Monday, July 30, 2012

Arms and The Country


Kanwal Sibal
Member Advisory Board, VIF

European nations compete for defence ties with India

When listing India’s defence partners Europe is mentioned, but it would be more accurate to speak of individual European countries as partners. Europe is unified economically but not in the defence domain. Unlike on economic issues, on defence issues India deals with individual capitals and not Brussels.

Some points are pertinent to our defence ties with European countries. One, these countries compete even more intensely with one another for defence contracts abroad than they do for commercial ones, as the former are fewer in number, the margins are bigger and the supply of spare parts and periodic upgrades provide large long-term returns. European countries compete with one another as zealously in India as they do with Russia, Israel or the United States of America, our other major defence partners.

Two, defence ties have a much more pronounced political element than commercial exchanges. Countries with serious political differences can have extensive economic ties, as is the case of the US and Japan with China. However, for defence ties, some geo-political understanding has to exist. The country supplying arms acquires a degree of political leverage over the recipient country. At critical moments, spare parts or ordnance could be denied because of sanctions. These considerations are important for India because of our past experience and potential concerns for the future. In this respect, France is considered more reliable than other European countries because it has eschewed sanctions on India, even for our 1998 decision to go nuclear. The United Kingdom’s record is tainted while Germany has been squeamish about defence trade for humanitarian or conflict-prevention reasons. The sanctions issue has, however, lost its previous edge because of the lifting of nuclear sanctions on India by the US and the Nuclear Suppliers Group, the deterioration of US/Nato-Pakistan relations and the receding of the Kashmir issue from the forefront of Western concerns.

Ultra Light Howitzers

Three, defence manufacturing is a high-cost industry as very advanced technologies and huge outlays on research and development are required. Exports help to achieve economies of scale and amortize development costs. European countries are maintaining large defence industries in spite of the absence of any real external military threat and dwindling domestic orders because of reduced defence budgets. Exports therefore become vital. We have so far failed to extract the maximum advantage for ourselves from this compulsion they have by way of obtaining genuine transfers of technology. This is in large part because all European countries adhere rather strictly to technology denial regimes individually, and some intra-European coordination exists on this score. In general, on issues of technology transfer, all of them are restrictive, with the latest generation technologies made almost impossible of access. We have also not used our bargaining power effectively enough because of systemic deficiencies which prevent us from integrating the opportunities we provide to European countries in diverse domains with a view to wresting concessions through cross-bargaining.

Four, the bigger European entities are habituated to wielding power internationally — such has been their domination of world affairs in previous centuries. Their big power status is intimately linked to the possession of a large defence industry. Its existence enables them to discharge their dominant role in maintaining international peace and security, whether through the Security Council, the North Atlantic Treaty Organization or a “coalition of the willing”. In the race for technological innovation, the civilian off-shoots of defence technologies are an important factor too, for retaining a large defence manufacturing base. This may not be a material factor in bilateral defence ties, but is relevant in the larger context of global power equations.

Five, rivalry with the US, which is both an ally and a competitor, is a powerful reason for major European countries to maintain a sizable, independent defence manufacturing base. This allows a degree of independence in foreign policy making and avoids complete subservience to the US. This rivalry with the US is being sharpened in relation to India because of improving India-US defence ties and the US success in bagging major defence contracts. In fact, the foreign military sales route is giving the US an edge as it excludes middlemen and, consequently, the problem of allegations of corruption that hobble acquisition decisions is avoided.

Six, it is important to note the increasingly ‘multinational’ nature of the European defence industry resulting from its consolidation through mergers and acquisitions on account of high costs of production, reduced domestic orders, the need for economies of scale and international competition. Various European countries have been forced to pool defence requirements and jointly fund production programmes. It is not only that complex defence products are now seldom purely ‘national’, but also that European products are likely to contain even US-made components.

Of European companies active in India, the European Aeronautics, Defence and Space company, for instance, combines some leading French, German and Spanish companies. Its missile branch was merged with the UK’s BAE systems and Italy’s Finmeccanica to form the MBDA. The Eurofighter is jointly produced by Germany, Britain, Italy and Spain. Dassault, whose Rafale has been selected in preference to the Eurofighter, is owned by the Dassault Group (50.55 per cent) and the EADS (46.33 per cent), the manufacturer of the Eurofighter. Thales, another French company involved in major Indian defence programmes, is tied up with the US’s Raytheon and the UK’s BAE which, in turn, is the manufacturer of the Hawk trainer aircraft sold to India and will supply Ultra Light Howitzers to India through the FMS route on account of its several American acquisitions. In view of these links between European defence companies — and this sector has been largely privatized — the reality of dealing with ‘individual’ European countries gets diluted, although at the political level the commitment of individual governments to forging defence ties with India in depth can be differentiated.

That India should be the world’s largest importer of arms is a serious indictment of the state of indigenous defence manufacturing. India should have built domestic capability on an accelerated basis in view of the enduring combined threat from China and Pakistan and Western technology denial regimes applied to us. India cannot have genuine strategic autonomy without possessing an independent defence production base. We have, unfortunately, not been able to leverage our large-scale imports for obtaining the level of transfers of technology needed by us. Fortunately, the size of the Indian market has persuaded countries like France and Germany to reduce their defence supplies to Pakistan.

With the lifting of the nuclear sanctions on us and Western support for our membership of key technology denial regimes, meaningful technology transfers to us are now more possible in principle. The offsets policy can enlarge our domestic manufacturing base with participation by European companies, but unless the present 26 per cent ceiling on foreign direct investment is increased to at least 49 per cent, it would be on a sub-contractual basis, with serious technology transfers remaining elusive.

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