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Comparative Strategy

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State vs. market in India: How (not) to integrateforeign contractors in the domestic defense-industrial sector

Moritz Weiss

To cite this article: Moritz Weiss (2018) State vs. market in India: How (not) to integrate foreigncontractors in the domestic defense-industrial sector, Comparative Strategy, 37:4, 286-298, DOI:10.1080/01495933.2018.1497323

To link to this article: https://doi.org/10.1080/01495933.2018.1497323

Published online: 06 Feb 2019.

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State vs. market in India: How (not) to integrate foreigncontractors in the domestic defense-industrial sector

Moritz Weiss

Geschwister-Scholl-Institute for Political Science, Ludwig-Maximilians-University Munich, Munich, Germany

ABSTRACTIndia has evolved not only as a rising power in Asia, but as the world’slargest arms importer. While facing some international threats, its defense-industrial policy is primarily driven by domestic opportunities and con-straints. India’s enormous market size enables technology transfers,whereas domestic factors fundamentally exacerbate their effective utiliza-tion. Most significantly, attempts to liberalize the defense industries facethe challenge of missing institutional prerequisites and political resistanceagainst reforms. To date, the predominance of state institutions has pre-vailed. This conclusion is derived from combining data on general trendswith the exploration of one recent process of fighter-aircraft acquisition.

Introduction

From an international perspective, India is today evolving as a rising power. However, its growthof military strength does not create severe global concerns, as its increasing capabilities are largelyregarded as defensive.1 While India is confronted with security competition in its neighborhood(especially Pakistan, and also China), its environment, nonetheless, provides some room of man-euver to address existing threats. In 1991, the initial founder of the nonalignment movementshifted its foreign policy view toward a Look East Policy; and recently to an Act East andNeighbourhood First Policy under the Narenda Modi government. India’s general outlook is con-tinental, rather than maritime.2 Although naval investments are also rising, the army is still themost powerful military service. Yet, India’s strategic culture is mostly characterized as defensiveand inward-looking, which is largely driven by its geography, great-power status, and the colonialpast.3 Given that India faces constant, but manageable, international threats, the international sys-tem allows the government to act on the global arms market without strong strategic limitations.

From a domestic perspective, however, India’s defense sector remains—despite recent attemptsof liberalization—constrained. It is predominated by public and thus politically accountable actorsand institutions. Foreign defense contractors face a situation of a highly regulated and protecteddefense sector, which complicates any technology transfers from more advanced defense-indus-trial nations. The defense bureaucracy has a lot of influence in the Ministry of Defence at theexpense of the armed forces, so arms acquisition and technology absorption are dominated bycivilian technologists rather than by the military end users. In particular, the Defense Researchand Development Organization (DRDO) predominates the innovation of weapons in India, andstate-owned industries serve the function of production agencies. Yet, India’s goal of self-relianceand uncoordinated activities hinder technology transfer and lead to delays.4

CONTACT Moritz Weiss moritz.weiss@gsi.lmu.deColor versions of one or more of the figures in the article can be found online at www.tandfonline.com/ucst.� 2018 Taylor & Francis Group, LLC

COMPARATIVE STRATEGY2019, VOL. 37, NO. 4, 286–298https://doi.org/10.1080/01495933.2018.1497323

Against this backdrop, the questions arise of what drives India’s defense-industrial policychoices? To what extent do domestic triggers prevail over international factors? This article arguesthat domestic constraints represent the main challenge for a more effective—and efficient—build-up of India’s defense industries. Indeed, the government may choose among a variety of potentialsuppliers world-wide; yet, it is largely incapable to exploit its enormous domestic market for tech-nology transfers beyond relatively simple manufacturing. While the impact on India’s generationof military capabilities is arguably difficult to specify, the available evidence suggests that India’spotential, at least, remains underexploited.

This article arrives at this conclusion by proceeding in two interrelated steps. The followingsection introduces India’s defense-industrial sector and, afterwards, addresses India’s arms pro-curement regulations to better understand the opportunities and challenges of the country whenit acquires large military platforms, such as combat fighter aircraft. This general trend is—in asecond step—illustrated by exploring one particularly prominent procurement process, the recentacquisition of combat fighter aircraft in the so-called Medium-Multi-Role Combat Aircraft(MMRCA) contest.

Opportunities and constraints in India’s defense-industrial sector

India’s defense industries have decent productions facilities, but not an across-the-board capabil-ity for research and development.5 Historically, India was left into independence without a genu-ine defense-technological sector. With the exception of some ordnance factories, the Indian statewas missing a defense-industrial base. Given the combination of this lack with its policy of nona-lignment, the state’s political objective gradually shifted from self-sufficiency toward the notion of“self-reliance,” which “permits technology acquisition from foreign suppliers, but with the inten-tion that this dependency would eventually be reduced through ‘indigenisation.’”6 As a result, thegovernment necessarily needed to collaborate with potent arms suppliers. To date, the sector’sstructural weakness is, however, illustrated by Figure 1, which contrasts arms imports and exportssince the end of the Cold War.

In addition, it seems valuable to dig one step deeper and to give an overview of India’s mostimportant arms suppliers (Figure 2). The four major arms suppliers—Russia, the United States,Israel, and the United Kingdom—are jointly responsible for more than 80 percent of all Indianarms imports (and Russia individually for 65 percent).

Figure 1. India’s arms imports and exports since 1990. Source: Data from SIPRI, 1990–2015 (http://armstrade.sipri.org/armstrade/page/values.php).

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Furthermore, in order to better understand India’s defense procurement from foreign sources,we need to focus on its state-owned defense public sector undertakings (DPSUs). In fact, they arehighly vertically integrated, so that India has not had a broad base of component suppliers at itsdisposal.7 For instance, Hindustan Aeronautics (HAL) possesses end-to-end capabilities. It produ-ces both airframes and engine, which is a constellation completely absent from the West’sdefense-industrial sector, where these key tasks are always accomplished by separate—and thus,specialized—firms.8 The government’s objective has always been to import selective foreign tech-nologies for modernizing its own economy—yet retaining state control over the structure ofnational business. This actor constellation and the resulting rents have historically created power-ful interest groups within the state-run sector.9 The “Indian private sector has always been por-trayed as being discriminated against with the government favouring state-owned defenceindustries.”10

Up to the 1980s, India’s license production limited domestic development to a considerableextent. “Although license production has been a stable form of production, it has not made Indiaself-reliant in terms of upper-ends of defence production, especially in the field of design anddevelopment.”11 As a consequence, the Indian government increasingly promoted coproductionand—if possible through one of the so far 26 joint ventures—co-development programs (e.g.,Sukhoi-HAL; BAe-HAL; Rolls-Royce, and Tata). Within this context, the new defense procure-ment procedures (DPP) also established opportunities for private Indian companies—after havingpassed a clearance of the Defense Acquisition Council—to become increasingly involved in themanufacturing of armaments.12 Moreover, the sources of military equipment have increasinglybeen diversified. While Russia is still the most important partner, major weapon systems mean-while stem from Israel, the U.S., the UK, South Africa, France, and others.13 Through arms col-laboration with these different partners, the Indian government ultimately aims to advancetechnologically by capitalizing on the huge size of its domestic market, which has meanwhileevolved as the largest import market for worldwide (Figure 3).

Yet, not only the sheer size, but tremendous growth makes India a favorable partner for allcompanies and states. After all, its defense market quadrupled from $3 billion in 2000 to $12.2billion in 2010.14 Whereas coproduction has gradually evolved as the norm, co-development is ofincreasing importance, albeit so far rather the exception.15 For example, India’s aerospace indus-tries may have critical “know-how,” yet largely lack the “know-why.”16

Figure 2. India’s arms imports by weapon supplier since 1990. Source: Data from SIPRI, 1990–2015 (http://armstrade.sipri.org/armstrade/page/values.php).

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To date, India’s defense industries have almost exclusively been state-driven. There are tenDPSUs (including about 39 ordnance factories),17 a defense research and development organiza-tion with a network of about 51 laboratories, and a similar amount of science and technologyunits, which are linked to almost 70 academic institutions. Today, the DPSUs are still the onlyrelevant defense firms in India. Whereas some Western companies have incrementally enteredthe market, the industry structure remains tilted towards the DPSUs, which has not always beena success story: India “has sufficient political and economic power to demand levels of technologytransfer that could conceivably transform its aviation sector. However, the country’s underper-forming state-run military aircraft manufacturer [i.e., HAL] still requires major reform, while theIndian defence sector as a whole lacks clear strategic direction.”18

Nevertheless, there are also several indications that liberalizing efforts may be extendedtoward the defense-industrial sector. For instance, defense management has been under con-stant reform since the mid-1990s. On the one hand, international collaboration shouldincreasingly follow a value-for-money ratio to reduce development costs and to provide newopportunities for potential Indian exports. On the other hand, there were some moderate pri-vatization efforts, coordinated via an army-industry partnership. It primarily aimed for greaterparticipation of private firms in the arms production process. Yet, their response has beenhesitant. Only the large companies, such as Tata’s and Larsen & Tubro, have increasinglybeen involved in the sector, whereas smaller firms merely show an increasing interest indoing defense business in the future.19

Historically, the Indian government had restricted both private and foreign investments intoits defense-industrial sector. Yet, since 2001, private investors may acquire 26 percent of Indiandefense entities and, today, even a 49 percent share is possible on a case-by-case basis.20 In add-ition, it removed an earlier provision related to the control of joint ventures, which had requiredthe single-largest resident Indian shareholder to have at least a 51 percent equity share. However,there remains one major obstacle: large multinational companies are highly concerned about theburgeoning bureaucracy and the protection of their intellectual property rights.21 Thus, thedemand for joint ventures or similar involvements are rather modest among private investors.The amount of FDI inflows in the Indian defense sector from April 2000 until December 2015

Figure 3. The world’s five largest arms importers between 2011 and 2015�. Source: Data from SIPRI, 1990–2015 (http://arm-strade.sipri.org/armstrade/page/values.php). �Largest importers during 2011–2015 as specified in SIPRI’s "Trends in InternationalArms Transfers, 2015" (http://www.sipri.org/googlemaps/2016_of_at_top_20_imp_map.html).

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was only $5,020,000, whereby it contributes less than 1 percent to all of India’s FDI during thattime span. The defense sector is therefore ranked as sector 61 of 63 when it comes to FDI.22 Thestate recently responded to this failure by specifying a “government approval route” of up to 100percent foreign ownership for instances providing access to modern technology in June 2016.23

Yet, the prospect for success is not clear.Defense procurement is predominantly based on (noncompetitive) intergovernmental pur-

chases. More than two-thirds of all acquisitions between 2000 and 2010 were concluded in thismode, whereby they normally include a crucial role for India’s state-owned defense companies,the DPSUs, who are licensed to produce the contracted equipment (e.g., Sukhoi Su-30 atHindustan Aeronautics Limited/HAL).24 As a result, India’s defense procurement is often ina stalemate:

The complexity of the acquisition procedure itself, the competition between the domestic defense researchestablishment and the armed forces, the failure of civilian security managers often to understand bothnational defense requirements and the utility of specific military technologies, and the chokehold exercisedby the Ministry of Finance in important matters pertaining to defense have all contributed collectively tothe pathologies of defense acquisition in contemporary India.25

Since 2002, however, a new DPP is in place. Enforced by several revisions and amend-ments, the objective is to increase offsets and to apply them as a strategic policy instrument.For instance, a new amendment in 2012 addresses micro-, small, and midsize enterprises andacquisitions of specific technologies by the Defense Research & Development Organization,which should receive a multiplier of offset credits in order to promote the integration ofthese suppliers into the defense sector. Another amendment in 2013 established a selectionprocess which provides strong incentives for India’s private sector to team up with globalfirms to compete for contracts. As a result, the procurement process is increasingly designedin terms of market prerogatives to capitalize on its own size and to move the defense-indus-trial sector from coproduction toward co-development projects. Yet, the effects are mixed atbest, as the former secretary of defense production admitted in 2010: “Our [defense] industryhas been in the habit of taking transfer of technology and building under license until theproduct dies a technological death. There is no expenditure on R&D and no technologyabsorption.”26 Whereas the sector’s output had been modest, defense management of stateauthorities is not a persuasive success story: “the ability to build up a set of capabilities thatare justified by a national strategy is virtually non-existent in India. The civilian leadershiphas no clue about defence requirements.”27

In sum, India’s defense industries have largely remained state-dominated. The sector is charac-terized by coproduction agreements with foreign sellers, implemented by state-owned DPSUs asproduction agencies, which have not gained strong development skills over time but rather a sta-ble reputation for underperformance. Today, the defense-industrial sector is dramatically growing,whereas foreign direct investment is still negligible. These characteristics are complemented by acomplex and state-dominated procurement process. Liberalizing reforms in the previous decadewere aiming for more efficiency through competition, but have so far been only reluctantlyimplemented.

Against the backdrop of these domestic constraints, the next section focuses on the so-calledMedium-Multi-Role Combat Aircraft (MMRCA) procurement process from its market-orientedinception toward the renunciation of the competitive procurement procedures in spring 2015.Rather than with technology transfers, India’s return to a government-to-government deal withFrance ultimately provided the country with combat aircraft off-the-shelf only. Hence, the follow-ing process analysis will not only illustrate the prevailing impact of domestic factors, but alsohow defense-industrial relations ultimately constrain India’s build-up of technological as well asmilitary capabilities.

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The MMRCA: Domestic constraints to liberalizing India’s defense sector

As a vital part of the desired transformation toward a more efficient defense sector, the Indiangovernment issued the so-far largest open tender for 126 combat aircrafts—worth up to $20 bil-lion—since 2007. The MMRCA, which was meant to become “the mother of all defence deals,”28

invited the world’s high society of defense contractors to promote their jets and, in turn, to offersignificant technology transfers: F-16 and F-18 from the United States, MiG-35 from Russia,Gripen from Sweden, Eurofighter from various EU countries, and the Rafale from France. The lat-ter won the competition and entered government-to-firm negotiations in January 2012. Yet, inApril 2015, after more than seven years of applying market mechanisms to the procurement pro-cess, the Indian government re-replaced competitive tendering by a simple intergovernmentalpurchase of a reduced number of fighter jets from France.29 Modernization through markets, andthus the integration of foreign contractors within India’s defense-industrial sector, had argu-ably failed.

This section seeks to explore the MMRCA process and suggests that domestic constraints wereprimarily responsible for the failure. It is argued that a defense market cannot be established bymerely setting strong incentives or following globally accepted standards of governance. Instead,the existence of effective political-economic institutions serves as an important prerequisite offunctioning market relationships to evolve. Empirically, the article examines the implementationof India’s initial market choice in 2007 up to the ultimate decision for a state-run approach in2015. It is shown how legal uncertainty and a shortage of private partners led to frictions in theimplementation of the market-based MMRCA. Its ultimate failure was triggered by politicalresistance of the bureaucracy and the state-owned defense industries. The ambiguity of rules andunintended consequences of initial choices empowered these defenders of the status quo so thatthe government shifted back to a state-run approach. In short, domestic constraints prevailed.

Contradictions between India’s defense-industrial sector and a market-based approach

First, several instances of problematic legal protection evolved during the procurement process.These were not unique to the MMRCA, but rather a more widespread characteristic of Indianauthorities’ negotiations with private arms contractors.30 Against this backdrop, India’s mostprominent expert group—the so-called Kelkar Committee—had made eleven recommendations ofhow to organize defense acquisitions, whereby ten of them aimed to increase transparency andlegal certainty.31

Most significantly, the lack of legal certainty negatively affected the sensitive nature of technol-ogy transfers. Their legal provisions were designed according to historically established intergov-ernmental purchases “rather than taking the form of minimum government-purpose IPRs[intellectual property rights] in contractually mandated deliverables in terms of design, form, fitand function data and other technical documentation, irrespective of manufacturing by the sup-plier or by the supplier’s sub-contractors.”32 While the government could previously adjustambivalences concerning property rights according to political considerations, commercialexchanges were becoming highly problematic under the less flexible conditions of arm’s-lengthtrade.33 In other words, the government had chosen a market-based approach; yet, the more spe-cific procedures continuously required political bargaining practices rather than the consistentapplication of legal provisions.

This sense of legal uncertainty about property rights increasingly came to the fore whenIndia’s government entered commercial negotiations with French private contractor Dassault afterJanuary 31, 2012.34 The latter had defeated the competitors on the basis of, first, technical and,second, monetary evaluations. Put simply, these negotiations were about the exchange of propertyrights between Dassault, on the one hand; and India’s government, on the other. Yet, it was not

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about exchanging material assets in the form of delivering components, but about technologytransfers and thus the process of system integration invented and owned by Dassault: What makesmodern technology ‘modern’ is not the blueprints or designs, but rather the process. Westerntechnological superiority is not based on designs it is based on process. To acquire these proc-esses, we [India] need to guarantee solid intellectual property protection.”35 Consequently, tech-nology transfers in terms of the coproduction agreement with the DPSU, HAL, evolved not onlyas the centerpiece of commercial negotiations, but also as the main obstacle to India’s build-up ofmilitary capabilities.

In particular, accountability under the condition of ambivalent property rights was at stake: whowould be responsible for potential delays and cost overruns of 108 coproduced jets by HAL? AsHAL had a reputation for inefficiencies in handling complex manufacturing and technology trans-fers, Dassault proposed to arguably clarify property rights and thus accountability by having separatecontracts for the 18 and the 108 aircrafts, respectively. Yet, this contradicted the terms of the mar-ket-based approach so that the Indian MoD “completely rejected this suggestion and made it clearto Dassault that it will be solely responsible for the sale and delivery of all 126 aircraft.”36 In contrastto previous weapon acquisitions, India’s contract partner was now a private firm highly concernedabout its property rights (e.g., process of system integration), rather than a government interested ina wide spectrum of potential gains. While an intergovernmental purchase was largely complemen-tary to a vague protection of property rights, the latter constituted a contradiction between India’sinstitutional setting and the requirements of a market-based approach.37

Second, not only some of the legal conditions contradicted arm’s-length contracting, but alsoprivate firms remained structurally constrained in India’s defense-industrial sector. The expansionof private business was exacerbated at both the legislative and the organizational level. WhileIndia’s defense procurement policy (DPP)—despite several amendments—continuously favoredstate industries in numerous critical areas,38 private firms were systematically deprived of accessto the Department of Defense. For instance, the “secretary of the Department of DefenceProduction does not have a dedicated wing under his command to examine issues related to pri-vate industries.”39

Beyond these structural constraints, the bureaucracy continuously endorsed informal coordin-ation through historically evolved channels rather than by formal contracting with privateactors.40 This excluded—or, at least, did not integrate—foreign and private suppliers of defensegoods. Yet, putting, for example, offset agreements into practice as part of the MMRCA tenderwould have necessarily required engaging private actors, because the extent was too large for stateindustries to absorb.41 Indeed, the MMRCA should have promoted private entry into the defensesector; yet, property rights were insufficiently protected and state-owned companies should con-tinuously be sheltered from potential competition. The “Indian private sector has always beenportrayed as being discriminated against with the government favouring state-owned defenseindustries.”42 In turn, “over-lapping institutional mechanisms” and “non-accountability”43 couldbe better compensated by an intergovernmental purchase, where political flexibility trumpedtransparency and legal certainty.

In sum, the discrepancies between India’s existing prerequisites and the requirements of theMMRCA implied that the deep-seated pervasiveness of the state could not be changed fromscratch. Instead, it was deeply embedded in its institutional structures and thus shaped seriousconstraints on India’s build-up of military capabilities by a market-based approach.

The political resistance against the market-based approach

Governments can hardly implement reforms unilaterally. Instead, they need to build coalitionsamong the most relevant stakeholders. Within the context of the MMRCA, the defense bureau-cracy primarily organized the procurement process, HAL served as production agency across the

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supply chain, and the IAF was the end user and thus the technical evaluator. The latter’s primaryinterest was in modern military capabilities from Western states, whereas the choice of a market-based approach vs. an intergovernmental purchase was of less importance.44

However, the most powerful coalition of India’s defense sector was the informal alliancebetween civilian bureaucrats (e.g., DRDO, Ministry of Defense, Ministry of Finance, CabinetSecretariat) and state-owned defense companies (e.g., HAL), both of which largely preferred inter-governmental purchases to extract rents from the existing system. Close and often informalexchanges between policymakers, bureaucrats, and partly the armed forces were the primarycoordination mechanism of this coalition.45 This kind of state prevalence was reinforced by thefact that DPSUs were not only the most powerful actors, who integrated military platforms at theend of the supply chain, but they coproduced themselves large parts of components and subsys-tems. In fact, a monopolist supplier—rather than the market—had supplied military platforms.The corollary was strong vertical integration in the defense sector, a weak private supplier base,and unfamiliarity in horizontal market exchanges.46 Existing stakeholders had benefited from thisinstitutional status quo as the defense market was substantially rising since the mid-1990s: “Thereare too many bureaucrats who have vested interests in keeping these white elephants [i.e.,DPSUs, such as HAL] going.”47

Their exercise of power was pervasive in India’s defense-industrial policymaking system as ithad remained under-balanced in practice by private actors with a preference for a market-basedapproach.48 In contrast to smaller developing states, the sheer size of India’s domestic market hadprovided the government with a strong bargaining position vis-�a-vis foreign vendors to achieve atleast some technology transfers and lucrative offset deals for its state-owned industries. As aresult, neither foreign capital nor private defense firms were required for domestic arms produc-tion.49 Given that the involvement of private firms was historically not necessary, private actorshad not sufficiently gained a foothold in India’s arms production, resulting in negative feedbackprocesses. There was severe shortage of societal allies, as most actors were predisposed towardnoncompliance with market exchanges. Hence, the question arises of how this coalition couldunfold its political influence on the MMRCA.

First, market-based rules were ambiguous to the extent that they opened up a political spacefor potential reform losers to delegitimize the government’s approach. Already the precise formu-lation of a competitive request for proposals (RfP) had raised serious problems. The consequencesof this cumbersome process were two-fold. It harmed not only the reputation of the contractingauthorities, but it also inhibited capitalization from offsets by integrating domestic private firms.The demand issued for offsets was initially so large that India’s industry could hardly absorb it.Given the insufficient coordination with private defense industries, the government suddenlyturned—in the midst of the ongoing process—back from its initial requests. This ambiguity exa-cerbated compliance and smooth implementation. Long after the competitors had submitted theirproposals, the Indian authorities allowed for indirect (i.e., not defense-related) offsets by revisingsome parts of the DPP in January 2011.50 Thus, the government could no longer gain securitybenefits from its market-based approach. This weak performance deprived some of the defense-sector’s interest groups from expected benefits and, thus, damaged the reputation of the contract-ing authorities. Accordingly, criticism of managing the MMRCA often served as the point ofdeparture for them to question the market-based approach itself and to propose the allegedlymore efficient intergovernmental purchase.51

Second, the initial choice of a market-based approach led to several unintended consequences.For instance, the government’s deliberate decision for implementing the procurement by thesophisticated criterion of life-cycle costs, rather than much simpler fly-away costs, affected thecommercial negotiations with Dassault in 2015. While the IAF has never promoted this proced-ure, both the Ministry of Finance and the Cabinet Office stressed its huge opportunities.52 Incontrast, India’s defense-finance bureaucracy had always been critical toward reforms, such as

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life-cycle costing, and exercised its power by repeatedly sabotaging this approach. However, it isimportant to note that this domestic alliance was equipped by powerful arguments, since the life-cycle costs approach was chosen for long-term economic reasons, whereas the government hadneglected the immediate legal repercussions.53

This problematique became evident after the down-selection of the Rafale and the Eurofighter,when the new phase of the procurement process targeted a feasible combination of costs andtechnology transfers. One challenge was, for the first time in India’s procurement history, toarrive at an ownership/life-cycle cost of both aircrafts over a 40-year/6.000 hr. run.54 Yet, themore severe challenge was to establish comprehensible results, possibly standing up in courtagainst the defeated competitor’s litigation. In other words, a formal appeal with reference to life-cycle costs was comparably simple given the inherently contested nature of these calculation mod-els. For instance, Dassault had sued Korean authorities for procedural reasons, because it had losta similar competition in 2002.55 The precedence was set. Although the opportunity of legalrecourse was an unintended consequence of an economically induced choice, it increasinglyevolved as a sword of Damocles for the MMRCA as a whole. Air Marshal Matheswaran, who wasresponsible for the MMRCA process on behalf of the Indian Air Force, admitted that “the pro-curement got stuck in the intricate cobwebs of the acquisition process that we created.”56

At the very moment that the Indian government would have signed a final contract withDassault, the five losers of the competition could have potentially turned to Indian courts andlegally attacked the government’s decision.57 This is common practice in more liberal marketeconomies, but would have resulted in further delays and legal uncertainty for both the govern-ment and the Indian Air Force. Building on information deliberately provided by opponents ofthe market-based approach, the potential lawsuit could be either based on the tender poorlydrafted, or on noncompliance within, the evaluation process.58

Most crucially, the “fear of corruption, or even the allegations thereof, which are usually lev-eled by the losers or other interested bystanders in a competition has had the stultifying effect ofeither paralyzing the acquisition process or delaying it interminably, or, on rare occasions, evennullifying procurement decisions already announced or on the cusp of being unveiled.”59

Opponents of liberal reforms could realistically threaten to undermine the successful conclusionof the MMRCA. Against this backdrop, the whole MMRCA process was suspended in April 2015,and a new—or, rather old—procurement procedure was inaugurated: a government-to-govern-ment deal with France.60

In sum, the available evidence suggests that India’s return to an intergovernmental purchasewas based on domestic constraints, which prevented not only the implementation of the initiallychosen market-based approach, but also the build-up of massive military capabilities.

Conclusion

This article departed from illustrating the general trends of India’s state-run defense-industrialsector, which had recently faced several liberal reforms, yet proved relatively resilient. The gov-ernment’s policy choices were subsequently explored in an investigation of one of the most prom-inent acquisition projects in recent years. I suggested that, first and foremost, domesticconstraints made the MMRCA competition fail. More specifically, the contradictions betweenIndia’s historically evolved defense sector and the prerequisites of markets shaped frictions.Neither sound legal protection was guaranteed beyond doubts; nor was a sufficient number ofprivate partners at the disposal of government reformers. In addition, the politics of implementa-tion revealed how some interest groups increasingly resisted reform efforts by exploiting ambigu-ous rules and capitalizing from unintended consequences of initial institutional choices like thelife-cycle costs criterion.

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Therefore, the article suggests that, if the preconditions for markets to function are largelyabsent, political flexibility—rather than transparency and legal certainty—will evolve as the keycurrency for resolving coordination problems. As a consequence, state-run practices reproduced ahistorically grown state-run sector and significantly exacerbated the integration of foreign con-tractors in India’s defense-industrial sector. In short, domestic constraints prevailed over theopportunities provided by international factors and prevented the build-up of India’s militarycapabilities.

Notes

1. Aseema Sinha, “Partial Accommodation without Conflict: India as a Rising Link Power,” inAccommodating Rising Powers: Past, Present, And Future, edited by T. V. Paul (Cambridge: CambridgeUniversity Press, 2016), 222–46; Sandy Gordon, India’s Rise as an Asian Power. Nation, Neighborhood,and Region (Washington, DC: Georgetown University Press, 2014).

2. Gordon, India’s Rise as an Asian Power, 112–13.3. Chris Ogden, Indian Foreign Policy (Cambridge: Polity Press, 2014), 34–35.4. Kartik Bommakanti, “Innovation in Strategic Technologies: India’s Experience in a Conceptual and

Historical Context,” in India’s Military Modernization: Strategic Technologies and Weapons Systems, editedby Rajesh Basrur and Bharat Gopalaswamy (Oxford: Oxford University Press, 2015), 18–19, 38–41. Thisview was also expressed by several Indian interviewees; for instance, by a former undersecretary of thedefense accounts department (Ministry of Defense; Frankfurt/New Delhi: February 9, 2018 [phone]).

5. “By the end of the Cold War, India was 100 per cent reliant on Soviet-era material for its ground-airdefence, 75 per cent dependent on Soviet equipment for its fighter aircraft defence, 60 per cent for itsground attack aircraft, 100 per cent for its tracked armoured vehicles, 80 per cent for tanks, 100 per centfor its guided missile destroyers, 95 per cent for its conventional submarines, and 70 per cent for itsfrigates.” Manjeet S. Pardesi and Ron Matthews, “India’s Tortuous Road to Defence-Industrial Self-Reliance,” Defence & Security Analysis 23, no. 4 (2007): 426; see also Richard A. Bitzinger, “Prospect forFuture Indo-European Defence Industrial Cooperation,” Policy Brief (Nanyang Technological University:RSIS, August 2014).

6. Pardesi and Matthews, “India’s Tortuous Road,” 420; see also Richard A. Bitzinger, “China vs. India: TheGreat Arms Contest,” RSIS Commentary, May 4, 2016.

7. Interview with policy expert from think tank on the MMRCA (Frankfurt/New Delhi: February 9, 2018[phone]). See also Brajesh Chhibber and Rajat Dhawan, “A Bright Future for India’s Defense Industry?”McKinsey on Government, Spring 2013, 46.

8. Ashley J. Tellis, Dogfight! India’s Medium Multi-Role Combat Aircraft Decision (Washington, DC:Carnegie Endowment for International Peace, 2011), 59–60.

9. Laxman K. Behera, “India’s Defence Public Sector Undertakings: A Performance Analysis,” Journal ofDefence Studies 3, no. 4 (2009): 118–30; Trefor Moss, “Eastern Fast Air,” Jane’s Defence Weekly, August17, 2011.

10. Vinod K Mishra, “Remarks on ‘Streamlining India’s Defence Procurement System,’” Observer ResearchFoundation (ORF) Seminar Series (New Delhi: ORF, 2012).

11. Deba R. Mohanty, Changing Times? India’s Defence Industry in the 21st Century (Bonn: BonnInternational Center for Conversion [BICC], 2004), 26.

12. Rahul Bedi, “India Struggles to Break Free of Imports,” Jane’s Defence Weekly, July 20, 2011.13. Pardesi and Matthews, “India’s Tortuous Road,” 424–29; Jane’s Defence Weekly, “Briefing: Indian Air

Force Capabilities—High and Mighty,” Jane’s Defence Weekly, February 2, 2011.14. Chhibber and Dhawan, “A Bright Future?” 45.15. See also Jane’s Defence Weekly, “Briefing: Indian Air Force Capabilities.”16. Tellis, Dogfight! India’s Medium Multi-Role Combat Aircraft Decision, 62.17. Stephen P. Cohen and Sunil Dasgupta, Arming without Aiming: India’s Military Modernization

(Washington, DC: Brookings Institution Press, 2013); Pardesi and Matthews, “India’s Tortuous Road,”432. The DPSUs are: BEML, Bharat Dynamics Limited, Bharat Electronics Limited, Goa ShipyardLimited, GRSE, Hindustan Aeronautics Limited, Hindustan Shipyard Limited, Mazagon Dock Limited,Mishra Dhatu Nigam Limited, and Ordnance Factory Board.

18. Moss, “Eastern Fast Air”; See also Chhibber and Dhawan, “A Bright Future?” 46. A similar conclusioncan be drawn from Department of Industrial Policy and Promotion and Department of DefenceProduction 2017; as well as from www.makeinindiadefence.gov.in/.

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19. Pardesi and Matthews, “India’s Tortuous Road,” 428; Chhibber and Dhawan, “A Bright Future,” 51; seealso Deba R. Mohanty, “From MIC to NSIC,” ORF, October 11, 2011, www.orfonline.org/research/from-mic-to-nsic/.

20. International Institute for Strategic Studies (IISS), The Military Balance 2015 (London: IISS, 2015),220–22, 220; Department of Industrial Policy and Promotion, “Foreign Direct Investment,” www.makeinindia.com/policy/foreign-direct-investment (accessed March 7, 2016). The revised FDI policy alsoremoved an earlier provision related to the control of joint ventures, which required the single-largestresident Indian share-holder to have at least a 51percent equity share. Under the new regulations,however, this shareholder now has the power to appoint a majority of the directors in a joint venture.IISS, The Military Balance 2015, 221.

21. Chhibber and Dhawan, “A Bright Future,” 53; Dinakar Peri, “Rafale Deal to Boost Strategic Partnership,”The Hindu, April 11, 2015.

22. Department of Industrial Policy and Promotion, “Quarterly Factsheet on Foreign Direct Investment,”2015, 10, http://dipp.nic.in/English/Publications/FDI_Statistics/2015/FDI_FactSheet_OctoberNovemberDecember2015.pdf.

23. The Hindu, “It’s 100% FDI in Most Sectors, Including Defence,” The Hindu, June 20, 2016, www.thehindu.com/news/national/Its-100-FDI-in-most-sectors-including-defence/article14434009.ece; P. R.Sanjai, “India Allows 100% FDI in Defence via Govt Approval,” June 20, 2016, https://www.livemint.com/Politics/25SUpO8jkE9v9jjAQv72LL/India-allows-100-FDI-in-defence-via-govt-approval.html; see alsoDepartment of Industrial Policy and Promotion and Department of Defence Production, “DefenceManufacturing Sector: Achievements Report” (New Delhi, February 13, 2017).

24. Chhibber and Dhawan, “A Bright Future,” 45–46.25. Tellis, Dogfight! India’s Medium Multi-Role Combat Aircraft Decision, 10.26. Cited from Bedi, “India Struggles to Break Free of Imports.”27. Cited from Moss, “Eastern Fast Air”; See also Deba R. Mohanty, “Why India’s Defence Procurement Is

Problematic,” ORF, April 10, 2012, www.orfonline.org/research/why-indias-defence-procurement-is-problematic/.

28. Rahul Bedi and Damian Kemp, “Contenders Line up for Indian Fighter Contest,” Jane’s Defence Weekly,February 14, 2007; see also Chhibber and Dhawan, “A Bright Future,” 47.

29. Times of India, “Direct Purchase of 36 Fighters Will Alter Original Rafale Deal,” Times of India, April 11,2015; Amit Cowshish, “New Twist in the MMRCA Tail,” Comment (New Delhi: Institute for DefenceStudies and Analyses, April 15, 2015).

30. Comptroller and Auditor General of India (CAG), “Procurement of the SU-30K,” Audit (New Delhi:CAG, 2000); Comptroller and Auditor General of India, “CA 18 Air Force and Navy: Coast Guard,”Audit (New Delhi: CAG, 2008); Comptroller and Auditor General of India, “Acquisition of Helicoptersfor VVIPs,” Audit (New Delhi: CAG, 2013); See also Bitzinger, “Prospect for Future Indo-EuropeanDefence Industrial Cooperation”; Bitzinger, “China vs. India.”

31. Ministry of Defence, “Kelkar Committee Submits Report on Defence Acquisition,” Press InformationBureau, Government of India, April 5, 2005, http://pib.nic.in/newsite/erelease.aspx?relid¼8386.

32. Sandee Verma, “India’s Defence Procurement Procedure: Assessing the Case for Review and Reforms,”Institute for Defense Studies and Analyses Issue Brief (New Delhi: IDSA, 2014), 6.

33. Peri, “Rafale Deal to Boost Strategic Partnership”; see also IISS, The Military Balance 2015, 221.34. “Rafale Edges Out Eurofighter,” The Hindu, February 5, 2012; Jay Menon, Robert Wall, and Michael

Bruno, “Vive La MMRCA,” Aviation Week & Space Technology, February 6, 2012.35. Abhijit Iyer-Mitra, “In Defence of 100 per Cent FDI,” Observer Research Foundation Analysis (New

Delhi: ORF, 2014).36. Agence France-Presse, “Report: India-France Rafale Deal Stalled,” Defense News, April 5, 2013; see also

Agence France-Presse, “Indian Negotiator for Giant Rafale Fighter Deal Dies,” Defense News, October3, 2013.

37. This legal uncertainty was even enhanced by the corruption problematique. While several complaints wereraised that “procedural deviations” had enabled the Rafale to evolve as the preferred bidder of theMMRCA, the government rejected these specific objections (Rahul Bedi, “MMRCA in Trouble overEvaluation ‘Irregularities’” Jane’s Defence Weekly, March 28, 2012). At the same time, however, therequired collaboration with DPSUs (especially technology transfers) introduced coordination on the basisof reciprocity and often informal alliances, both of which could contradict a market-oriented approach.Former Defense Minister Antony admitted that “Efforts to indigenize manufacturing are beset bycumbersome and complex bureaucratic procedures, technological over-reach and limited RandD” (citedfrom Bedi, “India Struggles to Break Free of Imports”), all of which were hardly compatible withcompetitive (or, at least, contestable) tendering.

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38. Mohanty, “Why India’s Defence Procurement Is Problematic”; see also Mishra, “Remarks on‘Streamlining India’s Defence Procurement System.’”

39. Deba R. Mohanty, “Military Indianisation: Are We Heading the Right Way?” ORF, June 15, 2011, www.orfonline.org/research/military-indianisation-are-we-heading-the-right-way/.

40. Interviews with former German ambassador to India (Berlin, August 12, 2015) and former Germanmilitary attach�e in Delhi (Munich, October 19, 2015 [phone]). Both interviewees were directly involved inthe MMRCA and—independently from each other—stressed this argument.

41. Robert Hewson, “India Looks to Imminent MMRCA Programme RfP,” Jane’s Defence Weekly, July 25,2007; Bedi, “India Struggles to Break Free of Imports.”

42. Mishra, “Remarks on ‘Streamlining India’s Defence Procurement System’”; see also Iyer-Mitra, “InDefence of 100 per Cent FDI.”

43. Mohanty, “Why India’s Defence Procurement Is Problematic,” emphasis added.44. Interview with a senior official of the IAF (Frankfurt/New Delhi, January 25, 2018 [phone]); interview

with a former German military attach�e in Delhi (Munich, October 19, 2015 [phone]).45. Behera, “India’s Defence Public Sector Undertakings”; Verma, “India’s Defence Procurement Procedure.”46. Interview with Air Marshal M. Matheswaran of the IAF, responsible for the MMRCA selection process

(Frankfurt/Chennai, February 3, 2018 [phone]).47. Moss, “Eastern Fast Air”; See also Standing Committee on Defence, “Indigenisation of Defense

Production—Public-Private Partnership” (New Delhi: Lok Sabha Secretariat, 2008), 19; Cohen andDasgupta, Arming without Aiming.

48. Interview with senior representative of involved prime contractor (Munich, March 2017).49. Peri, “Rafale Deal to Boost Strategic Partnership”; Pardesi and Matthews, “India’s Tortuous Road.”50. Hewson, “India Looks to Imminent MMRCA Programme RfP”; Rahul Bedi, “India Releases Delayed RfP

for MRCA Purchase,” Jane’s Defence Weekly, September 5, 2007; Aviation Week & Space Technology,“Diplomacy Will Play a Key Role in Fighter Competition,” Aviation Week & Space Technology, February7, 2011.

51. Laxman K. Behera, “India’s Interim Defence Budget 2014–2015: An Appraisal,” Comment (New Delhi:Institute for Defence Studies and Analyses, February 23, 2014); Cowshish, “New Twist in the MMRCATail”; See also Agence France-Presse, “Report: India-France Rafale Deal Stalled”; Agence France-Presse,“Indian Negotiator for Giant Rafale Fighter Deal Dies.”

52. Two interviewees who were involved in the implementation process emphasized the importance of life-cycle costing and its unfolding impact on the institutional choice in 2015. Interviews with former Germanambassador to India (Berlin, August 12, 2015) and senior official of defense contractor in Delhi (Munich,October 5, 2015 [phone])). See also Standing Committee on Defence, “Indigenisation ofDefense Production.”

53. Tellis, Dogfight! India’s Medium Multi-Role Combat Aircraft Decision, 69.54. Ibid., 66–67; “Dassault, Eurofighter, New Delhi Start Poring Over MMRCA Bids,” Aviation Week & Space

Technology, November 10, 2011; See also, “MMRCA Deal: Europe versus France Contest Begins forWorld’s Biggest Combat Aircrafts,” The Hindu, November 5, 2011.

55. “Dassault Sues Korea over Fighter Deal,” BBC News, April 4, 2002.56. Muthumanikam Matheswaran, “Rafale Deal: Much Needed Infusion for IAF,” South Asia Monitor, April

13, 2015, http://southasiamonitor.org/detail.php?type¼sl&nid¼11339.57. K.V. Prasad, “MMRCA Contract May Be Signed by September, Says Air Chief,” The Hindu, February

11, 2011.58. Several interviewees confirmed that defeated competitors had considered filing a lawsuit. Although

they deliberately arrived at the conclusion not to pursue this strategy (as other corporate activities inIndia could be damaged), this indicates the importance of this issue. Most crucially, the Indiangovernment could not be 100 percent certain about this possibility, which would have delayed theMMRCA for years.

59. Tellis, Dogfight! India’s Medium Multi-Role Combat Aircraft Decision, 9; see also Bedi, “MMRCA inTrouble”; “Don’t Corrupt Our People, Antony Tells Defence Companies,” The Hindu, July 13, 2011;Mohanty, “Why India’s Defence Procurement Is Problematic.”

60. Dinakar Peri, “Deadlock over Rafale Persists,” The Hindu, February 25, 2015; See also Dinakar Peri,“Rafale Deal Terms Non-Negotiable: Parrikar,” The Hindu, March 18, 2015; Times of India, “DirectPurchase of 36 Fighters Will Alter Original Rafale Deal”; Rahul Bedi and Fr�ed�eric Lert, “Modi AnnouncesRafale Buy,” Jane’s Defence Weekly, April 12, 2015.

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Notes on contributor

Moritz Weiss (moritz.weiss@gsi.lmu.de) is an assistant professor of international relations at the LMU Universityof Munich (Germany). His scholarship focuses on institutional theorizing, military innovation, and the politicaleconomy of defense-industrial policies. He is directing a research project on “Diversity or convergence? Explainingthe development of defense-industrial policies” (WE 3653/4-1), which is funded by the DeutscheForschungsgemeinschaft (DFG). Among other publications, he has published in Security Studies, European Journalof International Security, Review of International Political Economy, Journal of European Public Policy, and Journalof Common Market Studies.

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