India Defense Scandal's Wider Impact

India is no stranger to defense corruption scandals and it is in the middle of yet another multi-million dollar global defense scam, one that analysts say threatens its entire procurement program in its headlong effort to upgrade its creaking defense structure to meet challenges from Pakistan and China.

In the latest episode, Italian defense and aerospace company Finmeccanica's Chief Operating Officer Giuseppe Orsi is believed to have paid €51 million to secure a US$755-million contract for selling 12 VVIP helicopters to India. Orsi, who has been jailed in Milan, denies wrongdoing while New Delhi says it is will scrap the 2010 contract. The scandal threatens to slow India's defense upgrade.

"All these plans will now go into deep freeze," Avinash Garg, a Delhi-based defense analyst formerly with the ministry of external affairs, told Asia Sentinel. "The latest controversy will delay the ongoing acquisition of weapons in India as the government probes the allegations." The scandal, Garg adds, will also lead to a stormy upcoming parliamentary budget session, followed by stricter reviews of all defense deals and delays in the awarding of defense contracts.

The slowdown is certain to frustrate the armed forces, which have been urging the government to increase defense spending to modernize. Decelerating defense purchases will also have an impact on aerospace and defense companies worldwide who are betting on India's plans to spend tens of billions of dollars each year for new equipment.

India already slashed its defense budget for the fiscal year ending March 31 as economic growth has slowed. (GDP growth projections for 2013 have been recalibrated to 5.4 percent by the government after an earlier projection of around 6 percent.

Finmeccanica's bribes were allegedly paid to many Indian intermediaries, including retired Air Chief Marshal SP Tyagi, a former chief of the Indian Air Force, and his relatives, who swung the controversial deal for the choppers in favor of AugustaWestland, a wholly-owned subsidiary of Finmeccanica.

Alarmingly, despite the fact that allegations have swirled for years in India's scandal-prone defense procurement industry, this is the first time an Indian service chief has been directly named. According to a preliminary inquiry, the technical requirements for the helicopter were "tweaked" to allow the AugustaWestland to bid.

The defense ministry ratified the nearly US$1 billion contract in February 2010, and had consistently refused to order a probe into the deal despite more than a year of allegations of huge kickbacks. It is only now, after the report directly named Air Chief Marshal Tyagi, that the government ordered a Central Bureau of Investigation inquiry.

The scandal has provided grist for the opposition's mill in an election year. "I see the making of a second Bofors in this scam," said Ravi Shankar Prasad, a spokesman for the country's largest opposition party, Bharatiya Janata.

The Bofors scandal in the late 1980s implicated former prime minister, Rajiv Gandhi and several others who were accused of receiving kickbacks from Swedish defense company for winning a bid to supply field howitzers. The company paid US$11.65 million and the scandal led to the defeat of Gandhi's ruling Indian National Congress party in 1989 general elections.

India is also on the verge of finalizing a contract with Dassault Aviation of France to purchase 126 Rafale fighter jets in a deal estimated at over US$10 billion. The Rafale acquisition is part of a massive Air Force plan to buy 400 planes and helicopters through 2022.

Fearing a backlash from the Finmeccanica episode, French President Francois Hollande, who is currently on an India visit, assured New Delhi that no "middlemen" will be involved in the country's biggest defense deal.

Besides the Rafale deal, the Indian Army is also in the process of acquiring new tanks, artillery, missile batteries and machine guns while the Navy is upgrading its fleet with new frigates and submarines.

Sullying the atmosphere further was a revelation by India's former army chief General VK Singh last month that he was offered a hefty bribe by a lobbyist to approve a defense procurement deal. Singh's public announcement shocked many over the unhindered access that international arms middlemen enjoy to senior Indian military and defense personnel.

"Just imagine, one of these men had the gumption to walk up to me and tell me that if I cleared the tranche, he would give me [US$2.73 million]," Singh told reporters. "He was offering a bribe to me, to the Army Chief. He told me that people had taken money before me and they will take money after me. I was shocked. If somebody comes and tells you, you will get so much, what can you do?"

Singh's public disclosure sent the government scurrying to institute a high-level enquiry, which is probing whether a serving general was indeed offered a bribe to clear the purchase of substandard vehicles.

Analysts say the corruption scandals can be largely blamed on middlemen in the procurement process. "Wherever big bucks are involved, such dubious characters will exist," a Home Ministry Secretary said. "One has to evolve a system where they can operate legitimately within a system of checks and balances. Why has the defense ministry not been able to register them as official agents for companies?"

Analysts are also shocked that despite India being the world's largest arms importer, having spent well over US$50 billion over the last decade, the nation does not boast a single authorized agent of a foreign armament company on the defense ministry's rolls. What exists instead are shady "consultants" and middlemen.

"Defense deals normally amount to about 10 percent of the total contract value, with a lion's share going to politicians. Middlemen normally get around three percent with bureaucrats and officers from the Army, Navy and the IAF sharing the rest of the spoils," the secretary said privately.