2 minute readDelayed M-777 buy means higher price

Photo: BAE Systems

Photo: BAE Systems

The long-pending proposal for the purchase of 145 BAE Systems M-777 Ultra Light Howitzers (ULH) via a government-to-government (G2G) Foreign Military Sale (FMS) from the US has been shocked out of coma and cleared by the Indian Defense Acquisitions Council (DAC).

The potential sale was first notified by the US Defense Security Cooperation Agency (DSCA) to the US Congress in January 2010 for approximately USD 647 million. The Indian defense ministry submitted its Letter of Request for the artillery only in November 2012.

But in August 2013, the US DSCA announced a hike in the price of the 145 howitzers to USD 885 million in a notification to the US Congress.

The validity of the old price of USD 647 expired at the end of October 2013. BAE Systems also began winding down its assembly of the howitzers in this period with the end of existing orders, and it was understood that any order that came after this would have the price of reopening of the assembly line tagged on to it.

By this time, the US government had extended the validity of its offer five times, already.

The AK Antony-defense ministry under the previous government appeared incorrigibly obtuse about the imperatives for placing an order on a timely basis and by the end of 2013, it was widely assumed that only the next government would be in a position to consider the proposal.

In recent months, it is the prodding of the defense ministry by the army leadership on this acquisition that has led to the resurrection of the proposal to purchase the howitzers, and subsequent DAC approval.

But the approval at this time also means that India will have to bear a much higher price because of the weaker rupee.

The average exchange rate in January 2010 was INR 46.02 to the US Dollar, which is how the price was understood to be INR 2,900 crore at the time. But in today’s terms, USD 647 million comes to around 4,100 crore, and unless the rupee gains substantially against the dollar by the time the order is finally placed, this will be the effective price tag.

And even if there were only a marginal increase in the dollar price (since the revised price of USD 885 million was never actually conveyed to India), India will also likely have to bear the cost of raising the shutters and getting the line moving again.

On the bright side, besides a 30 percent offset requirement, it is also understood that an Indian partner could likely be involved in the Assembly Integration and Testing (AIT) of the system in India. More importantly, this could finally represent an end to the three-decade-long mess in acquisition of artillery by the army.

But like the DAC approval for the Airbus-Tata bid for the Avro replacement program, the M-777 acquisition will also have to first be approved by the finance ministry and the Cabinet Committee on Security, before any order is placed.

So what do you think?