U.S. Deputy Defense Secretary Ashton Carter’s visit to India in late July capped a two-month focus for the Pentagon on India that began with Defense Secretary Leon Panetta’s own visit in early June.
During his trip, Carter addressed the Confederation of Indian Industry, where he outlined the rationale behind the U.S. “rebalancing” toward Asia, as well as an American commitment to deepen bilateral defense trade by streamlining technology transfers, better align U.S. foreign military sales with India’s procurement procedures and search for opportunities on co-production and co-development.
The speech was largely focused on what the U.S. will commit to in the coming months to facilitate a deeper defense trade relationship. However, nestled toward the end of his speech, Carter also mentioned two key items for India to consider.
The first item urged India to raise “its foreign direct investment (FDI) ceiling to international standards that would increase commercial incentives to invest here.”
The long-running debate within India over increasing the rate of FDI has been rooted in Indian concerns about ceding majority ownership over an Indian company to a foreign investor. However, a high-level Indian task force on national security reform, chaired by a former ambassador to the U.S., Naresh Chandra, recently recommended in its report to the prime minister, “The limit of FDI in defense industries should be raised for partnerships both with defense PSUs (Public Sector Undertakings) and with private Indian companies.”
While India zealously (and rightfully) guards its sovereignty, greater foreign investment offers significant benefits. More foreign investment would allow private Indian companies to gain insights into how American companies engage in defense production. And Indian workers building defense equipment to American standards and specifications would accrue greater knowledge of advanced manufacturing techniques, quality assurance and technology transfer.
Greater Production Control
American companies would gain from this arrangement since they would have greater control over production timelines and quality, as well as forge long-term partnerships with Indian companies that could eventually contribute to the global supply chain.
There are concerns about whether India could use this know-how to become an eventual competitor in overseas markets, but such concerns need to be balanced against the benefits both sides might accrue from greater FDI limits.
The second item in Carter’s speech offered gentle advice to India on offsets when he said, “offsets can be tremendously helpful in growing industry capability if you have the right companies and the right absorptive capacity.”
There are concerns among defense industry officials that the Indian public sector does not have the capacity to handle billions of dollars in offsets. The problem is compounded by the lack of private industrial capacity in the defense arena, which makes it exceedingly difficult for foreign companies to find effective partners for discharging their offset obligations.
While many companies have traditionally considered offsets a nuisance to their main defense sales, the offset requirement is not going away soon. With the coming downturn in U.S. and European defense spending, defense companies are emphasizing the international market, where potential buyers, including India, are increasingly demanding offsets as a key part of any deal.
However, while India desires offset resources to build its defense industrial capacity, it would be well-served to seriously address the nature of the current system, perhaps by setting up a national commission to determine the best way to use offsets. With pressing needs in infrastructure (as the recent blackouts have shown), education and job training, India should consider diversifying its offsets for nondefense purposes.
There are other steps both sides could take to deepen defense ties. A recent Center for Strategic and International Studies report, “U.S.-India Defense Trade: Opportunities for Deepening the Partnership,” offers 41 recommendations.
In addition to FDI and offsets, both sides should develop an understanding of India’s future defense equipment needs. Having a common understanding of their defense trade partnership will help better channel American equipment sales and technology transfers to fulfill India’s defense needs.
As the U.S. prepares to “rebalance” toward Asia, it is not hyperbole to assert that deeper defense trade between the U.S. and India could greatly improve Asian stability. Combined with greater co-production and co-development, larger amounts of American hardware in India’s inventory and greater people-to-people contacts could lead to an arms relationship beneficial for both sides, deepening yet another critical dimension of the U.S.-India strategic partnership.
By S. Amer Latif, a visiting fellow at the Wadhwani Chair for U.S.-India Policy Studies at the Center for Strategic and International Studies. He is the principal author of the CSIS report “U.S.-India Defense Trade: Opportunities for Deepening the Partnership.” These views represent those only of the author.