The Indian Defense Market: Changing Dynamics

2012-08-19 By Richard Weitz

The back-to-back visits of U.S. Deputy Secretary of Defense Ash Carter and Russian Deputy Prime Minister Dmitry Rogozin, in charge of that country’s military-industrial complex, to India last month demonstrate the heightened competition for India’s defense import market, currently the largest in the world. India accounted for 10% of all global arms imports in 2011.

While in India, Carter said that the administration was committed to India’s military modernization and wanted to be the country’s “highest-quality and most trusted long-term supplier of technology – not a simple seller of goods — in such fields as maritime domain awareness, counterterrorism, and many others.”

India was the second-largest Foreign Military Sales customer of the United States in 2011, with $4.5 in total FMS transactions.

These included six Lockheed Martin “Super Hercules” C-130 four-engine military transport aircraft.

One long-standing impediment to increased India-U.S. defense cooperation—Russia’s quasi-monopoly on Indian defense purchases—may soon be weakening.

According to Russian calculations, during the past four decades the total value of all Russian-Indian military-technical cooperation has exceeded $35 billion.  Indeed, Russia’s arms sales to India remain the most important element of their overall relationship.

Bilateral defense ties have recovered from the problem-filled 1990s, when the Indian military had difficulties receiving adequate maintenance, support, and spare parts for its previous Soviet-era weapons purchases. At the time, the Russian defense industry was coping with the aftermath of the collapse of the integrated and lavishly funded Soviet military industrial complex. Cash-strapped Russian firms demanded hard currency for arms transactions instead of the traditionally favorable soft terms offered by New Delhi during the Soviet period.

India was the second-largest Foreign Military Sales customer of the United States in 2011, with $4.5 in total FMS transactions. Yet continued barriers on the United States side will limit the ability of the United States to be a key Western country supplanting the Russian’s historical dominance. And doing things like NOT responding to Indian RFIs on the F-35B do not help either. Credit Image: Bigstock

Despite the problems that traumatized the Russian defense industry following the disintegration of the Soviet Union, Russia has remained the main source of most of these advanced weapons systems. For example, approximately half of the major surface combatants and combat submarines in service with the Indian Navy were constructed in Russia or the Soviet Union.

The Indian Army has also purchased almost 2,000 T-72 tanks and hundreds of BMP-1 and BMP-2 armored vehicles from the Soviet Union. Even many of the Indian-made ships are equipped with Russian-made weapons systems such as ship-to-ship and surface-to-air missiles, torpedoes, guns, and anti-submarine weapons.

Furthermore, Russian companies receive revenue from servicing and upgrading India’s primarily Soviet-based military hardware.

Notwithstanding the end of the Cold War, Russian-Indian defense cooperation remains strong because of geopolitical imperatives, shared security concerns, and mutual economic benefits. Both countries fear radical Islamic terrorism, share concerns about regional instability in Central Asia, and are uneasy with U.S. military hegemony and the rise of China.

Powerful interest groups in both countries also have a common interest in sustaining Russian arms sales to India. Russia’s defense industry needs foreign sales to achieve economies of scale in some production runs as well as to sustain a manufacturing base that remains excessive for simply meeting Russian domestic demand. India has an enormous legacy of Soviet-based weapons that it needs to modernize, upgrade, and replace. In addition, Russian arms supplies continue to offer a good price-performance tradeoff.

But recurring problems with some Indian purchases along with India’s changing geopolitical orientation closer to the West, especially the United States, could eventually lead to Russia’s currently preeminent status in India’s foreign military purchases falling to that of first among equals.

During the 1990s, Indians complained about shoddy maintenance and insufficient spare parts for their Russian-built warplanes. More recently, in September 2007, the Indian government suspended payments under a $150 million contract to upgrade five Il-38SD anti-submarine patrol aircraft due to their unsatisfactory performance in test flights.

The most notorious bilateral defense snafu has involved the Russia-Indian deal to renovate the Soviet-era Admiral Gorshkov and transfer it to the Indian Navy. As things turned out, the Sevmash shipyard could not meet the terms of the original contract, which stipulated delivery in August 2008. After months of hard bargaining, Russia and India renegotiated the terms of the contract. India has ended up paying much more for the ship while waiting many additional years to receive the vessel, which is supposed to be delivered later this year.

India’s military establishment has also expressed concerns about the quality and timely delivery of other Russian naval purchases. For example, Indians have objected to the lengthy time Russian shipbuilders have required to deliver some multi-role frigates and to upgrade the Indian Navy’s Kilo class diesel submarines.

The “Nerpa” nuclear-powered attack submarine that India is now leasing from Russia has proved equally problematic. Under the lease contract, India provided hundreds of millions of dollars to finish construction of the Nerpa at Amur Shipyard in return for ten years’ use of the ship and Russia’s training of the Indian crew. The Nerpa was initially scheduled to join the Indian Navy as the INS Chakra in 2008, but production delays along with the accidental release of toxic gas from the ship’s automatic fire suppression system in November 2008 delayed the transfer until 2010.

India’s has also experienced problems with the 1,000 T-90 main battle tanks that New Delhi purchased under license from Russia in 2001. As of December 2011, the factory has manufactured only about 150 of the expected 1,000 T-90 tanks. Indian sources accuse Russian sources of impeding the transfer of the technology and the Russian-built assemblies India needs to build the tanks.

At the 11th meeting of the India-Russia Inter-governmental Commission on Military Technical, the Indian minister complained of delays in receiving export clearances for the vital equipment needed to repair Russian weapons systems India has already purchased.

Russian defense manufactures were deeply disappointed by the failure of the MiG-35 to survive even the first round of the recent multi-billion dollar competition to sell India 126 medium multi-role combat aircraft. This tender, dubbed the combat aviation “deal of the century,” was one of the most lucrative procurement aviation contracts in history, worth an estimated $15 billion. The Indian government announced earlier this year that Dassault Rafale had won the competition to replace India’s aging Russian MiG-21 fighter jets.

Indian analysts speculated that the subsequent Russian decision to cancel last year’s planned INDRA joint naval exercises at the last minute could have been intended to signify Russia’s displeasure.

Nonetheless, the Indian Defense Ministry subsequently bought the U.S. AH-64D Apache Longbow attack helicopters rather than the competing Russian-made Mi-28N Night Hunter attack helicopter.

In an attempt to sustain its market share, Russia has sought to meet Indian demands that Russia transfer more defense technologies to India and, in line with Moscow’s increased willingness to import weapons and co-produce them, engage with India in more joint research, development, and production of new military systems.

During his visit, Rogozin stressed that, “We want to move from basic trade to joint development projects with India in defense.” While in New Delhi, Rogozin expressed most interest in joint ventures involving the manufacture and sale of cargo and passenger aircraft. For example, the two countries are engaged in the joint development of a multi-purpose fifth-generation “stealth” fighter. They have completed the first stage of their preliminary design contract and their second stage is scheduled to be finalized by September 2012.

Russia should remain India’s largest defense partner for at least several years given that the two countries have already signed arms deals worth some 11 billion dollars in future transactions and have established several important joint ventures. 

Almost half of India’s air force’s inventory is considered obsolete and needs to be replaced with new acquisitions.  Geopolitical ties also remain strong, with the two countries elevating their relationship in 2011 to that of a “Special and Privileged Strategic Partnership.”

Russian defense firms have been counting on continuing orders from India to help cushion the decreasing opportunities in China. A few years ago, Russia’s previously lucrative arms sales relationship with the PRC drastically decreased, and Russian policy makers want to avert a similar fall in the case of India, whose purchases now account for about half the value of all Russia’s foreign military sales.

Nevertheless, the growing competition from Western companies, problems with past Russian sales, potential budgetary cutbacks, and the increasing sophistication of India’s indigenous defense industry could lead New Delhi to buy fewer Russian weapons in coming years.

Russia’s difficulties offer opportunities for Western defense companies, but Carter acknowledged while in India that “the U.S. system can be confusing, rigid, and controls too many items for the wrong reasons.” Carter recalled that, when he was undersecretary of defense for acquisition, technology and logistics, “There was a chart on my wall, outlining the 250 … steps it takes to move a program from development to delivery. It read like hieroglyphics.”

The United States has only recently removed India’s Defense Research and Development Organization and the Indian Space Research Organization off the Commerce Department’s entity list, which identifies organizations that the United States fears could misuse U.S. dual-use technologies for proliferation purposes.

He insisted that the administration was seeking to improve matters, both through long-term export reforms and by making “more anticipatory [decisions], looking at what partners are likely to want in the future, and beginning our thinking and processes earlier,” with the aim of “building exportability into our systems from the start, so it doesn’t consume time and money to do it later.”

For example, the Pentagon has a new fund to procure long-lead, high-demand items in anticipation of partner country requests. It also is seeking to develop a cadre of acquisition experts to help other countries define their requests and to streamline DOD’s response.

Editor’s Note: But doing things like not responding to RFIs from India about the F-35B do not help matters.

Like Russia, Carter said that the United States wants to move beyond simply selling India items toward cooperative research, development and co-production. For example, in Hyderabad, India’s Tata Advanced Systems Limited and Lockheed Martin will soon begin producing parts for the C-130J. India could help lower the costs of producing U.S. weapons due to its more competitive labor costs.

India could assist this process if it raises its foreign direct investment [FDI] ceiling to international standards. India currently limits foreign investment in its defense sector to 25 percent. Another problem is that some of India’s offset requirements are too onerous or excessively narrow.

Indian negotiators typically require foreign weapons suppliers to stipulate in new contracts a significant transfer of defense technologies to Indian firms.

They have also insist that other foreign firms rely less on selling complete turn-key systems and instead consent to engage in the joint research, development, and manufacture of new defense technologies and systems. They regularly demand that foreign governments agree to allow Indian firms a role in producing (under license), maintaining, and repairing the weapons.

Carter correctly noted “both sides we need to change, reform, and push ourselves to get to a place where U.S.-India defense relations are only limited by our thinking, not by our capacity to cooperate.”

 India’s Imports from Russia, 2005 – 2010

 

Weapon designation Weapon description No.
Delivered/ Produced
Year(s) of Deliveries Comments
Kopyo Aircraft radar 125 2001-2006
Kh-31A1/AS-17 Anti-ship missile 200 2000-2007
3M-54 Klub/SS-N-27 Anti-ship missile 150 2001-2008
Il-38SD/May ASW aircraft 3 2008 Indian Il-38 rebuilt to Il-38SD
Il-38/May ASW aircraft 2 2009 Ex-Russian; modernized to Il-38SD version before delivery
MiG-29SMT/Fulcrum FGA aircraft 10 2010 For use on Gorshkov (Vikramaditya) aircraft carrier
Su-30MK/Flanker FGA aircraft 18 2007-2008 Su-30MKI version; exchanged for 18 Indian Su-30K (replacing original planned modernization of Su-30K to Su-30MKI)
Su-30MK/Flanker FGA aircraft 26 2009-2010 $1.5-1.6 b deal; Su-30MKI version; assembled from kits in India; delivery 2009-2011/2012
AK-630 30mm Naval gun 20 1998-2005 For 3 Brahmaputra (Project-16A) frigates and 4 Kora(Project-25A) corvettes produced in India
T-90S Tank 310 2001-2006 (L)
T-90S Tank 150 2009-2010 (L)
$866 m deal (part of $2.5 b deal); option on some 700 more; assembled in India; delivery 2009-2011/2012
PJ-10 BrahMos Anti-ship missile 110 2006-2010 (L)
Version of Yakhont (SS-N-26); officially joint venture for development but mainly using Russian technology; incl ship-launched, air-launched and submarine-launched and land-based version
Su-30MK/Flanker FGA aircraft 75 2004-2010 (L)
$3-5.4 b deal; Su-30MKI version; delivery 2004-2014/2015

SOURCE: Stockholm International Peace Research Institute

For additional articles that look at the dynamics of change in the Indian defense market see the following:

http://www.sldinfo.com/the-indian-defense-industry%E2%80%90market-opportunities-and-entry-strategies-analyses-and-forecasts-to-2017/

http://www.sldinfo.com/will-the-indian-fighter-decision-downselect-be-implemented-prior-to-the-2014-elections/

http://www.sldinfo.com/why-did-india-choose-the-rafale/

http://www.sldinfo.com/india-makes-progress-with-new-seabased-air-assets/

http://www.sldinfo.com/brazil-india-and-the-global-fighter-market/

http://www.sldinfo.com/the-plane-truth-brazil-and-a-tale-of-two-competitions/

 

 

 

 

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