CARNEGIE ENDOWMENT for INTERNATIONAL PEACE
no-cost-no-commitment trial system, which dominates the Indian government’s approach to major capital acquisitions, imposes extraordinarily high costs on both foreign and domestic private vendors. And the lengthy and often erratic processes of tendering, which frequently result in aborted tenders if corruption or procedural irregularities are suspected, end up imposing onerous burdens on foreign suppliers who have little to show for the time, money, and energy invested in such infructuous bids. Addressing these issues, among others, quickly would enable U.S. companies, all of which are largely private entities, to participate more successfully in India’s defense-procurement efforts to the benefit of both the Indian military and the U.S.-Indian strategic partnership. As New Delhi focuses on these hurdles, it should also address the other challenges associated with its defense industrialization. In recent years, even as India procured advanced weapons from abroad, it has increasingly required foreign suppliers to help develop its domestic base through coproduction and offsets as part of any successful contract. This is, in general, a sensible policy aimed at improving India’s technological capacity. However, New Delhi ought to be conscious of the fact that demanding offsets requirements can undermine its strategic objectives. A litany of complications could discourage potential overseas suppliers. If the offsets cannot be satisfied either because Indian industry sometimes cannot provide the goods and services required to meet the contractual obligations or because the offsets credits are not flexible enough, foreign suppliers could balk. If the financial penalties for failure to fulfill obligations are unreasonably high or if the period of performance is too short to enable satisfactory compliance, international providers could also be scared away. Beyond these specific problems, however, India needs to squarely face up to the fact that its current offset policies are ill-designed to advance what is ostensibly its principal goal: improving the level of technological sophistication so as to enable the country to develop and produce advanced weapons systems indigenously. The failures here reside less in the offset policies per se than in the structural context of their implementation. As a superb study of arms procurement reforms recently pointed out, India’s offset policies are simply “not conducive to joint technology-intensive ventures with leading global suppliers of key technologies.” That is not only because the country lacks “a sufficient stock of highly specialized technology manpower to undertake and sustain the [desired] high-tech production” but also because it does not yet possess “access to R&D capabilities with advanced technology infrastructure and laboratories supported by a robust policy to systematically pursue the task of acquiring critical technologies.”32 The Indian government’s quick fix to this problem is unlikely to work either. Merely requiring Indian private or state-owned entities to develop joint ventures with foreign counterparts in order to hurriedly acquire advanced technology will not be sufficiently attractive to any foreign partner if there are uncertainties about the durability of these cooperative arrangements, the denial of majority stakes to the outside investor, and weak protections accorded
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Opportunities Unbound