IMAGE:Jagadeesh Nv/Reuters/Landov

TATA AT CONTROLS: Ratan Tata, chairman of India’s immense and diversified Tata Group, piloted an F-16 during the 2007 Indian air show.

Defense contractors seeking Indian business are bound by an offset clause introduced in a 2006 Indian government regulation, the Defense Procurement Policy. It applies to all Indian weapons imports exceeding $66 million in value, and says the foreign vendor has to buy from Indian suppliers technologies, services, or components worth at least 30 percent of the contract value.

The foreign firms can fulfill that offset obligation in three ways: purchase military items or services available in India, invest in Indian companies doing defense research and development, or directly invest in the Indian defense sector, up to 26 percent of the contract value.

Indian defense officials consider the offsets a device that will augment their military's technological base. “Offsets provide an excellent opportunity for the Indian industry; both public and private enterprises should make use of them,” says K.P. Singh, the Defense Ministry's secretary for production.

The procurement policy makes clear that the better a vendor's offsets proposal, the better its chances will be of clinching a defense contract. Although the U.S. Defense Department opposes such offset requirements on principle, in practice it is letting the USIBC engage Indian partners to define offsets that suit American bidders.

“We have encouraged the broadening of the definition of offsets to include indirect offsets, so other areas of India's economy may gain from the massive investments that are sure to flow from aerospace and defense contracts,” says Nikhil Khanna, director of policy advocacy at USIBC in Washington. The advocacy group is seeking credit for technology transfer, limitation of liability, and the ability to “bank” the value of current projects as offsets for future defense contracts. New Delhi, Khanna says, is considering the suggestions.

India's Ministry of Defense seems open to such ideas, at least up to a point. “If there is scope for improvement, we will adjust and make minor changes to the policy,” A.K. Antony, India's defense minister, said at the air show. “Our mind is open.”

The new relationship between the Indian and U.S. defense worlds is not without pitfalls for both sides. “The U.S. industry will have to deal with painful Indian bureaucracy and infamous defense procurement procedures that stretch to several years,” says Bedi, of Jane's. A complication peculiar to India is that the country lacks a common defense chief—the army, air force, and navy are separate fiefdoms, an arrangement that has its dangers for India itself.

“I don't see any focus” in India's spending plans, comments Andrew Brookes, an aerospace analyst at the International Institute for Strategic Studies, in London. “Why does India want these aircraft? Neither Pakistan nor China will invade India. What is the game plan?”

Bedi, expressing similar concerns, complains that “India is putting together an ad hoc arsenal, with no perspective on what the security scenario will be like in 2020.”

Brookes wonders, too, whether India's new openness to U.S. contractors is to the subcontinent's benefit. “It might make political sense to go for the American equipment, but it does not make logistical or business sense,” he says. India already has a multiplicity of airplanes in its arsenal, and Brooks says it shouldn't add U.S. airplanes and weaponry to it. He says it is “very difficult to manage both Russian and American equipment.”

Such views may have merit, but it's not likely that the U.S. contractors will let that get in the way of sales. Not only is India an alluring market for military hardware, commercial aircraft exports are doing well, too. Boeing logged Indian orders for 101 airliners in 2005, valued at more than $15 billion, and for 30 planes last year. Airbus, the European manufacturer, and Boeing reckon the Indian market will be worth $100 billion in the next two decades.

Airbus hired Infosys Technologies, in Bangalore, to design part of the superjumbo A380's wings, and the company is working with Tata Consultancy Services, in Mumbai, to design cockpit software. HCL Infosystems, headquartered in Noida, just outside New Delhi, is working on the collision avoidance and zero-visibility landing software that Boeing plans to incorporate into its 787 Dreamliner.

Altogether, taking both the defense and civil sectors into account, India's aerospace engineering services are expected to be a $3 billion industry by 2020, says M. Ashok Kumar, executive vice president of global business development at HCL, citing a National Association of Software and Service Companies—Booz Allen Hamilton report. Kumar says defense manufacturing outsourced to India will amount to at least an additional $2 billion.