a river. Operated by a three-man crew --- a commander, a driver and a gunner --- it will also carry seven fully equipped infantrymen into battle protecting them while they are aboard from bullets and shrapnel. The FICV’s strike power --- an anti-tank missile; a rapid-fire cannon; a 7.62 mm machine gun; and a grenade launcher --- will enable it to destroy enemy tanks, ICVs, missile carriers, attack helicopters and infantry.

“The FICV will be a 22-24 tonne vehicle with the strike power of a 45 tonne main battle tank (MBT),” predicts Brigadier (Retd) Khutab Hai, who heads the defence business of the Mahindra Group.

The army’s insistence on an amphibious FICV constitutes a key design challenge. The generals believe an ability to quickly swim across rivers would be a battle-winning ability in the riverine Punjab plains. The BMP-2, its current ICV, is fully amphibious. But not since the Soviet Union days has any army inducted a fully amphibious ICV.

Since Oct 09, when the MoD approved the FICV project, private sector aspirants like the Mahindras, Tata Motors and L&T have put in place the designers and technical facilities needed for developing the complex FICV in the MoD’s tight timeframes. Now there is concern that, 20 months after submitting their project proposals to the MoD in Oct 2010, the winning proposals have not yet been announced. According to the MoD’s own timelines, this evaluation should have been completed in 8 months.

“The Mahindra Group has invested Rs 30 crore in putting together our FICV team. For two years, we have trained our people, working with our technology partners, BAE Systems, in Sweden; and Rafael in Israel. We are looking for an early decision from the MoD. Keeping this team idle costs us money,” says Brig Hai.

Business Standard visited the Mahindra Group’s facility in Palwal, Haryana, where its joint venture company, Defence Land Systems India (Mahindra, 74%: BAE Systems 26%), has set up a high-tech Systems Integration Laboratory that will spearhead the FICV design process.

L&T, too, hopes for an early decision. It has set up a design facility at Talegaon, and tied up with technology partners like CMI of Belgium. Interestingly, L&T is looking to Indian company, Ashok Leyland, to play a role in the automotive aspects of the FICV. “L&T’s design strengths are well known. Many hours of skilled engineering have gone into the innovative design that we have presented to the MoD,” says MV Kotwal, L&T’s heavy engineering chief.

Meanwhile, uncertainty clouds the Tata’s proposal, which has German giant, Rheinmetall, as a technology partner. MoD sources say that at least one of Tata’s rivals has objected, pointing out that the CBI is investigating Rheinmetall Air Defence for allegedly bribing former Ordnance Factory Board chairman, Sudipta Ghosh. It is unclear whether the MoD’s delay in finalising the DAs for the FICV is related to this.

The MoD has not responded to an emailed query from Business Standard on this question?

The MoD says that programmes like the FICV, under the “Make” category of the DPP, will be key to developing India’s private defence industry. Vivek Rae, the MoD’s procurement chief, stated during the Defexpo 2012 international defence exhibition in New Delhi in March, that the MoD would soon announce many more “Make” projects.

“There will be a list of 150-180 ‘Make’ projects that (the MoD) will put on the web. With Indian companies tying up with one another and competing, I think we could energise the industrial base of the country. The sheer act of design and development, sharing of risks and sharing of costs (in an 80:20 ratio) will be a very significant move forward,” said Rae.

Tuesday, 26 June 2012

MoD flouts offset policy, foreign arms vendors benefit

By Ajai Shukla
Business Standard, 26th Jun 12

With the Defence Ministry (MoD) poised to revise the defence offsets policy, India’s defence industry fears a comprehensive dilution of the original intent of offsets, which was to impel foreign arms vendors towards sourcing defence goods and services from India. The global arms industry, backed in many cases by their respective governments, has lobbied since 2006 for relaxing offset conditions.

But offset rules, it would now appear, have existed mainly on paper. MoD whistleblowers have given Business Standard multiple examples of how the ministry systematically flouts its own offset policy, irregularly clearing offset contracts that violate guidelines. In each case, a foreign arms vendor has benefited, while Indian industry has lost out.

The more flagrant violations relate to:

1.   Offsets worth Rs 1,100 crore arising from the Rs 3,700 crore purchase from Italy’s Finmeccanica group, of twelve AW-101 helicopters for Indian VVIPs like the PM and the president. (The Italian police are separately investigating bribery allegations in this deal. Finmeccanica denies irregular conduct, while admitted that sacked former chairman, Lorenzo Borgogni, illegally transferred “millions of Euros” in consultancy fees). In New Delhi, the Prime Minister’s Office zoomed this procurement through the MoD, despite protests from sections of the IAF and the MoD that these were civilian helicopters that the IAF happens to operate. But even while treating this as a military purchase, the offsets flagrantly violate the Defence Procurement Policy guidelines, granting Finmeccanica offset credits for expenses relating to travel, accommodation and allowances for project committee meetings and steering committee meetings. The rules do not allow for this, since such offsets do nothing for indigenous defence production capability. Neither Finmeccanica, nor the MoD, have responded to an emailed request for comments.

2.  Offsets worth Rs 1,485 crore arising from the Rs 4,950 crore purchase of eighty Mi-17V5 medium lift helicopters from Russia’s Rosoboronexport Ltd, Moscow’s arms export arm. In violation of the DPP, the IAF (rather than an Indian company) has been designated as the Indian Offset Partner (IOP), through which Rosoboronexport will discharge offset obligations. Instead, offset proposals involve training the IAF’s Base Repair Depots in issues like spares management. The MoD legitimised this belatedly in 2009, rewriting the regulations to permit IAF depots to be IOPs “on a case to case basis in consultation with DDP (Department of Defence Production).”

“What benefit has this brought to India’s manufacturing capability?” asks the CEO of a defence manufacturing company. Neither the Russian Embassy in New Delhi, nor the MoD, has responded to an emailed request for comments.

3.   Offsets worth Rs 1,233 crore relating to the Rs 3,856 crore contract with Rosoboronexport to upgrade the IAF’s fleet of 62 MiG-29 fighters. Described by MoD officials as “a double whammy,” the contract stipulates that all but the first six MiG-29s would be upgraded in India by Hindustan Aeronautics Ltd; and Rosoboronexport priced the deal accordingly, including technology transfer costs and license fees. Inexplicably, the vendor was also granted offset credits for the work that would be done in HAL, benefiting twice over. Furthermore, offset credits were given for IAF pilot training, which the rules only permitted from 1st Jan 2011. MoD sources confirm that no waiver was granted for allowing training as offsets.

Neither the Russian embassy, nor MoD has responded to an emailed request for comments.

4.   Offsets worth Rs 240 crore for a Rs 800 crore contract with Italian shipbuilder, Fincantieri, for a fleet tanker that will replenish Indian Navy warships on long patrols. The MoD’s tender specified certain “buyer nominated equipment,” or BNE, which Fincantieri would be required to source from Indian defence manufacturers. This included engines from Wartsila India; a combat system from Bharat Electronics Ltd; an AK-630 gun from the Ordnance Factory Board; and several other components. Fincantieri quoted accordingly, factoring in the cost of building components in India. But then, again providing a double benefit, Fincantieri was also granted offset credits for the BNE that was sourced from India.

The benefit to Fincantieri, by the ministry’s own measure, would be more than Rs 100 crore. The MoD’s Director General of Acquisitions, Vivek Rae, publicly estimated at a seminar in New Delhi last July that global vendors add 13% to the contract price where offsets are imposed. Fincantieri apparently obtained that benefit despite having factored in the cost of BNE into its quote. Neither Fincantieri, nor the MoD, has responded to an emailed request for comments.

Business Standard has earlier reported on serial irregularities in offset contracts. US company Lockheed Martin’s $275 million offset contract, which related to India’s purchase of six C-130J Super Hercules aircraft flouted the offset regulations blatantly, offering little, if anything, to Indian industry. (“Lockheed offsets mock MoD norms”, 9th Dec 2010). Similarly, French company, Thales, was allowed to get away with providing 100 cc motorcycles, domestic air-conditioners, bicycles, cars, shelters, etc in its fulfillment of Rs 171 crore worth of offsets related to the Rs 570 crore sale of Low Level Transportable Radars (LLTR) to the MoD.

The defence offset policy compels global vendors who win defence contracts worth Rs 300 crore or more to invest at least 30% of the contract value into India’s defence industry. From 2011 onwards vendors can discharge offset liabilities in civil aerospace and internal security as well.

“The MoD allows vendors to wriggle out of useful offsets. The primary job of the Acquisitions Wing is timely procurement, not developing India’s defence industry. It views offsets as an inconvenient hurdle to procurement, a box that must be ticked. The result is that vendors get away with sub-standard proposals that do nothing to build indigenous capability,” points out Maj Gen (Retd) Mrinal Suman, an expert on offsets who has worked in the Acquisitions Wing.

Make offsets work

by Ajai Shukla
Business Standard, 26th June 12

The defence ministry (MoD) is waiting for a suitable moment to promulgate a new round of revisions to the defence offset guidelines. Several changes were finalised back in April, but an announcement has been stalled by disagreement over a crucial question: who in the MoD should handle offsets? Some officials argue that offsets should be under the Acquisitions Wing, the MoD’s nodal point for all procurement, since offsets are a part of procurement too. Others say that the Department of Defence Production (DDP) must oversee offsets, which are designed to stimulate domestic defence production.

For the uninitiated, the MoD’s offset policy is a form of counter-trade, which compels global vendors who win Indian defence contracts worth Rs 300 crore or more to source 30% of the contract value from Indian defence industry, or invest an equivalent amount into Indian R&D. Since 2011, offset liabilities can also be discharged in the fields of civil aerospace and internal security.

This question of responsibility remains unsettled even after six years of desultory internal debate. With Defence Minister AK Antony keen on releasing a single comprehensive revision to the offset guidelines, even the policy amendments that enjoy broad-based support are on hold. These are: permitting transfer of technology (ToT) as offsets; allowing credit multipliers of up to 300% for specified technologies that vendors transfer to the Defence R&D Organisation (DRDO); extending by two years the period within which vendors must discharge offset obligations; and extending the validity of banked offset credits to seven years (it was earlier two years).

Also in the pipeline is a vital piece of clarity that Broadsword has long argued for: an explicit enunciation of the objectives of the defence offset policy. I hear that the MoD will announce a threefold objective “to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encourage development of synergistic sectors like civil aerospace and internal security.”

Such a clear aim --- “to develop Indian defence industry” --- is crucial. It is the absence of such clarity that has facilitated a raft of misdirected and perverse offset contracts for VVIP helicopters; Mi-17V5 helicopters; MiG-29 fighters upgrade; fleet tanker; C-130J Super Hercules aircraft; and the Low Level Transportable Radar that are listed in today’s Business Standard. None of those offsets develop Indian defence industry in any way. Instead they are cozy arrangements between our military and the vendor, which pay lip service to offsets while quickly handing the former its toys and the latter its inflated profits.

As important as a clear aim is the need to thrust upon the DDP a major role in implementing offsets. As perceptive observers note, the Acquisitions Wing focuses on timely procurement, with no mandate or mind space for developing indigenous defence industry. Even with an honest director, the Acquisitions Wing is institutionally geared to view offsets as a hurdle to procurement, a box that must be ticked before the contract is signed. With an equipment-hungry army and air force backing token offsets (such as “donations” of training simulators by the vendor), the Acquisitions Wing sees no moral conflict in disregarding indigenous defence industry.

Convenient arguments are also marshaled by foreign vendors who tell the Acquisitions Wing that India’s domestic defence industry is incapable of absorbing the deluge of offsets that lies ahead! This despite the fact that India exported over $60 billion (Rs 3,40,000 crore) worth of engineered goods last year to the US alone.

Even assuming (for the sake of argument) that Indian manufacturing industry was incapable of producing defence-standard equipment, it is the vendor’s responsibility to identify and develop local partners, handhold them in developing their production techniques, and eventually integrate them into his own global supply chain.

That having been said, it is equally essential for the currently toothless DOFA (or Defence Offset Facilitation Agency, a DDP department that is tasked to connect vendors with Indian industry) to become more proactive. DOFA must map the indigenous defence industry, updating its data regularly, and presenting overseas vendors with an indigenous capability matrix that would facilitate them in choosing an Indian Offset Partner (IOP).

Ideally, a more pro-active and less paranoid MoD would be actively connecting indigenous private defence companies, particularly SMEs, with foreign technology partners in order to develop them through offsets into high-tech powerhouses. But, in the climate of caution and apprehension that characterises the Antony MoD this might seem like a rash invitation to a CBI tea party. However, this is what the DDP does, 365 days a year, for its defence PSUs. All that is needed is the realization that all defence producers, from both the public and private sectors, fall under the DDP.

Thursday, 21 June 2012

L&T-Tata-HCL shortlisted in Rs 10k-cr defence deal race

Last year, the MAFI contract (see my story, above)... now the TCS development. The private sector finally has its foot in the defense production door. Now let's see it deliver.

by Ajai Shukla
Business Standard, 21st Jun 12

In a long-anticipated move towards unleashing the abilities of India's private sector in equipping the military, the ministry of defence (MoD) has chosen a private sector consortium to compete with Bharat Electronics Ltd (BEL), the public sector giant, to develop a backbone communications network for the 21st century battlefield. The project is worth an estimated Rs 10,000 crore.

Called the Tactical Communications System (TCS), this network will be created simultaneously by two Indian ‘development agencies', or DAs. Besides BEL, the MoD's traditional go-to shop for electronics and communications, South Block has selected a private sector consortium of Larsen & Toubro, Tata Power (Special Electronics Division) and HCL. The MoD today informed the two DAs in writing about their selection. Business Standard has reviewed a copy of the MoD letter.

The TCS is a mobile communications grid that is rolled out across the battlefield, even deep inside enemy territory, for advancing tank formations. Each TCS provides an army corps (some 60,000 soldiers) with the frequencies and bandwidth needed for its communications, including voice, data and video.

It operates like a cellular phone network, but with three major differences. First, the TCS is mobile, its exchanges and switches installed in high-mobility vehicles that can transport and install these anywhere, including mountains and deserts. Second, the TCS transmits enormous volumes of data, such as map overlays, video conferencing or streaming video from unmanned aerial vehicles. Finally, the TCS maintains secrecy, forestalling enemy eavesdropping by rapidly hopping frequencies, hundreds of times a second, in a coded sequence.

Given the importance of secrecy, the MoD ruled that the TCS must be built in India. It is the first project being taken up under the ‘Make' category of the Defence Procurement Policy of 2008 (DPP-2008). This mandates that an Indian company, or consortium, must develop the TCS, with a minimum 30 per cent indigenisation at the prototype stage.

The two DAs will now take about six months to prepare a Detailed Project Report (DPR). This will define every system, sub-system, and capability of the TCS network. After studying the DPR, the MoD will estimate the cost of developing a TCS prototype. Industry sources say a working TCS prototype for an army division (15,000 troops) could cost about Rs 300 crore. MoD will fund 80 per cent of this cost; the vendors will pay 20 per cent.

The next crucial stage, explains Rahul Chaudhary, CEO of Tata Power (SED), is the building of the TCS prototype, which the two contending DAs would do separately, taking some 18 months. Then, in six to eight months of user evaluation trials, MoD will choose the better design. The DA that indigenises technology better will have an advantage over the one that relies more on foreign technologies and components.

The trials would also give the user a last chance to recommend design changes. The finalised design, to be documented into a General Staff Qualitative Requirement (GSQR), will be the TCS that enters operational service. The government could nominate a single winning vendor —between BEL and the L & T-led Special Purpose Company (SPC) — to build all seven TCS systems the army needs, each worth some Rs 1,500 crore. However, most insiders expect MoD would speed up production and hedge risks by distributing the order 65:35, with the superior design getting the lion's share.

In choosing the two DAs that were intimated today, MoD evaluated eight carefully vetted companies: L & T, Tata Power (SED), HCL, Rolta, Wipro; and also from PSUs: BEL, Electronics Corporation of India Ltd and ITI. Given the complexity of the projects and the stakes involved, L & T, Tata Power (SED) and HCL decided to combine forces, bidding jointly as an SPC.

Jayant Patil, executive vice-president at L & T, told Business Standard at Defexpo India 2012 in March that the distribution of stakes in the SPC are: L & T, 56.67 per cent; Tata Power (SED), 33.33 per cent; and HCL 10 per cent.

Monday, 18 June 2012

Defence ministry to dilute offsets next week

by Ajai Shukla
Business Standard, 18th June 12

The ministry of defence (MoD) is poised to sharply dilute its Defence Offset Guidelines (DoG) during the coming fortnight.

MoD and industry sources tell Business Standard that among the amendments the apex Defence Acquisition Council (DAC) is to clear on June 24 is one that would allow foreign vendors to discharge their offset obligations with minimal production and value addition in India.

While some of the likely amendments to the DoG are broadly acceptable, a controversial new proposal has set alarm bells ringing among Indian defence producers. This innocuous, but far-reaching, amendment relates to how ‘value addition’ will be calculated when an Indian Offset Partner (IOP) produces a system or a sub-system for a foreign vendor (offset credit is only given for value addition in India). Imported items have always been excluded from the ‘value add’, calculated as the IOP’s billed cost for the equipment supplied to the foreign vendor, less the cost of imported items used by the IOP. The proposed amendment would allow the IOP to buy foreign parts from Indian sub-vendors, and present that as value-add, provided the sub-vendor is paid in rupees. 

In practice, here’s how this would work. Consider a hypothetical offset-related contract that a foreign vendor, Smith Aerospace, signs with an IOP, Jai Bhagwan Hydraulics. If Jai Bhagwan uses Rs 80 crore worth of imported components in Rs 100 crore worth of hydraulic pumps that it supplies Smith Aerospace, the existing offset policy gives Smith Aerospace offset credit for Rs 20 crore, i.e. the value the IOP has added in India (billed cost, less cost of imported components). The new proposal changes this calculation fundamentally by defining value-add as billed cost, less the import cost incurred by the IOP.

In practice, this would allow Smith Aerospace to generate Rs 100 crore worth of offset credit through the same transaction, merely by encouraging Jai Bhagwan Hydraulics to buy the imported components (worth Rs 80 crore) from an Indian sub-vendor. Though the components remain imported, they would be treated as value-add, simply because the IOP, Jai Bhagwan, has not imported these (and has, in fact, paid the sub-vendor in rupees). This would entitle Smith Aerospace to claim offset credits for the full Rs 100 crore.

This only requires a slight amendment to Para 6.4 of the current Defence Procurement Procedure of 2011 (DPP-2011). The DAC will discuss this amendment on June 24. MoD did not respond to questions on the subject.

“Instead of encouraging the Indian defence industry to produce in-country, this amendment effectively legitimises imports. Instead of the Indian Offset Partner doing the import, the Tier-2 supplier will do it. The foreign vendor will get enhanced offset credits without any extra production having taken place in India,” points out the CEO of an Indian defence company, who has requested not to be identified.

The new policy also incentivises foreign vendors to select micro, small and medium enterprises (MSMEs) as their offset partners, by introducing a multiplier of 1.5 for offsets discharged through MSMEs. That means if Jai Bhagwan Hydraulics were an MSME (according to the monetary guidelines specified by the department of micro, small and medium enterprises, the offset credit to Smith Aviation would be multiplied to Rs 150 crore (Rs 100 crore times 1.5).

Ironically the revised policy will, for the first time, explicitly state that the offset policy is aimed at developing Indian defence industry. The threefold aim it specifies is “to leverage capital acquisitions to develop the Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for research, design and development related to defence products and services and (iii) encourage development of synergistic sectors like civil aerospace and internal security.”

Other changes
The proposed policy would also permit transfer of technology (ToT) as offsets; granting any foreign vendor a multiplier of three for technologies specified by the Defence R&D Organisation (DRDO). It extends by two years the period within which vendors must discharge offset obligations and extends the validity of banked offset credits to seven years (it was earlier two years). In complex procurements (like the recent medium fighter contract) where multiple sub-vendors incur offset liabilities, the new policy will permit sub-vendors to individually discharge their respective liabilities, even while holding the main vendor responsible for discharging offsets in full.

Another amendment being discussed on June 24 could resolve a six-year debate that has exercised the MoD — which agency should administer offsets? One group, supported by the army and air force, has argued the powerful Acquisitions Wing should oversee offsets, since it buys the foreign arms that create offset obligations. Other bureaucrats apprehend a conflict of interest that might foredoom offsets, since the Acquisitions Wing’s primary mandate of expeditious procurement pre-disposes it to regard strict offsets as an encumbrance. This group argues that as offsets aim at boosting indigenous defence production capability, they should be handled by the department of defence production (DDP), a separate MoD wing that is led by a secretary.

MoD sources say the proposal that the DAC will examine gives the Acquisitions Wing responsibility for concluding offset contracts alongside each procurement contract. The DDP will, thereafter, oversee the discharge of offsets.

Offsets were first made mandatory in the Defence Procurement Policy of 2006 (DPP-2006) and then revised periodically. The policy requires foreign vendors who win defence contracts worth Rs 300 crore or more to plough back at least 30 per cent of the contract value into India in the form of defence orders, technology or infrastructure.

The amendments now proposed continue the MoD’s steady dilution of this policy. Global arms vendors, backed openly or tacitly by their governments, have mounted a sustained lobbying campaign against offsets, arguing that Indian defence players do not have the capacity to absorb the offset production that will arise. Meanwhile, India’s defence producers have argued that the very aim of the offset policy is to develop production capacity and, therefore, the foreign vendors must assist in building up capacities. The MoD, by incrementally diluting the offset policy, has indicated that it supports the foreign arms vendors.

Wednesday, 13 June 2012

US-India strategic dialogue: Iran disagreement recedes as talks begin

By Ajai Shukla
Business Standard, 12th June 12

On Wednesday, in Washington D.C., the third US-India Strategic Dialogue will be co-chaired by US Secretary of State Hillary Rodham Clinton and India’s Foreign Minister SM Krishna.

The US State Department has announced that the dialogue between “the world’s oldest and the world’s largest democracies” will include discussions on bilateral and regional economic issues, regional security and defence, public health, innovation, agriculture, and women’s empowerment.

While engagement between Washington and New Delhi has expanded since President Obama’s visit in 2010, the last year has seen strains over the two countries’ differing approaches to Iran, in particular India’s insistence that its energy needs demand continued oil imports from Iran, irrespective of US-led sanctions. However, vocal public disagreement involving the two countries’ media, legislatures and strategic communities has not prevented the two governments from deftly bridging the gap.

On Monday, Clinton granted India (and six other countries) a six-month waiver from sanctions, justified by the actions they have taken to reduce oil dependency on Iran. India has reduced oil imports from Iran from the 2008-09 high of 16% of total oil imports to just 10% last year, with further reductions planned to 7%. Reducing below this level is problematic because refineries like those of Mangalore Refinery and Petrochemicals Ltd (MRPL) are engineered specifically for Iranian crude.

New Delhi officials, speaking anonymously, say entirely shutting off Iranian crude would be undesirable, even if Saudi Arabia offered to make good the shortfall. “We would not like all our eggs in one basket. Besides, we are exploring other sources: imports of crude from Venezuela have begun; and our traditional source, Iraq, has begun exporting crude again,” says a senior foreign ministry official.

Even at the reduced import levels from Iran, India faces difficulties in making payment. While it has been agreed that 50% of India’s oil imports will be paid for in rupees (reassuring to America because that reduces the flow of hard currency to Teheran), India’s share of the $15-16 billion bilateral trade is a mere $2.6 billion. Paying in rupees requires India to step up exports to Iran, but enhancing trade arouses further criticism of India.

“After 28th June, if the US decides to implement watertight sanctions on the Central Bank of Iran, payments would be difficult unless we have a larger rupee component, or implement counter-trade,” says the foreign ministry official.

Within New Delhi’s strategic elites, India’s relationship with Iran has become a major discussion point. Officials and analysts inclined towards the US point to Iran’s unpredictability; to India’s emerging strategic partnership with the US and Israel; and to gulf states like Saudi Arabia with whom India has longstanding relations, and to the need to keep the gulf region stable as it has 6.3 million migrant Indian workers.

The counter view, which is closer aligned to official policy, sees Iran as an influential player in West Asia that opposes Sunni extremism; as a potentially crucial Indian ally in stabilizing Afghanistan, and as a country that provides India a gateway to Afghanistan and Central Asia through the port of Chabahar.

While many regard the ongoing Iran crisis as a “west-versus-Iran” confrontation, the longer-term Indian security perspective envisions a balancing act between Riyadh and Teheran, both geopolitical rivals in a West Asian power play. They have multiple points of confrontation: civilizational Arab-Persian tension; Shia-Sunni sectarian rivalry; radically different approaches towards the west, and different outlooks to tackling Israel.

“The internal dynamics of the Islamic world are crucial. If Iran is badly weakened, the fundamentalist, pan-Islamic forces, which are heavily funded by Wahabbi regimes like Saudi Arabia and others will gain in vigour,” argued a senior diplomat in a closed-door discussion in New Delhi last week.

MEA officials have long insisted that reports of US-India tension over New Delhi’s continuing relations with Teheran reflected analyst opinion rather than the official bilateral relationship. Washington and New Delhi, in fact, were understanding of each others’ concerns and imperatives in dealing with Teheran. That appears to have been verified by the US waiver on Monday.

The strategic dialogue caps an intense engagement between Washington and New Delhi over the preceding months. Andrew Shapiro, the Assistant Secretary of State for Political-Military Affairs, visited New Delhi in April, followed by Defence Secretary, Leon Panetta this month. The Us Treasury Secretary, Tim Geithner, is scheduled to visit India on June 27-28.

Tuesday, 12 June 2012

Facts on the frozen ground

by Ajai Shukla
Business Standard, 12th June 12

Few Indo-Pak issues are as emotive as the Siachen Glacier dispute; a misleading term given that India controls all of Siachen while Pakistan only hankers for it. Each time Siachen is up for discussion articles appear in the Indian media, arguing for “demilitarising” the area in order to “build confidence,” i.e. hand Islamabad a sop that might evoke corresponding generosity. The Pakistan Army badly wants a troop pullback, given the comprehensive mauling it has received and the unfavourable positions it holds. Meanwhile, Indian hardliners argue that, as in Kargil, Pakistan could backtrack from even a signed agreement, occupying Indian positions after our army has climbed down.

Today, Siachen is on the table again, with Pakistan’s influential army pressing for talks after a killer avalanche in the area buried 127 Pakistani soldiers. And The Hindu, a newspaper that advocates concessions in Siachen, published a front-page headline story on Sunday entitled “Siachen was almost a done deal in 1992.” The article, presenting well-known and widely-documented facts as news, “reveals” that a mutual pullback agreement was at hand in the 6th round of Siachen talks in Nov 1992, but “the Indian political leadership developed cold feet,” forcing our negotiators to pull back from the agreement.

Quoting the head of the Indian delegation, NN Vohra, who was then the defence secretary, the article reveals that a scheduled signing ceremony had to be called off overnight, because the Indian government decided to conclude matters at the next round of talks in January 1993.

Newspapers are entitled to their views, howsoever unsound. But it is mystifying why well-known events are being presented as front-page news headlines. In his seminal book, “Siachen: Conflict Without End”, Lt Gen VR Raghavan, then the army’s Director General of Military Operations and a key member of the Indian delegation, has explained why he thinks India’s political leadership changed its mind: growing differences between the Congress and the BJP over the Babri Masjid issue made a political consensus difficult; and the political leadership had second thoughts in view of the violence that Pakistan was instigating in J&K.

But the Hindu article portrays New Delhi as somehow stabbing Pakistan in the back by refusing to sign. Surely nobody can argue that a nation cannot reconsider an agreement up to the time that it actually signs it?

The article incorrectly mentions that, “the Pakistani delegation offered a proposal that met India’s demand of recording existing ground positions before withdrawal of troops from a proposed zone of disengagement.” India has always demanded (and the Indian draft of the agreement published by The Hindu corroborates this) that the Actual Ground Position Line (AGPL), which marks the dividing line between the two armies, be clearly spelt out in the agreement. Pakistan, however, proposed that the AGPL be buried in an Appendix in the form of a “redeployment schedule.” In 1992, India’s demand had not been met, but it was still (unwisely) considering acceding to Pakistan’s request.

The reason this would be unwise is that a “redeployment schedule” tucked away in an Appendix would never have the authority of a marked map with a delineated and specified AGPL. It cannot be forgotten that the only reason the international community, especially the United States, turned against Pakistan at the time of the Kargil intrusions was because India could present a signed map, on which the two sides had delineated the Line of Control (LoC) in 1972.

Furthermore, when the entire 700 km-long LoC --- extending from Akhnur, near Jammu, to NJ 9842, where Siachen begins --- has been delineated and marked on a signed map, there is no reason at all for the 109 km-long AGPL to be marked in any other way. Pakistan argues that the AGPL was formed due to Indian perfidy (and violation of the Shimla Agreement). But India is on equally solid ground in arguing that the LoC was formed by Pakistani perfidy and violation of J&K’s Instrument of Accession to India.

New Delhi must make it clear that Siachen will never be a handout to Pakistan, or a “confidence building measure” to take forward the Indo-Pak dialogue. Siachen is a vital part of the Kashmir “core dispute”; for that reason, it cannot be a mere confidence building measure.

In addition, any Siachen pullback must be made conditional on a Kargil pullback, where Pakistani perfidy in 1999 forced the Indian Army to deploy some 20,000 soldiers, in conditions that rival Siachen, to prevent Pakistani soldiers from violating the LoC again. The Indian Army has mastered conditions in Siachen; Pakistan clearly has not. The conditions in Kargil are less favourable to us.

India offers space for all shades of opinion, including the Wagah candle-lighters who believe that the vicious, vengeful, self-destructive extremism that spreads alarmingly across Pakistan is merely a thin crust, beneath which bubbles a wellspring of tolerance, secularism and democratic liberalism that will burst forth any day, washing away the evil. The fraternal Indo-Pak functions that these idealists organise do no harm and, perhaps, a little good. But when this cuckoo lobby pushes to hand over hard-won territory for “building confidence” with Pakistan, it is time to push back. The only confidence this will build in Rawalpindi is that New Delhi has not learnt the lessons of history.

Sunday, 10 June 2012

Broadsword Poll: Should India sign an agreement with Pakistan to demilitarise the Siachen sector

Just checking the blogger viewpoint. Kindly stick to a yes-or-no answer... everyone already knows the pros and cons of the Siachen debate!

Thursday, 7 June 2012

US will continue drone strikes in Pakistan, says Panetta

By Ajai Shukla
Business Standard, 7th June 12

Leon Panetta, in his first visit to New Delhi as America’s secretary for defence, flatly declared that the United States will continue drone strikes against terrorist targets in Pakistan’s Federally Administered Tribal Areas (FATA), even if Islamabad believed that its sovereignty was being violated. The strikes were justified, said Panetta, because the terrorists who killed 3000 Americans on 9/11 continued to take refuge in FATA.

The statement is significant, given that President Barack Obama faces attack at home over the legal rationale for drone attacks on Pakistani soil. A Republican congressman, Dennis Kucinich is leading a growing movement that questions the administration on the legal basis for striking targets in a country that the US is not at war with. The Pakistani media is prominently covering this letter campaign.

Today, addressing an audience of strategic thinkers in New Delhi, Panetta laid out the administration’s case in detail. “With regards to drones… this is about our sovereignty as well. Because there were a group of individuals who attacked the United States on 9/11 and killed 3000 of our citizens. And we went to war against those who attacked the United States of America. The leadership of those that were involved in planning those attacks located (themselves) in Pakistan in the FATA. We have made clear to the Pakistanis that the United States of America is going to defend ourselves against those that would attack us. And we have done just that. We have gone after their leadership and we have done that effectively, targeting Al Qaeda leadership and terrorists.”

Panetta went on: “The terrorists who threaten the United States threaten Pakistan as well. This is not just about protecting the United States; it is also about protecting Pakistan. And we have made very clear that we are going to continue to defend ourselves.”

Panetta made common cause with India on the need to stabilize Pakistan. “We can’t have a stable Afghanistan without a stable Pakistan,” he said. “India views the relationship with Pakistan as complicated and so do we. And it is… but at the same time, it is a necessary relationship… it is not easy, but it is necessary.

In contrast to the hard line against Pakistan, Panetta described India as central to America’s new posture in the Asia Pacific. “America is at a turning point. After a decade of war, we are developing a new defence strategy --- a central feature of which is a “rebalancing” towards the Asia-Pacific region. In particular, we will expand our military partnerships and our presence in the arc extending from the Western Pacific and East Asia into the Indian Ocean region and South Asia.”

“Defence cooperation with India is a linchpin in this strategy. India is one of the largest and most dynamic countries in the region and the world, with one of the most capable militaries. India also shares with the United States a strong commitment to a set of principles that help maintain international security and prosperity.”

During his two-day visit to New Delhi, Panetta met the prime minister, the national security advisor, and held delegation meetings with his counterpart, Defence Minister AK Antony. Panetta says the two sides discussed America’s new focus on the Asia-Pacific; the transition in Afghanistan and the need for India to continue supporting the government in Kabul; the India-Pakistan peace dialogue; and issues like piracy, terrorism, Iran and North Korea.

Wednesday, 6 June 2012

Massive military helicopter buys allow for indigenisation

By Ajai Shukla
Business Standard, 6th June 12


1.            Mi-17 V-5                                                        139                        Russia
2.            Heavy lift helicopters                                    15                         CH-47 Chinook likely
3.            Medium attack helicopters                          22                         AH-64 Apache likely
4.            Utility twin-engine helicopters                 159                        Dhruv Mk III (HAL)
5.            Naval twin-engine helicopters                   50                        Global market
6.            Naval medium, multi-role                          91                        Global market
7.            Weaponised utility helicopter                    76                        Rudra (HAL)
8.            Light Combat Helicopter                          179                        LCH (HAL)
9.            Light Utility Helicopters                           197                        Global market
10.          Light Utility Helicopters                           187                        HAL

The Indian Air Force (IAF) purchase of 126 Rafale fighters has made global headlines, and the Indo-Russian Fifth Generation Fighter Aircraft (FGFA) could be another jaw-dropper. But Indian military aviation could see an even more prominent growth area in helicopters, where the defence services are poised to induct well over a thousand rotary wing aircraft in the coming decade, the majority of them developed and built in the country.

Already on the anvil for the army, IAF, navy and coast guard are the following:

The IAF is inducting 139 Russian Mi-17 V-5 medium lift helicopters, for an estimated $2.4 billion. The workhorse Mi-17, which transports 26 soldiers in combat gear, or 4 tonnes of supplies to high altitude posts, has been in IAF service for decades, but the new-model V-5 is a vastly superior machine, with new engines, rotor blades and avionics. An IAF order for 80 Mi-17s is already being delivered, which is likely to be followed by an order for 59 more.

Fifteen American CH-47 Chinook heavy lift helicopters will be bought to replace the IAF’s Russian Mi-26 helicopters, of which just 3-4 remain serviceable. The Chinook, built by Boeing, has seen extensive combat, most recently in Iraq and Afghanistan. The IAF has evaluated the helicopter and is please with its avionics and power, which allows it to accurately deliver 50 fully equipped soldiers, or a payload of 12.7 tonnes, onto the roof of a house or the edge of a cliff.

The IAF has also completed trials for the purchase of 22 medium attack helicopters, and homed onto Boeing’s AH-64 Apache. Attack helicopters, which operate from close behind the forward troops, provide immediate fire support --- cannons, rockets and anti-tank missiles --- to soldiers that encounter the enemy, providing them a battle-winning advantage. Unlike most other countries, India has chosen not to use attack helicopters in counter insurgency operations for fear of collateral damage.

The IAF and army have also placed a Rs 7000 crore order for 159 Dhruv Mark III utility helicopters. These have been designed and built by Hindustan Aeronautics Ltd (HAL), which builds 36 Dhruvs each year. There is an estimated need for more than 350 Dhruvs for the army, IAF, coast guard and paramilitary forces.

The navy is buying an additional 50 light, twin-engine helicopters, most probably from Agusta Westland. The Dhruv does not meet its needs since its composite rotors cannot be folded up for stowing the helicopter in a warship’s tight confines.

In addition, the navy is procuring another 91 medium, multi-role helicopters to replace its vintage Sea King fleet, which flies from larger frigates and destroyers. A global tender is out for 16 helicopters, to which another 75 have been added.

Riding on the Dhruv’s success is HAL’s Rudra, a heavily armed version of the Dhruv, which carries a cannon, rocket pods, anti-tank missiles and a full suite of electronic warfare (EW) equipment. The army and the air force will buy 76 Rudras.

HAL is also developing the Light Combat Helicopter, of which 179 are on order (IAF 65; army 114). This 5.5 tonne light armed helicopter features the Shakti engine, the Dhruv’s dynamic components (main rotor, tail rotor, and the gearbox), and the weapons suite that is being developed on the Rudra. The LCH will be a high altitude virtuoso: taking off from Himalayan altitudes of 10,000 feet, firing guns and rockets up to 16,300 feet, and launching missiles at UAVs flying at over 21,000 feet.

The military’s other bulk requirement is for 384 light utility helicopters, or LUH’s, to replace the army and IAF’s obsolescent Cheetahs and Chetaks. This has been divided into two streams: 197 LuHs are being bought off-the-shelf through a global tender; and 187 LuHs are being developed and built in India by HAL. To ensure timely delivery, the MoD has specified target dates for HAL’s development milestones: building of a mock-up; the design freeze; the first flight; Initial Operational Clearance, and so on. Each time HAL misses a milestone its order reduces from 187.

Unlike the IAF’s fixed wing aircraft acquisition plan that focuses on foreign buys, its rotary wing plan leans towards indigenisation. This after a strategic assessment in the mid-1990s, when Ashok Baweja was HAL’s chairman, that indigenisation could be realistically pursued in the less challenging rotary wing field than in the cutting-edge realm of fighter aircraft.

This policy drew strength from the technological breakthroughs of the Dhruv helicopter and the Turbomeca-HAL Shakti engine. Both these were optimised for high altitude operations up to 20,000 feet, a unique feature in the Indian Army’s operating environment.

P Soundara Rajan, HAL’s helicopter chief, says the Bangalore-based division will ramp up turnover from the current 10% of HAL’s turnover to 25% a decade from now. Having taken 40 years to build its first 700 helicopters, which were basic second-generation machines, HAL aims at building another 700 fourth-generation within the next 15-20 years.

Monday, 4 June 2012

US curbs on Javelin missile sale cloud Indo-US relationship

By Ajai Shukla
Business Standard, 5th June 12

A dangerous flashpoint in US-India relations faces visiting US Secretary of Defense, Leon Panetta, who faces tough questions from Indian officials on Tuesday. The US State Department has slashed India’s request for Javelin anti-tank missiles, offering instead a smaller quantity that Washington sources say is “less than half of what India has requested for.”

Indian MoD officials are furious that Washington, an avowed strategic partner, has pared down India’s requirement of Javelin missiles, even while arguing that defence sales are a cornerstone of the US-Indian strategic relationship.

“This (US reduced offer) is a deal killer. Washington will not dictate the quantity of weaponry we need. This will severely damage the prospects of US vendors in future arms contracts,” a South Block official told Business Standard.

This unexpected rebuff stems from the US Department of Political-Military Affairs, a State Department office that examines the political fallout of proposed US arms sales. Pol-Mil Affairs, as this department is called, often nixes or curtails arms sales because they might “destabilize the regional military balance.”

Neither the US Embassy in New Delhi, nor the Ministry of External Affairs, is prepared to reveal the reason provided by Washington for slashing the Indian request. The MEA and the MoD have not responded to requests for comments.

US Embassy spokesperson, Peter Vrooman, said, “We don’t discuss individual sales. Secretary Panetta looks forward to having an exchange with the Government of India on a broad range of issues.”

Andrew Shapiro, the Assistant Secretary of State for Political-Military Affairs, had told Business Standard, in an exclusive interaction during his visit to New Delhi on 17th April, that Washington had cleared the transfer of technology for manufacturing the Javelin missile in India. Given that readiness to transfer high-end technology, the curbs placed by Washington on the missile numbers remains inexplicable.

The FGM-148 Javelin, built by US companies Lockheed Martin and Raytheon, is one of two anti-tank guided missiles (ATGMs) that the Indian Army is evaluating for its 350-odd infantry battalions. The other is the Spike, built by Israeli company, Rafael. These are both shoulder-launched, “fire-and-forget” ATGMs, which means that they autonomously track their targets after they are fired by a two-man crew.

Both missiles are scheduled to come to India for user evaluation trials later this year. However, the Javelin has already impressed the Indian Army. During joint exercises with the US Army, Indian missile crews have fired ten Javelin missiles. All ten hit their targets.

The US industry, which has heavy stakes in a successful Javelin sale to India, is sharply critical of the State Department for curtailing the Indian request. “Offering a reduced number of missiles will almost certainly kill the Javelin deal; in fact it seems to almost be designed to be so. It seems as if Hillary Clinton herself remains unconvinced about the India relationship and is trying to set a different tone,” complains an industry member.

A key US frustration in the defence relationship has been New Delhi’s refusal to sign three defence cooperation agreements that Washington has pressed for: a Communications Interoperability and Security Memorandum of Agreement (CISMOA); a Basic Exchange and Cooperation Agreement for Geo-spatial Cooperation (BECA); and a Logistics Support Agreement (LSA). New Delhi believes that signing these agreements would put it overtly in the US camp, diluting its “multi-aligned” foreign policy that emphasises strong relations with multiple foreign powers.

There are also growing frustrations in Washington over India’s resistance to allowing US “end-user” inspections of weaponry sold to Indian security forces. New Delhi regards end-user monitoring as a violation of sovereignty.