The US Deputy Secretary for Defense Ashton Carter has come to New Delhi with a bag full of prospects for partnerships to entice India.
Carter has come with at least five proposals for co-development or co-production of US-origin military equipment in India, which, admittedly, have the potential to take Indo-US defense trade to a new level. These include development and production partnerships for:
But in return, the US is looking at the Indian defense ministry to make it easier for US companies to do business with it. One of the important items on the wishlist of US vendors is flexibility on offset structuring. India typically requires international defense companies to plow back at least 30 percent of the value of any orders they receive that are worth INR 300 crore (USD 50 million) or more into Indian industry.
Flexibility on offsets
So, for instance, for items of co-development and co-production such as those listed above, US companies would like such programs to be exempt from offset requirements, altogether, arguing that the nature of such programs is such that they directly service the purpose of offsets by boosting the manufacturing and technological base of Indian defense industry.
And even for other orders through, both, Foreign Military Sales (FMS) and Direct Commercial Sales (DCS), US vendors are hoping for Carter to urge the defense ministry to be more flexible in the implementation of offset contracts.
These companies would like some leeway in being able to add, remove, change or replace Indian offset partners or restructure the values of offset contracts depending on changes in contracts, as and when, new, better candidate companies for offset partnerships emerge in India, or if existing partners no longer offer the value envisaged earlier. This, they claim, would allow them to deliver on their offset obligations more efficiently and tailor them to the best and dynamic interests of Indian defense industry.
As things stand, no deviation is allowed from offset proposals and contracts once they are concluded.
There is also disagreement over methodologies for valuation of technologies being considered for transfer and the credit US companies can derive from such transfers, which, some observers say, is because decision-makers in India are still to fully understand how such issues are resolved and transacted internationally.
Limiting liability after delivery
Another issue that Carter is expected to bring up during his visit is that of limitation of liability of US vendors after delivery of order.
US companies feel that since neither the Indian Defense Procurement Procedure (DPP) nor the Defense Procurement Manual (DPM) talks about any specific formulae or guidelines for imposing the burden of risk on vendors, their assumption of liability at the time of selection as preferred vendors, for possible problems after future delivery, may end up uncertain and arbitrary.
US industry says that liabilities need to be balanced to distribute risk between the vendor and the buyer.
The defense ministry, on it’s part, seems to have gone along with this in some cases and has allowed some shelter from liability in the past, but US companies are hoping for a more defined policy on the parameters of the liabilities they will be required to assume after delivery of the order. This protection from liability has only been applied to Foreign Military Sales (FMS) orders, so far, but the US wants it extended to Direct Commercial Sales (DCS), as well.
US companies worry that they may be required to assume unrestricted liabilities if the policy on liability limitation is not clarified in the DPP or DPM.
They claim that liability for loss of product and consequential/incidental damages is exempted internationally, and actually rests on the owner who operates and maintains the equipment and decides on the assumption of risk to it, especially in the aerospace domain.
The US claims that vendors are already liable to the Indian buyer in a number of ways and argues that international contract law and the Indian Sale of Goods Act should guide the definition of liability after delivery.
Finally, Ash Carter would like the defense ministry to speed up decision-making, especially in cases where the Letters of Offer and Acceptance (LOA) have been approved. US companies claim they find it difficult to maintain the validity of their offers indefinitely, citing rising costs and uncertainty over the life of their assembly lines.
The underlying message is that if delays continue, they may no longer find it feasible to compete in India in the absence of valid expectations of decisions within a reasonable timeframe.