India Tries to Repair Scandal-Scarred Defense Procurement

India has had a long and distressing history of defense acquisition deals with foreign companies that involved spectacular allegations of kickbacks and bribes. The resurfacing of yet another old one involving top politicians including Congress Party leader Sonia Gandhi has shaken the political establishment again this week.

Known as "Choppergate," the scam goes back to 2010 when AgustaWestland, an Italian helicopter design and manufacturing company, and wholly-owned subsidiary of Finmeccanica, signed a US$450 million contract to supply 12 AW-101 helicopters to the Indian Air Force after edging out American manufacturer Sikorsky’s S-92 Superhawk.

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However, a subsequent investigation into the deal led to the unearthing of a scam worth billions of dollars. It also led arrest in Switzerland of Guido Ralph Haschke, a middleman who allegedly got €51 million from AgustaWestland to swing the contract. The Italian probe, which started after allegations of corruption surfaced in February 2011, alleged that Orsi and his accomplices had paid money through intermediaries to Indian nationals and the US-born consultant, Haschke, who was of Italian nationality.

The Milan Court of Appeals earlier this week made public a 225-page document describing the affair and mentioning the name of one “Signora Gandhi.” The ruling right-wing BJP party insists this is a reference to opposition leader Gandhi, also of Italian descent, whose Congress-led government (headed then by Manmohan Singh) signed the deal in 2010. The deal was cancelled in 2014 after Italy said it was confident that executives had paid kickbacks. Mediators say that “Signora Gandhi” was driving force of the AgustaWestland VVIP chopper deal.

Expectedly, the Congress party is vehemently denying any wrongdoing. In boisterous Parliamentary sessions that ensued after Gandhi's name surfaced this week in the Italian court order, the party is insisting that in addition to ordering a CBI enquiry at the time, it had also blacklisted both firms from competing for defence contracts in India. It further asserts that the decision was reversed by Prime Minister Narendra Modi who assumed power in 2014. Who ordered the "blacklisting" – and whether it was quickly relaxed – forms the latest episode of the AgustaWestland controversy.

Not that India is new to such embarrassments. In 1987, Sonia's late husband and former Prime Minister Rajiv Gandhi was embroiled in the country's huge US$1.3-billion Bofors scandal after allegations surfaced that millions were paid to middlemen to facilitate the deal for 155mm howitzers from the Swedish firm. It was alleged that Italian business tycoon Ottavio Quattrocchi, and a friend of the Gandhis was the chief facilitator in the negotiations and had received kickbacks.

Given this contentious backdrop, Modi has been under enormous pressure to overhaul the country's defense procurement policy, reduce the country's dependence on foreign companies for the modernization of defence forces and build an ecosystem for indigenous manufacture of arms and other wherewithal.

With these aims in mind, the BJP government launched the new document that became operational this month, laying out the roadmap on how India, the world's largest arms importer, will acquire equipment. The aim, as Defence Minister Manohar Parrikar put it, is to ensure transparency, fast-track acquisition and give a push to the 'Make in India' initiative that aims to make the country a global manufacturing hub.

Parrikar has stressed that the new policy will ensure that the modernization of defence forces remains unaffected, at least due to procedural intricacies. "I do not say that the document is foolproof. Let us take a review after six months. Nothing is perfect, but we are taking it to perfection," Parrikar said at the document's launch.

The new plan also seeks to give more prominence to small and medium enterprises operating as defense firms. Now, say analysts, government-funded defence projects with estimated development cost of less than US$1.5 million will be reserved for SMEs. The DPP also has a new category of Indigenously Designed Developed and Manufactured (IDDM) as the most preferred category for procurements. The three sub procedures under the “Make” category aim to boost domestic private and small scale industry.

"In India invariably, defence procurements get linked to kickbacks and therefore there was a crying need for transparency, probity and public accountability. There needs to be a balance between expeditious procurement, high quality and cost-effectiveness," said Prabhash Dhaundiyal, chief contractor at Reliance Energy. "The IDDM and Buy and Make Indian categories will help foreign investors and Indian companies forge partnership for co-development and co-production."

"The integration of Indian companies in the global supply chain will help the establishment of defence manufacturing,” said Airbus India chief Pierre de Bausset.

Analysts say that the new policy's most important takeaway is the increase in the offset baseline and its promise to make the defence market more lucrative for Indian industry. This was a major issue under Congress-led UPA rule when Defence Minister A. K. Antony was accused of stalling the country's defence modernization program by not issuing contracts to companies for fear of kickbacks.

The failure of Antony's ministry to develop indigenous manufacturing and research, delays in procuring defence equipment and technology, and its lethargy in implementing administrative reforms added to decades of negligence, reduced India's armed forces to a sad state of disrepair. Presided over an era marked by policy inertia, procurement paralysis, and administrative fumbling, India’s defence preparedness was at its nadir at the time.

The new policy hopes to address these problems. It also makes the push for 'Make in India' a key thrust area. "Self-reliance is vital for a nation's military capability, so the new policy hopes to leverage the indigenous manpower and engineering capability. It also proposes to utilise and consolidate design and manufacturing infrastructure within the country," says Abhilash Ojha, a former major in the Indian army.

The major adds that delays in procurement impact defence preparedness and lead to cost escalation. "Hopefully, the new rules will encourage quicker decision making and lead to merit-driven acquisitions and increased synergy between global manufacturers and Indian companies."

The Indian defence sector is getting a fresh start with the new DPP. Insiders say time is now ripe to leverage the country's position as a dominant military market in the region and ensure that more designing and manufacturing is done domestically apart from greater transparency in defense acquisitions which have geopolitical ramifications and impact national security.

While there is optimism over new beginnings, there are reservations still over how the new policy will navigate the minefield of Indian bureaucracy and procedural bottlenecks.

"Given the new policy push, surely there will be faster decision-making at the top in approving as well as scrapping of modernisation proposals. But only time will tell whether bureaucratic hassles will remain or disappear and whether the procedures will get streamlined or not. We're keeping our fingers crossed, " said a senior official of the state-run Defence Research and Development Organization.