India's corruption-ridden military procurement system has again been hit by a major scandal that has resulted in the arrest of the chairman of the state-controlled Ordnance Factory Board and the banning of seven major domestic and international companies including ones from Singapore, Poland and Israel.

The current scandal is reminiscent of one – also involving Singapore – that brought down the government of the late Prime Minister Rajiv Gandhi, who, along with several others, was accused of receiving kickbacks from the Swedish arms maker Bofors AB and led to the defeat of the ruling Indian National Congress in November 1989 general elections.

Similarly, Defense Minister George Fernandes was forced to step down in 2001 after an Indian website released a secretly filmed video implicating senior officials in corrupt arms deals, energizing opposition parties to call for the entire government to quit.

The latest controversy doesn't appear to be likely to bring down the government. In a strongly worded statement, Defense Minister A K Antony declared: "I will take strong action if any wrongdoing is detected. No one found guilty will be spared.

The first victim is Gen. Sudipto Ghosh, the Ordnance Factory Board chairman, who has been arrested along with several others for taking bribes in exchange for defense contracts. Although seven companies have been named by the Central Bureau of Investigation, India's version of the FBI, Israeli Military Industries (IMI) and the state-owned Singapore Technologies are among the biggest, currently estimated to be negotiating contracts over Rs 60 billion (US$1.27 billion).

Despite their size, Israel and Singapore rank among the world's biggest arms dealers. The Associated Press reported in 2007 that Israel ranked as the world's fourth-biggest after the United States, Russia and France, selling US$4.3 billion in arms exports, primarily to the United States and India. .

Singapore has been repeatedly identified as a channel for illicit arms sales. In 1995, Michael Heseltine, the former British Deputy Prime Minister, asked for an investigation into Royal Ordnance, formerly a state-owned arms maker, which allegedly was channeling arms through Singapore to both Iran and Iraq.

In the 1980s, the Swedish government announced that all arms exports to Singapore had been frozen in an effort to stop the island nation from being used as a possible channel for the unauthorized export of Swedish weapons. Between 1980 and 1984, according to the Swedes, Unicorn International, an associate company of Chartered Industries of Singapore, which in turn was a subsidiary of an arm of Singapore's ministry of defense, bought 304 missiles and 27 field sighting units from Bofors that were traced to the Middle East.

According to Mark Pythian in his book "Arming Iraq: How the US and Britain Secretly Built Saddam's War Machine," "Nobel Kemi and Bofors, subsidiaries of Nobel Industries Sweden and member companies of EASSP, arranged for arms shipments for Iran to be transferred through conduit countries, most notably Singapore. Singapore was the second-largest largest importer of Swedish arms and accounted for 14.4 percent of all Swedish arms exports. Bofors sold Singapore artillery shells, 155mm guns, 40mm naval guns, and 70 laser-guided anti-aircraft missiles that were later shipped to Iran."

IMI, the manufacturer of the Uzi, arguably the world's most popular submachine gun, supplies most of the Indian military's small arms. Singapore Technologies manufactures the towed 155-milimeter howitzer among a variety of other weapons.

"Ending (ST's) contract means that a major upgrade to the artillery equipment will have to end," said the website Bnet. "A whole new contract proposal and award process would have to be completed, seriously delaying the reequipping of the military with more modern and advanced artillery. This means that India may have to reconsider ending the contracts as they require the capability being provided."

Two other Israeli companies possibly related to the inquiry, Israel Aerospace Industries and Rafael, were not blacklisted, the website said, as their contracts are considered so important to the modernization of India's military.

The other offending companies named are Media Architects of Singapore and BVT Poland. The Indian companies are HYT Engineering, R K Machine Tools and T S Kishan Ltd.

The CBI in its first information report stated that Ghosh vigorously pushed Israeli firms for defense-related purchases and entered into "criminal conspiracy" with a "private person and other accused" to demand and obtain "huge illegal gratification" for supply orders. New Delhi has thus put on hold all procurements and projects underway with the seven firms till CBI completes its probe into the alleged huge commissions.

Sources say that the armed forces will now have to look for new suppliers of the defense equipment, critical to keep their arms updated. The contracts affected were between IMI and the Ordinance Board in March, worth around Rs 12 billion (US$252 million), to set up an ordnance complex at Nalanda in Bihar to manufacture propellant charges for artillery ammunition meant for Bofors howitzers.

Blacklisted firms have not been allowed back into Indian defense contracts due to the political repercussions of such moves. The Nalanda complex has been a particular victim. In 2004 a South African firm, Denel, was blacklisted which then went into oblivion from the Indian scene. Denel had been originally sought for the construction of the Nalanda Ordinance factory, which also went into limbo.

Similar has been the fate of the then-Swedish Bofors (now owned by BAE Systems), which was caught in the controversy involving commissions to middlemen that cost Gandhi his job. Despite India's desperate need for howitzers, Bofors has been unable to break back into the Indian scenario; the guns that were delivered have proved their mettle during the Kargil war between India and Pakistan in 1999.

Officials say that given the latest moves to blacklist companies, IMI will be particularly impacted. It will certainly affect future Indo-Israeli defense ties, which now run into billions of dollars. In addition to the Uzi and Tavor 21 submachine gun, variants of which cater to the needs of the Indian forces, IMI supplies 125mm tank shells and manufactures Zitara carbines and cargo ammunition (a variant of cluster bombs).

The Indian Defense Research and Development Organization (DRDO) was also to be assisted by IMI in the development of the long delayed indigenous Arjun tank for the Army. The OFB and IMI were also looking collaborate on the development of PB500 bombs capable of penetrating two-meter-thick concrete.

Meanwhile, ST was to supply Pegasus howitzers (140 air-mobile ultra-light ones) valued at nearly Rs30 billion. The firm was also contending to win the Rs80 billion deal to sell 400 155mm/52-calibre towed artillery guns, along with transfer of technology for indigenous manufacture of 1,100 howitzers. The Pegasus howitzer was due for field testing in the western state of Rajasthan this summer. The guns are needed to be deployed in rural areas as well as along the India-Pakistan and India-China borders.

Among the Indian firms blacklisted, T S Kishan Co was to supply spares and accessories for T-72 and T-90S main-battle tanks of the Indian Army; Pune-based HYT Engineering components of missiles produced within India and the Ludhiana-based R. K. Machine Tools spares for vehicles and machinery produced by state unit Bharat Earth Movers.

Observers say that the latest scandal and blacklistings will certainly impact India's defense modernization efforts, one of the largest globally, pegged at over US$50 billion between 2007 and 2012 aimed at building an immediate strike force against Pakistan and longer term deterrence against China.

In a report last year, the Associated Chambers of Commerce and Industry of India said the country over three years (2004-7), spent US$10.5 billion on military imports, making it amongst the largest arms importers in the developing world.

Last month the IAF inducted the first of the three Israeli Phalcon AWACS, India's most potent force multiplier, capable of tracking down incoming missiles and can keep an ``eye'' on neighboring nations without infringing airspace. India is paying US$1.1 billion for the three AWACS.

Another system India recently purchased from Israel for US$600 million are aerostat radars to also spot surreptitious guerilla attacks such as the one in Mumbai wherein the attackers used dingy boats to infiltrate the city. New Delhi has also signed a US$1.4 billion deal with Israel to purchase a 70 km shore-based and sea borne anti-missile air defense system.

(Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com)