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    Servicing Committed Liabilities: Kicking the Can down The Road Will Not Help Amit Cowshish March 14, 2019

    Shortage of funds even to service the committed liabilities raises questions about the financial affordability of the defence modernisation programme and viability of the push for ‘Make-in-India’ in defence.

    It was known even before the financial year (FY) 2018-19 started that the budget allocated for capital acquisitions was inadequate even to service the committed liabilities related to the ongoing contracts. The Vice Chief of Army Staff had raised the red flag while appearing before the parliament’s Standing Committee on Defence (SCoD) in February 2018.1 As it turns out, there was an overall shortfall of Rs 16,061.65 crore in the allocation for meeting the committed liabilities of all the three services during FY 2018-19.2

    Such a situation should have never come to pass. That it actually did was a matter of great concern, which warranted immediate remedial measures. But as per the SCoD report of January 2019 on the action taken by the Ministry of Defence (MoD) on its recommendations related to the Demands for Grant for FY 2018-19, no specific measures were taken.3  If anything, reports of a shortfall of more than Rs 10,000 crore for meeting the committed liabilities of the Indian Navy and the Indian Air Force4 during FY 2019-20 have reinforced existing concerns.

    With no additional allocation of funds in the Revised Estimates, MoD seems to have somehow managed the problem faced in FY 2018-19 by re-appropriation of funds between various budget heads within the capital budget and also by deferring some payments to the Defence Public Sector Undertakings and possibly to other Indian companies.

    Indeed, in January this year, the Economic Times reported that the Indian Air Force owed Rs 14,500 crore to Hindustan Aeronautics Limited.5  Earlier, the Press Trust of India reported in October 2018 that the Military Engineer Service Builders Association of India had threatened to stop construction (also funded mainly from the capital budget) at some defence sites over non-payment of dues.6

    The crisis may have been averted, but shortage of funds even to service the committed liabilities is fraught with a risk far greater than the possibility of MoD defaulting on some contractual payments and consequently facing litigation. It raises questions about financial affordability of the defence modernisation programme and viability of the push for ‘Make-in-India’ in defence. It is time the issue is taken up head on, beginning with the acknowledgement that there indeed is a problem that needs to be fixed.

    It will do no good to gloss over the fact that the committed liabilities are the first charge on the budget. If enough money is not available even to service the committed liabilities, the only inference one can draw is that funds are not available for signing new contracts also or, even if a new contract is signed, the MoD will not be able to make any payment against that contract (Typically, 15 per cent of the contract value is paid as advance within 30 days of signing of a new contract.)

    This is pretty discouraging for the industry and should leave no one in doubt about the seriousness of the problem. Accentuated by shortage of funds for the second year running, it also signifies ineffectiveness of whatever system is currently being followed to regulate the committed liabilities or worse, perfunctory treatment of the problem by the MoD.

    Even the SCoD has dealt with the problem rather pedantically, considering that the best advice it could give to MoD in the matter last year was to ‘ensure that the allocations to the Services under the Capital Head be appropriately increased at the Revised estimate stage so as to enable our Services to fulfil their Committed Liabilities’ and that the MoD ‘should proactively take up this matter at Ministerial level to avoid default in payment of committed liabilities’.7

    The problem has not arisen for want of MoD asking for higher allocation at the Budget Estimates or additional allocation at the Revised Estimates stage. The genesis of the problem apparently lies in the way the committed liabilities are regulated. While seeking approval for commencing the tendering process and later for signing the contract, the sponsoring Service Headquarter (SHQ) has to certify availability of funds. It is possible that availability of funds is routinely certified without due diligence, which seem to escape attention in the absence of a comprehensive database and a robust cross-checking mechanism in the MoD.

    Due diligence requires summing up the total of (a) the contractual payments against on-going contracts (committed liabilities), (b) payments to be made in respect of the procurement proposals for which availability of funds has already been certified, (c) provision for emergency purchases, and subtracting the sum total of all these from the allocation expected to be made during the future years. A working model for determining availability of funds, based on the principles of accrual accounting, is presented below in a tabular form.8

    Table for determining availability of funds


    Sr No
      Year 1 Year 2 Year 3  ------ ------
    1 Likely allocation during the year          
    2 (-) Contractual payments against on-going contracts (committed liabilities)          
    3 (-) Payments to be made in respect of the procurement proposals for which availability of funds has already been certified          
    4 (-) Provision for emergency purchases          
    5 Balance (A)          
    6 (-) Payment to be made against the procurement proposal for which approval is being sought          

    Note: The availability of funds should be certified only if the figures in Row 6 are less than the figures in Row 5.

    A critical factor in this model, or any other model that is evolved, is the assumption to be made about the likely budget outlay in the future years. This responsibility has to be discharged by the MoD in consultation with the Ministry of Finance (MoF). It should present no difficulty. Indeed, on several occasions in the past, the MoD has conveyed to the SHQs the growth in budget outlays that could be considered for the purpose of planning. This practice should be streamlined or revived, if it has got discontinued.

    In the past, the MoF generally kept its part of the bargain and allocated funds it had indicated it would provide. If, however, this is not the case anymore, the issue will need to be resolved between the two ministries. The SCoD could also play a more constructive role in facilitating resolution of the problem than has been the case so far. On their part, SHQs will have to adhere to the indicated growth in the outlays; there is nothing to be gained by not doing so. It has to be realised that the MoD is unlikely to get the allocation it seeks year after year from the MoF. The coat has to be cut according to the cloth.

    It may take some time to put an elaborate system in place for regulating the committed liabilities. Meanwhile, the MoD needs to assuage the apprehensions about the possibility of default on contractual payments by being candid about the situation and explaining how it is going to be handled in the FY 2019-20. An opportunity to clear the air will come shortly when the SCoD takes up examination of MoD’s Demands for Grant following presentation of the regular budget by the government after the general elections.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    Defence Acquisition, Defence Budget, Indian Defence Policy Defence Economics & Industry https://idsa.in/system/files/defence-fund.jpg https://idsa.in/system/files/thumb_image/2015/defence-fund_0.jpg IDSA COMMENT
    AK-203: A Boost for the Army and Make in India Sujan R. Chinoy, Laxman Kumar Behera March 11, 2019

    That the AK-203 would be produced in India with 100 per cent indigenous content in less than three years makes it a win-win deal for the Army and the Make in India initiative, with Ordnance Factory Korwa emerging as the biggest winner.

    Nearly 10 years after the Army expressed a strong desire to replace the INSAS with a modern assault rifle, the government has zeroed in on AK-203 as the basic weapon for the vast majority of the Indian defence and security forces. The new weapon, the most advanced version of the famous AK series of rifles, will be manufactured in the country by the Indo-Russian Rifles Pvt. Ltd, a Joint Venture (JV) between the Ordnance Factory Board (OFB) and Russian partners. The AK-203 will not only boost the Army’s fire power and morale but will also further the Make in India initiative in defence manufacturing through the 100 per cent indigenisation of the rifle in a few years. The Ordnance Factory Board’s Project Korwa in Amethi, Uttar Pradesh, which will manufacture the rifles as the main JV partner, is the major beneficiary as its volume of business is set to increase manifold with a firm order of at least 750,000 rifles.

    The Army’s Long Search for an Assault Rifle

    Ever since the 5.56x45mm INSAS was inducted in 1994, the Army has been dissatisfied with this rifle designed by the Defence Research and Development Organisation (DRDO) and manufactured by the OFB.   The rifle’s limitations in terms of lethality and reliability, as well as weight and lack of integrated sighting system, led the Army to look for an alternative even though a number of improvements were made over the years. In November 2009, the Defence Acquisition Council (DAC), the highest decision making body of the Ministry of Defence (MoD), gave in-principle approval for procurement of 1,87,825 assault rifles (including 16,056 for the Navy) under the ‘Buy and Make’ category with a provision of license production by the OFB. Post the DAC approval, the Army issued a Request for Proposal (RFP) in November 2011 for the procurement of a dual calibre (capable of firing both 5.56x45mm and 7.62x39mm ammunition) assault rifle. The RFP did not, however, fructify as no vendor could meet the stringent technical specifications – called the General Staff Qualitative Requirement (GSQRs) in procurement parlance. Consequently, the RFP was retracted in June 2015.

    Following the retraction of the RFP, the Army along with the OFB, DRDO and Directorate General Quality Assurance (DGQA) attempted to develop a new 5.56x45mm assault rifle. Although the new rifle, named INSAS 1C and produced by the Rifle Factory Ishapore (RFI), could meet the required technical and operational parameters including reliability test with firing of 2400 rounds, it did not progress further. In August 2016, the Army changed the specification of the calibre to 7.62x51mm based on its revised operational philosophy that gave prominence to ‘Shoot to Kill’ over ‘incapacitation’, which was the major design consideration behind the INSAS 1C development. With the revised operational philosophy in place, the Defence Minister, in a meeting held in September 2016, directed the OFB to develop a 7.62x51mm assault rifle under the guidance of the Project Monitoring Team (PMT) set up under the chairmanship of Director General Infantry (DG-INF) with members drawn from the DRDO and DGQA. The first prototypes, produced by the RFI, were ready by May 2017. But the initial trials were apparently not up to the Army’s expectations.

    With the PMT-led development of a rifle not satisfying the army, and with the latter in urgent need of a modern long-range rifle for frontline troops deployed on the borders, the DAC on January 16, 2018 decided to procure 72,400 rifles along with 93,895 carbines on a fast track basis.  The following month, on February 13, 2018, the DAC gave another approval for 740,000 assault rifles for the three Services under the ‘Buy and Make (Indian)’ procurement category, with the provision that both the OFB and the private sector would licence-manufacture a portion each. The tender for the procurement of 72,400 rifles has fructified, with the American Firm, Sig Sauer, signing the contract valued at nearly Rs 700 crore with the MoD in February 2019.

    The procurement of bulk rifles took a new and decisive turn when India and Russia reached an agreement to set up the Kalashnikov production centre in India during President Vladimir Putin’s visit in October 2018. An Inter-Governmental Agreement (IGA) soon followed on February 18, 2019 to set up a joint venture to produce at least 750,000 7.62x39 mm AK-203 rifles in India. As per the IGA, the JV, which was registered on February 25, 2019, will have a 50.5 per cent equity stake by the OFB and the balance by the Russian partners. The equity structure emulates that of another India-Russia JV, BrahMos Aerospace, and is designed to allow the firm to operate as a private company rather than as a public sector enterprise.

    India’s choice of AK-203 was influenced by the rifle’s modern design and potency. It was selected over other AK series of rifles – AK-103, AK-103 (Modernised) and AK-15 – which were all evaluated by a team of Army officials who, along with OFB officials, visited the Kalashnikov manufacturing centre in Russia in early December 2018. The Army found that the AK-203 has better accuracy, more picatinny rails (required for mounting various types of day/night sights and grenade launcher on the rifle), reduced flash and recoil, better ergonomics and greater ease of operation in combat. The AK-203 was developed in 2016 and supplied to the Russian armed forces in 2018. India will be the first country to which Russia would be transferring the design/manufacturing of this rifle. The signing of the IGA and the formation of the JV have finally brought to an end a decade-long saga involving an arduous process for inducting a modern rifle for the Indian armed forces.

    Boost to Make in India

    While the Army will finally get its long-waited weapon, the AK-203 is also an attractive proposition for the Make in India initiative, and for the OFB in particular. The objective of higher indigenisation, as enshrined in the Make in India programme, is set to be achieved in the course of producing the rifle in India. As per the IGA, the indigenous content (IC) is to be progressively increased in each phase of production. All rifles to be produced beyond the first 120,000 will have 100 per cent indigenous content (see Table 1). More significantly, 100 per cent indigenisation is to be achieved in 32 months from the contract date, and all the future technological upgrades to the rifles, as and when required, will be done by the JV in India. The OFB, which is facing increasing competition from the private sector, could not have asked for more as it is assured of nearly Rs 5,000 crores of order through the production of the AK-203. Moreover, given that the JV is a first involving an ordnance factory, it will open up opportunities for the OFB to explore other international partnerships to stay ahead of its competitors.

    Table 1. Planned Indigenisation of AK-203



    Phase

    No of Rifles

    Indigenisation Level (%)

    1

    20,000

    5-15

    2

    20,000

    15-30

    3

    40,000

    30-70

    4

    40,000

    70-100

    5

    Balance No.

    100

    The major beneficiary of the AK-203 deal is clearly the Ordnance Factory Korwa which was set up in 2007 with a sanctioned investment of Rs 408 crore to manufacture Close Quarter Battle (CQB) Carbine under Transfer of Technology (ToT). Earlier, because of the non-fructification of ToT due to a variety of reasons, the factory, which has over 200 employees on its payroll, has been operating well below capacity, with output limited to the manufacture of low-value Bore Action Guns for the Ministry of Home Affair and State Police Forces, and various parts and components for sister factories (see Table 2). With a voluminous order of Rs 5000 crore and an annual targeted production of 75,000 rifles, the company will be able to fully utilise its available production capacity for at least a decade. With its volume of business set to increase by nearly 30 times on an average in the next 10 years, it may well seek an expansion of its present capacity. The order will also allow the factory to play the role of an anchor investor for creating a local supply-chain for parts and components, which will create employment opportunities and boost economic growth in and around Korwa. More significantly, with an order to manufacture the most contemporary rifle in the world, the factory stands a good chance of becoming the centre for small arms manufacturing in the country besides breaking into the lucrative export market.

    Table 2. Value of Production of Ordnance Factory Korwa



    Year

    2013-14

    2014-15

    2015-16

    2016-17

    2017-18

    Rs in Crore

    0.9

    2.6

    6.6

    10

    17.9

    Conclusion

    India’s current and future security environment necessitate the continued deployment of security forces, especially the Army, in a highly lethal environment involving both conventional and sub-conventional war. With the AK-203, the Army’s long search for a modern assault rifle to deal with multiple challenges has finally come to a successful end. The rifle’s proven lethality, accuracy, reliability, and advanced features would give every soldier in possession of the weapon the necessary confidence and morale to take on a wide spectrum of challenges effectively and efficiency. The fact that the rifle would be produced in India with 100 per cent indigenous content in less than three years makes it a win-win deal for the Army and the Make in India initiative, with Ordnance Factory Korwa emerging as the biggest winner.

    Views expressed are of the authors and do not necessarily reflect the views of the IDSA or of the Government of India.

    Make In India, Ordnance Factories, Defence Industry, Indian Army, Indian Defence Policy Defence Economics & Industry https://idsa.in/system/files/ak-203-make-in-india.jpg https://idsa.in/system/files/thumb_image/2015/ak-203.jpg IDSA COMMENT
    MBS Visit Strengthens the Indo-Saudi Strategic Partnership Lakshmi Priya March 05, 2019

    The key focus areas during the visit of MBS to India were terrorism, investment, energy, skill development, security and Indian diaspora in Saudi Arabia.

    Crown Prince Mohammed Bin Salman Bin Abdulaziz Al-Saud (Bin Salman or MbS) made his first state visit to India on February 19-20, 2019 as part of a three nation Asia tour that included Pakistan and China. The visit took place in the backdrop of the Pulwama terror attack by the Pakistani jihadi terrorist group Jaish-e-Mohammed in which 44 CRPF personnel were killed. Saudi Arabia was one of the first countries to strongly condemn the Pulwama terror attack. Foreign Minister Adel bin Al-Jubeir denounced the attack saying that "anyone who supports and finances the menace must be designated and must be punished". Prime Minister Narendra Modi received the Crown Prince at the airport going beyond protocol. India-Saudi Arabia ties had entered an era of strategic partnership with the signing of the Riyadh Declaration in 2010, followed by the Memorandum of Understanding (MoU) on defence cooperation in 2014. During the visit of MbS, the two countries agreed to fortify the partnership by establishing a high level monitoring mechanism in the form of the Strategic Partnership Council. They also signed five Memorandums of Understanding (MoUs) related to investment, tourism, housing, and information and broadcasting.

    After PM Modi’s last state visit to Saudi Arabia in 2016, the return state visit of  King Salman to India was scheduled but postponed twice, first in 2017 and again in 2018. But certain regional developments made it important for the Crown Prince to pay a visit in early 2019. Firstly, the alleged murder in October 2018 of the US-based Saudi journalist Jamal Khashoggi in Saudi Arabia’s consulate in Istanbul led to widespread criticism of the Kingdom. The Riyadh conference organized by Saudi Arabia in the same month was boycotted by the chief executives of JP Morgan, Siemens and Blackrock, as well as by the CEO of the International Monetary Fund. In addition, the Governments of France, Australia, New Zealand and the Netherlands pulled out of the conference. Secondly, Saudi Arabia also seems to be losing its hold on the Gulf Cooperation Council, with Qatar refusing to bow down despite the imposition of sanctions starting June 2017. Third, Russia’s proactive diplomacy in the Middle East combined with Trump signalling a less active role in the region have compelled Saudi Arabia to look east towards India and China.

    Terrorism as a common concern

    The key focus areas during the visit of MBS to India were terrorism, investment, energy, skill development, security and the Indian diaspora in Saudi Arabia.  The Pulwama terror attack brought the issue of terrorism to the fore and both Modi and the Crown Prince emphasized that all countries should renounce the use of terrorism as an instrument of policy. India and Saudi Arabia agreed to constitute a ‘Comprehensive Security Dialogue’ at the level of National Security Advisors and set up a Joint Working Group on Counter-Terrorism.

    During the last several years, Saudi Arabia has been cooperating with India in countering terrorism. It has been repatriating Indian citizens who have been found involved in terrorist attacks and related activities. In 2012, it extradited the 26/11 suspect Sayed Zabiuddin Ansari also known as Abu Jundal or Abu Hamza to India. Since then, 18 terror suspects have been sent back by Saudi Arabia and the United Arab Emirates to India. During the visit, the Saudi Crown Prince reiterated the willingness to share intelligence to combat terrorist activities. India and Saudi Arabia also signed an MoU on Technical Cooperation in Cyber Space and Combating Cyber Crime. They expressed serious concern at the misuse of cyber space as a medium to promote subversive and extremist ideologies. They also noted the need for concerted action by the international community against terrorism through the conclusion of a Comprehensive Convention on International Terrorism (CCIT), which India had proposed as far back as 1996.

    Building the Strategic partnership

    Saudi Arabia is India’s fourth largest trading partner after the US, China and UAE. India and Saudi Arabia aim to transform their traditional buyer seller relationship into a strategic partnership. India imports nearly 80 per cent of its energy needs, and about 20 per cent of that comes from Saudi Arabia. The Kingdom has been the top exporter of crude oil to India. In 2017-18, India imported US$ 16.8 billion worth of crude from Saudi Arabia. India is dependent on the Persian Gulf for its energy security and the rise in oil prices can have a destabilizing effect on its economy. With the United States imposing fresh sanctions on Iran after withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and the waiver granted with respect to continued oil imports from Iran slated to end in May 2019, India, which sources nine per cent of its oil imports from Iran, has to find alternate sources. This compulsion makes Saudi Arabia and other Gulf countries important for India to meet its energy requirements.

    For its part, Saudi Arabia aspires to diversify its economy and promote economic stability through long term investments. During the visit, the Crown Prince highlighted his intention to invest more than US$ 100 billion in India in the areas of refining, petrochemicals, infrastructure, agriculture, minerals and mining, manufacturing, education and health. In addition, an MoU was signed to enable Saudi investments in the National Investment and Infrastructure Fund (NIIF) for the building of roads, ports, airports, power etc. Furthermore, a Framework cooperation programme was signed between Invest India and Saudi Arabia General Investment Authority (SAGIA) to facilitate investment by the private sector and the establishment of joint ventures in the fields of petrochemical industries, pharmaceuticals and medical equipment.

    Under the leadership of Bin Salman, Saudi Arabia is embracing socio-economic reforms and is keen on India becoming part of this effort. The two countries agreed to align the Saudi Vision 2030 and thirteen Vision Realization Programs with India’s flagship initiatives of Make in India, Start Up India, Smart Cities, Clean India and Digital India. The Saudi Vision 2030 also focuses on developing a vibrant entertainment industry. As part of its economic reforms Saudi Arabia is building an amusement hub called Qiddiya entertainment city and seeks Indian investment in the venture.

    Saudi ARAMCO, along with Abu Dhabi National Oil Company (ADNOC), has pledged to invest in the Ratnagiri Refinery and Petrochemicals Limited (RRPL). An Indian consortium composed of Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation, RRPL is estimated to cost US$ 44 billion and expected to become operational in 2025. In addition, India and Saudi Arabia are exploring the possibility of a US$10 billion investment through the Public Investment Fund and the technology partners of RRPL. The two countries also intend to discuss other investment opportunities worth $26 billion in the Project.

    Way Forward

    The Crown Prince’s visit has led to a cementing of ties through commitments to enhance cooperation in a number of areas, greater investments in each other’s economy, and encouraging people to people contact. The two countries can promote cooperation in the areas of agriculture, renewable energy and Indian diaspora in Saudi Arabia. Finding ways to enhance India’s farm exports to Saudi Arabia needs to be explored. Saudi Arabia imports farm produce worth more than US$ 19 billion a year, but India has only an 11 per cent share in this market. With a view to boosting Indian farm sector exports to West Asia, India has decided to remove all restrictions on organic products and processed products. Apart from that, as Saudi Arabia intends to invest in renewable energy, new facets of collaboration can be explored in line with its agreement to join the International Solar Alliance.  

    Saudi Arabia is home to more than 3.2 million Indians engaged in various sectors and professions. India and Saudi Arabia look forward to integrate their migration platforms e-Migrate and e-Tawtheeq. In order to enhance people to people contact, India has consented to increase the seats of Saudi Arabian Airlines from 80,000 seats per month to 112,000. For its part, Saudi Arabia has agreed to increase India’s haj quota to two lakh.

    Indo-Saudi ties have come a long way from being transactional business relations to evolving into a strategic partnership. The Crown Prince’s visit is indicative of India’s growing acceptance as an important global power and reflects the strong ties that it has forged in recent decades with Gulf countries in general and Saudi Arabia in particular. Last year, External Affairs Minister Sushma Swaraj had attended the Janadriyah festival in Saudi Arabia as a guest of honour and inaugurated the India pavilion showcasing India’s growth and development along with cultural aspects. Saudi Arabia also played a key role in the invitation that was extended to India by the United Arab Emirates to be a ‘guest of honour’ at the 46th Session of the Council of Foreign Ministers of the Organization of Islamic Cooperation (OIC).This broadening of the relationship between India and Saudi Arabia is likely to take the strategic partnership to new heights.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    India-Saudi Arabia Relations, West Asia, Indian Foreign Policy Eurasia & West Asia https://idsa.in/system/files/saudi-india%20copy.jpg https://idsa.in/system/files/thumb_image/2015/saudi-india_small%20copy.jpg IDSA COMMENT
    Mohammed bin Salman walks the India-Pakistan tightrope Prasanta Kumar Pradhan February 25, 2019

    Visiting ‘brother’ Pakistan and ‘friend’ India at a time when tensions are running high both in West Asia and South Asia, Saudi Crown Prince Mohammed bin Salman walked the India-Pakistan tightrope with extreme caution.

    Saudi Crown Prince Mohammed bin Salman visited Pakistan on February 17-18 and India on February 19-20, 2019. His visit, coming barely days after the terrorist attack on security forces in Pulwama in Jammu and Kashmir, was undertaken in a tense atmosphere and heightened security concerns in the subcontinent. Saudi Arabia well understands the existing political and security dynamics between India and Pakistan. Therefore, during his visit, the Crown Prince was particularly cautious so as not to look like being supportive one country over the other. Further, at a time when Saudi Arabia faces immense security and geopolitical challenges in its own neighbourhood, it was only prudent for him to carefully tread a middle path between India and Pakistan.

    During the Saudi Crown Prince’s visit to Pakistan, the two countries signed seven agreements including in the key fields of petrochemicals, power generation and renewable energy. He committed a total investment of around US$ 20 billion to Pakistan in multiple projects. Saudi Arabia has often come to Pakistan’s rescue whenever the latter faced acute economic challenges. Most recently, in October 2018, it announced a US$ 6 billion bailout package for Pakistan. Both countries agreed to further strengthen their defence and security ties and to cooperate on combating terrorism and extremism. Though Pakistan is a known state sponsor of terrorism, Saudi Arabia has never expressed its disapproval of Pakistan providing safe haven to terrorist organisations. Riyadh has overlooked Pakistan’s support for terrorist groups and, in return, has got continued support and unquestioned loyalty from Islamabad.

    In New Delhi, Mohammed bin Salman reiterated his support for India in countering terrorism and extremism, which, he stated, are issues of common concern for both India and Saudi Arabia. He suggested a further strengthening of ties in counter-terrorism, maritime and cyber security. He also announced a Saudi investment of over US$ 100 billion in several key areas such as energy, refining, petrochemicals, education and health. The announcement to align the ‘Saudi Vision 2030’ and Indian initiatives such as ‘Make in India’ would certainly provide a boost to bilateral trade and investment. In recent years, India-Saudi relationship has been on an upswing covering economic, energy, security and strategic aspects. This visit adds further impetus to the already vibrant India-Saudi bilateral relationship.

    From the Saudi perspective, both India and Pakistan are important countries for their own reasons. For Riyadh, Pakistan is a key ally that is politically and ideologically subservient and economically dependent. Pakistan is also a reliable security partner for Saudi Arabia that has openly committed itself to the Kingdom’s security. Prime Minister Imran Khan has gone to the extent of stating that if the Holy places were to be attacked, Pakistan will come forward to defend the Kingdom. Further, Riyadh also wishes to keep Pakistan closer on its side to deflect Iranian influence in Pakistan. On the other hand, Saudi Arabia looks at India as a stable democracy, with a growing economy and a market for its energy, which is moreover well positioned to play a constructive role beyond the Indian subcontinent. Saudis recognise India’s growing profile as an emerging global power and a reliable partner to engage with in future.

    Consequently, during his visit to India and Pakistan, Mohammed bin Salman tried to strike a delicate balance between the two countries. While with Pakistan he established the ‘Saudi-Pakistan Supreme Coordination Council’ to be jointly chaired by himself and the Pakistani Prime Minister, with India he agreed to constitute a ‘Comprehensive Security Dialogue’ and to form a ‘Joint Working Group on Counter-Terrorism’. Saudi Arabia is reportedly investing in a joint petroleum refinery in Gwadar, even as India and Saudi Arabia have agreed to establish a US$ 44 billion joint venture in a petroleum refinery. On the critical issue of terrorism also Saudi Arabia tried to maintain a balance between India and Pakistan. The Crown Prince agreed with Pakistan the importance of not politicising the UN listing regime. But he also agreed to join hands with India to counter terror and share intelligence. Saudi Arabia condemned the terror attacks on India, but it did not condemn the Pakistani involvement in the cross border terrorism targeting India. It issued a statement condemning the Pulwama terror attack, but refused to accept that Pakistan was in any way involved in it.

    Besides, in its own neighbourhood, Saudi Arabia faces a number of regional security challenges. Saudi military operations in Yemen have drawn a lot of criticism. The Iranian challenge is also growing. The Gulf Cooperation Council (GCC) is going through a most difficult phase post the boycott of Qatar. The Qatar-Turkey-Iran partnership is emerging as a major geopolitical challenge for Saudi Arabia. The Khashoggi affair led to a lot of international pressure on the Kingdom and Mohammed bin Salman in particular for his alleged involvement in the killing. In the light of the above, it is natural that the Kingdom would try to keep as many countries as possible on its side. Thus, Mohammed bin Salman, during his visit to the subcontinent, was mindful not to give the impression of wanting to strengthen ties with one country at the expense of the other.

    Underlining the importance of both countries for the Kingdom and conscious of the history of the India-Pakistan relationship, Saudi Arabia has always maintained that Pakistan is a ‘brother’ and India a ‘friend’. Mohammed bin Salman’s visit to the two countries has reaffirmed this Saudi policy. Keeping important Saudi national interests in the region in mind, the Crown Prince adopted a calibrated approach towards India and Pakistan by walking the tightrope with extreme caution at a time when tensions are running high both in West Asia and South Asia.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    India-Saudi Arabia Relations, Pakistan-Saudi Arabia Eurasia & West Asia https://idsa.in/system/files/ind-saudi-arab.jpg https://idsa.in/system/files/thumb_image/2015/ind-saudi-prince.jpg IDSA COMMENT
    Why Creating an Indigenous LTE Chipset is Such a Big Deal Ashish Chhibbar February 25, 2019

    India, the second largest smartphone market in the world, needs to encourage and incentivise its ICT industry to not only boost ‘Skill India’ and ‘Make in India’ initiatives but also provide cyber autonomy to its critical cyber assets.

    Speaking at the Chennai International Centre’s first Business Visionaries Series talk on February 09, 2019, Vembu Sridhar of Zoho Corporation declared that: “We have developed a 4G LTE Modem in stealth mode. 50 engineers worked for eight years, and it taped out just last week in Taiwan. 5G is on its way. India must have its own LTE chip for national security.”

    With these many words, the Indian Information and Communications Technology (ICT) industry came of age and shattered the glass ceiling by developing and manufacturing indigenous high end chipsets. The news comes in quick succession to another such remarkable achievement i.e. Project SHAKTI of the Indian Institute of Technology (IIT) Madras, which in August 2018 announced the development of a family of six types of microprocessors with the initial batch of 300 chips of Class C processor called RISECREEK being manufactured free of cost by Intel Corporation at their facility in Oregon.

    Development of indigenous microprocessors not only opens up immense business opportunities in the ICT space but provides a very high degree of security and assurance to strategic cyber systems ranging from space, infrastructure and navigation to power, defence and nuclear. The next step in becoming a true power house in the ICT arena would be development of indigenous systems and technologies covering the entire gamut of ICT ecosystem ranging from high end servers and routers to last mile modems and smart phones.

    The Long Term Evolution (LTE) Segment in Global Cellular Market

    Mobile communication standards are classified in terms of generations or “g”. The 2g networks had a maximum data rate of 64 Kilobits per second (Kbps) and could barely pass data required for multimedia messaging service (MMS). The 3g networks have a maximum data rate of 2 Megabits per second (Mbps) and are capable of sending and receiving a host of data applications including web pages, etc. In 2008, the International Telecommunications Union (ITU) promulgated the 4g standards which had peak data speeds ranging from 100 Mbps (for mobile devices) to 1 Gigabits per second (Gbps) for static hot spots. Since none of the cellular networks were able to achieve these data ranges, LTE as a marketing terminology was coined to specify those systems and devices which had progressed far beyond the 3g data rates but were yet to achieve the 4g data rates. Thus, 4g LTE written near the antenna symbol on the mobile phone specified that the peak data rates were higher than 2 Mbps but had not yet achieved 100 Mbps.

    Another aspect to LTE is transition from circuit switching to packet switching and Carrier Aggregation (CA). Older networks used to rely on circuit switching technology. In this a circuit was engineered end to end (from host mobile phone to destination mobile phone) before the call being processed. This ensured a higher quality of service but with a lesser data rate and the call used to get disconnected in case a link in the connection suffered a break down during the call. In packet switching technology, the data stream is divided into data packets of fixed length with each packet being sent from the host to destination device through multiple routes. The packets are combined at the destination end and some loss of packets is acceptable to the system. This technology can provide higher data rates and is used extensively in video calls as well as voice calls over a host of social media applications like Skype, etc. Sometimes, it is referred to as Voice over Internet Protocol (VOIP) or Voice over LTE (VoLTE). Secondly, most of the cellular service providers hold licences of a smaller block of mobile radio spectrum (one carrier channel is of 20 Megahertz or Mhz bandwidth). In order to achieve higher data rates, blocks of spectrum (carrier channels) are aggregated dynamically to achieve a higher bandwidth (say, 40 Mhz for LTE cat 6 speed) and are referred to as 2xCA or 3xCA.

    There are 20 User Equipment (UE) categories (based on their uplink and down link data speeds) specified in the LTE standards. These UE categories enable the LTE base stations to communicate effectively with the terminal devices (smart phone, tablet, hotspot, etc.). LTE 0 has a maximum downlink as well as uplink data rate of 1.0 Mbps while LTE 15 has a maximum downlink data rate of 750 Mbps and uplink data rate of 226 Mbps. LTE 6 to LTE 8 are known as LTE Advance or LTE-A and use CA for increasing data rates.

    The LTE market is expected to garner business of up to US$ 997 billion and grow at a Compound Annual Growth Rate (CAGR) of 58.2 per cent during 2013-2020. Qualcomm is the market leader with 65 per cent of the market share. Its microprocessor Snapdragon 820 is the heart of Samsung top end smartphone Galaxy S7 as well as LG G5. The Snapdragon820 supports LTE 12 (maximum downlink data rate of 600 Mbps, uplink data rate of 150 Mbps with 3xCA). Apart from Qualcomm, the other major players are Samsung, Hi-Silicon (subsidiary of Huawei), Intel and MediaTek. The LTE chipsets are used in network transmission systems and user terminal devices like smart phones, tablets, mobile hotspots, USB dongles, ultra-books and host of Internet of Things (IoT) devices.

    According to Vembu, the Zoho chipset is on the transmission side (modem) and not on the terminal device side, details of which are yet to be disclosed. The latest LTE modem by Qualcomm is Snapdragon X24 which supports category 20 LTE (with peak downlink data rate of 2 Gbps and uplink of 316 Mbps). It has been estimated that the global smart phone population is expected to reach 2.5 billion in 2019 (36 per cent of the global population). With 1.3 billion smart phones, China will top the list, followed by India at 530 million, and the United States of America coming in a distant third with 229 million. In 2018, mobile devices accounted for 73 per cent of the time spent on using the internet clearly establishing the predominance of smartphones over other mobile devices, like laptops and tablets, when it came to use of internet for personal use.

    Need to Indigenise ICT Capabilities

    The broad categories of ICT industry include software, devices and infrastructure, IT and business services, emerging technologies and telecommunication services. By 2019, the global ICT market including video and TV services is projected to be €4.4 trillion industry. The Indian ICT sector is expected to have revenue of US$ 225 billion by 2020 with a growth CAGR of 11.1 per cent. In addition, as per the United Nations Conference on Trade and Development (UNCTAD) statistics of 2017, India had a negative trade balance of $ -147,840 million in spite of an export growth rate of +13.3 per cent with the share of ICT goods at mere 0.89 per cent of the total export. The above statistics clearly indicate that by indigenisation of ICT industry, India will not only be able to substantially reduce its imports but also drastically improve its global exports resulting in a favourable trade balance between exports and imports, in addition to generating revenue and employment opportunities for our vast population.

    Another important aspect with respect to cyber indigenisation is the growing use of cyber domain for intelligence gathering, espionage, crime and warfare. Kaspersky, in its latest report, highlighted the growing cyber threat to mobile devices especially smartphones and tablets as they become the preferred medium for accessing the internet. One of the looming threats to mobile devices employed in critical tasks is the use of embedded spyware or backdoor in the chipset, which are tough to detect and can cause not only enormous loss of critical data but can also be remotely controlled to either malfunction or preform wrongly during crucial moments.

    On October 04, 2018, Bloomberg came out with the sensational news of Chinese embedding covert electronic backdoor the size of a grain of rice into servers of major American companies including Apple and Amazon during the manufacturing stage. Nowadays, chipset production technology has advanced to producing System on Chip (SoC), which essentially means integrating many different devices like antenna, transceiver and processor onto one single chip which makes it nearly impossible to detect the presence of backdoor in the chipset, which creates serious problems for devices employed in performing critical functions. Under such conditions, having indigenous ICT technologies spanning the entire ICT spectrum enables protection of critical IT systems as well as provides the much needed cyber autonomy.

    Lessons from Zoho Corporation

    Zoho Corporation is a fully private owned company which started off as AdventNet Inc. in 1996 with WebNMS as their first business product for telecommunication industry. Today, the company has over 25 products and 50 mobile apps and specialises in providing a complete range of software solutions for running a business including Customer Relationship Manager (CRM), Mail, Books (accounting software), Projects and Create (for developing customised software for business needs). The company not only specialises in cloud based business software but also provides specialised software to the telecommunication industry for managing IT assets and networks. Zoho Corp boasts of having a worldwide user base of 35 million and revenue of Rs. 2,468 crores.

    What is unique about the company is that it runs a university which picks up talented youth from low income households and after training absorbs them in its workplace. Almost 15 per cent of the 3,600 employees of Zoho Corp are Zoho University graduates. Also, the amount of time and effort placed on Research & Development (R&D) is worth a mention. Vembu has often remarked that the reason why the company has never gone public is because it wants to work according to its own clock without worrying about giving revenue to the investors at fixed intervals. Developing and improving a product for eight years with a team of 50 scientists in such a time sensitive industry speaks volumes about the R&D efforts as well as pursuit of excellence of Zoho Corp. The company has therefore been extremely successful in producing indigenous world-class software and selling it to the world, and with the production of LTE chipset it would soon start making forays into the hardware segment of the ICT industry.

    In a sense, Zoho Corp is a role model for Indian companies trying to enter the highly competitive and niche field of ICT manufacturing and services. It has proved that the global ICT market is open to absorbing new players irrespective of their size and revenue provided they offer well researched innovative solutions and products as per global standards at competitive price.

    Conclusion

    The almost back to back announcements of IIT Madras and Vembu Sridhar in successfully designing and carrying out initial production of microprocessors and chipsets is a much awaited shot in the arm for Indian ICT industry and signifies its coming of age. What now needs to be watched is the type of modem chipset Zoho Corp has designed and its subsequent acceptance and absorption in the cutting edge global mobile industry.

    India, being the second largest smartphone market in the world, definitely needs to encourage and incentivise home-grown ICT industry for not only giving a boost to its ‘Skill India’ and ‘Make in India’ initiatives but also to provide cyber autonomy to its critical cyber assets. In addition, there is an urgent need to have the entire gamut of ICT infostructure to be indigenously manufactured including the much awaited Galium Nitride fab as proposed by the Indian Institute of Science, Bangalore.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

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    US-Venezuela Stand-off: Impact on Global Oil Prices Shebonti Ray Dadwal, Chithra Purushothaman February 20, 2019

    With US sanctions in place on the Venezuelan oil industry, global oil prices are set to rise once again, which may have major geopolitical and geo-economic consequences.

    Oil prices are on the rise again. Part of this is due to the ongoing stand-off between the United States and Venezuela, one of OPEC’s member producers. However, Washington’s announcement on January 28, 2019, after a two-year long unrelenting pressure campaign, that it was imposing sanctions on the Venezuelan oil industry did not initially have the expected impact on global oil prices, since Venezuela’s oil production has been declining over the last few years and now stands at around 1.57 million barrels of oil per day (mbd), down from 3.1 mbd in 2010. Moreover, the US, which was the largest market for Venezuelan crude, will now terminate imports completely after sanctions were imposed on Petroleos de Venezuela, S.A (PdVSA). Essentially, the sanctions seek to deprive the Nicolas Maduro government of oil revenues worth $11 billion, besides blocking some $7 billion in state assets. Moreover, all property and interests in property of PdVSA that are subject to US jurisdiction would be frozen. And Americans are generally prohibited from engaging in transactions with PdVSA, and its 50 percent-owned subsidiaries would be prohibited from engaging in transactions with the company. However, the general licenses for certain transactions and activities related to PdVSA and its subsidiaries, viz., the US-based PdVSA subsidiaries such as CITGO Holdings and PDV Holdings, as well as several American companies that are importing Venezuelan oil have been permitted to continue till July 27, 2019 although payments for transactions benefiting PdVSA will have to be made into an escrow account that the Maduro government would not be able to access.1

    How is Venezuela expected to deal with this increasingly difficult situation given that oil is its main revenue earner? More importantly, how will this crisis impact on global oil prices, and what will the repercussions be for India, which is not only the third largest consumer and importer of oil, but currently the largest buyer of Venezuelan oil?

    The first challenge that Caracas faces is to find markets for its crude. With the American market now on the verge of dissipating, Asia, and particularly China and India, have increasingly become Venezuela’s largest and perhaps the only other possible markets. Refineries in these countries are the only ones outside the US with the ability to refine Venezuelan heavy, sour crude. Even before the most recent sanctions were imposed by the United States, President Maduro had said during his visit to China in September 2018 that Venezuela would increase oil exports to China to one mbd. This would essentially be in return for the loans Venezuela had received from China – more than $50 billion over the last decade, in addition to $17 billion as loans and credit lines from Russia. But as Caracas still owed about $20 billion to Beijing, it has been repaying the debt with oil exports in a barter deal. China has also agreed to invest $5 billion more in Venezuela to boost crude production.2

    The other market that Venezuela is banking on is India. At the Petrotech meeting in New Delhi on 10-12 February 2019, Manuel Quevedo who is not only Venezuela’s oil minister but also the president of PdVSA and the current chairman of OPEC, said that his country wanted to double its export of oil to India. In 2018, India imported more than 3,40,000 barrels per day (b/d) from Venezuela, becoming the second largest importer of Venezuelan oil.3 Caracas has also expressed interest in expanding its trade in technology and services with New Delhi.

    Given that several European nations, along with the United States, have de-recognised the Maduro government in favour of opposition leader, Juan Guaidó, payment for Venezuelan oil would be a challenge for India. As of now, New Delhi has not taken any firm stand on the issue, having issued a statement only on January 25, 2019, that: “India and Venezuela enjoy close and cordial relations”, and “We are of the view that it is for the people of Venezuela to find political solution to resolve their differences through constructive dialogue and discussion without resorting to violence. We believe democracy, peace and security in Venezuela are of paramount importance for the progress and prosperity of the people of Venezuela.”4  

    The companies that have been buying crude from Venezuela are Reliance Industries Ltd. (RIL) and Nayara Energy (formerly Essar and which is partly owned by Russia’s Rosneft).5 Prior to the recent US-Venezuela stand-off, RIL had been paying PdVSA in cash through the latter’s American subsidiary, CIDGO. However, as in the case of Iran from which RIL imported crude, the company may terminate its trade with PdVSA due to its exposure to the US financial system. Nayara, however, may decide to continue to trade with Venezuela, given its links with Rosneft, which is an important source of loans for PdVSA, although Nayara has terminated all imports from Iran after it was hit with the recent US sanctions. Such decisions will, however, be weighed against possible sanctions on shipping and payment mechanisms, which may be imposed after July 28, 2019.

    With regard to the Indian state-owned refiners, it is unlikely that they will opt for Venezuelan crude because they will need to blend it with lighter crude before it can be processed in their facilities. Moreover, given its falling oil production, it is unclear whether Venezuela would be able to meet its contractual obligations with current clients. Already, Venezuelan shipments to India fell by 11 per cent in the first half of 2018 due to production problems within PdVSA, which forced Indian refiners to look for alternate supplies, although not many can replace the Venezuelan heavy crudes.

    At the Petrotech meeting, Quevedo had also said that Venezuela was open to conduct trade with India through a barter system, which would provide India the opportunity to balance its trade with Venezuela. In fiscal 2017-18, India’s imports from Venezuela were worth $5.87 billion, while its exports totalled $79.3 million.6 Hence, a barter system could allow for the trade deficit to be bridged to some extent. Currently, India has limited items to export to Venezuela, however, and is trying to expand its trade basket to include rice and pharmaceuticals,7 apart from the current items of exports consisting of chemicals, calcined petroleum coke, textiles and engineering products and machinery.8 India’s main imports from Venezuela are crude oil, iron pellets and electrical cables.9 Venezuela has also evinced interest in collaborating with India in the health, bio-technology, remote sensing and IT sectors.10

    However, the MEA spokesperson has clarified that “Venezuela is the chair of OPEC and GECF (Gas Exporting Countries Forum). We don't have any barter system with Venezuela; commercial considerations and related factors will determine the value of trade which we have with any country.”11 It is also likely that PdVSA would offer incentives like price discounts and other sweeteners to increase oil sales to India.

    Although Venezuela has appealed to OPEC for support against US sanctions, there has been no official statement from the cartel so far. However, with the OPEC plus countries now agreeing to further cut production, accompanied by the fall in Iranian and Venezuelan supplies, producers in general will gain as the price of oil has gone up, with some predicting that it may cross $70 a barrel over the next few weeks.

    According to some reports, the US is planning more punitive actions, including blocking foreign companies from dealing with PdVSA, in order to hasten Maduro’s exit. This may deter countries that are still dealing with the Maduro regime from doing business with PdVSA. In the meantime, while the sanctions have sent ripples down the global oil sector, the crisis could have larger geopolitical and geo-economic consequences, with big powers like the US, Russia and China picking sides. All in all, the world seems set to undergo yet another round of high oil prices.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

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    Consolidating India-Iran Cooperation Nagapushpa Devendra February 14, 2019

    While Iranian Foreign Minister Zarif’s visit has created a better environment, the challenge lies in sustaining the current momentum

    India and Iran are trying to manage the impact on their bilateral relationship of US withdrawal from the JCPOA and re-imposition of sanctions on Iran. The visit of Iranian Foreign Minister Mohammed Javad Zarif to India on 7-9 January 2019 was an attempt to provide impetus to various aspects of the bilateral relationship. While the focus of engagement during Zarif’s visit was on enhancing economic cooperation, the issue of Afghanistan in the backdrop of Trump’s announcement to withdraw American troops was also discussed. Zarif termed his visit “productive”.

    Economic Engagement

    India-Iran ties have traditionally been dominated by oil trade. Bilateral trade during fiscal 2016-17 stood at USD 12.89 billion, with Indian imports constituting USD 10.5 billion and exports accounting for USD 2.4 billion. When the Obama administration lifted US sanctions on Iran, India increased its share of oil imports from Iran from 7 to 13 per cent. However, in 2018, the Trump administration re-imposed oil-related sanctions on Iran and urged countries to reduce their imports of Iranian oil to zero. At the same time, the Trump administration granted India, along with China, Turkey, Japan, Turkey, Italy and Greece, country specific waivers under Section 1245 of NDAA 2012, which allows companies to continue importing Iranian oil for 180 days. India, which had previously planned to raise oil imports from Iran to around 500,000 bpd in 2018-19, will now be buying only 300,000 bpd up to March 2019.

    As the deadline for the waiver period approaches, Indian officials are working with their Iranian counterparts to find a way to minimize the impact of unilateral US sanctions. One mechanism they have agreed upon is the payment of dues for Iranian crude in Indian rupees, which Iran will use to source non-sanctionable and humanitarian goods like food and medicine from India. Discussions were also held in this regard during Zarif’s visit. During a public event in which Zarif participated, Minister of State V.K. Singh noted the potential for deeper cooperation in the engineering and pharmaceutical sectors. Speaking at the same event, Gholamhossein Shafei, the president of Iran Chamber of Commerce Industries, Mines and Agriculture, noted the potential for partnerships between Indian and Iranian companies in the field of medicine.

    India and Iran also need to address other issues that have tended to constrain bilateral trade. For instance, on the agricultural front, Shafei stated that the imposition of high tariffs on imported Iranian farm products is a major barrier for Iranian exporters. Another matter of concern is the increasing cost of urea imports from Iran. Due to US sanctions, Tehran cannot sell fertilizers directly to India but only through intermediaries. Indian farmers are paying 38 per cent more for Iranian fertilizer than earlier. This issue merits the attention of Indian and Iranian officials.

    The energy sector is another important area of concern. Iran's deputy foreign minister for economic diplomacy Gholamreza Ansari has urged India to seek another waiver from US sanctions to ensure that their oil trade does not suffer. New Delhi faced a similar situation in 2012, but on that occasion had managed to meet the US requirement by significantly reducing its imports from Iran and thus meeting the exemptions granted under the Significant Reduction Exemption (SRE) category of NDAA 2012. For India, Iranian crude is crucial because of subsided prices and 90-day credit facility. Since the SRE provision went back into effect on November 5, 2018 after the US withdrawal from JCPOA, India would now have to continue to reduce its imports of Iranian oil.

    There are also other barriers to importing Iranian crude. India mostly used to employ foreign carriers to import oil from Iran. But US sanctions have deterred international shippers and insurers from extending their services. Currently, Iran is providing both tankers and insurance under CIF contract (Cost, Insurance and Freight). But this is not sustainable because, according to the Merchant Shipping Rules 2012, it is mandatory for foreign ships entering Indian ports to hold a valid third-party liability cover, commonly referred to as protection and indemnity (P&I). Such third-party liability risks have to be insured with the London-based International Group of P&I companies or an insurance company authorized by the Indian government. As foreign firms are susceptible to sanctions, it is imperative that India and Iran negotiate the matters of insurance and identify a host to cover the liability.

    Although economic diplomacy was the key highlight of Zarif’s visit to India, not much was said about the impasse over the Farzad B gas deal. The negotiation of the deal was meant to be completed by September 2017, but has been delayed due to issues over pricing. Last year, the bilateral relationship became strained after Tehran sought investors like Russia’s Gazprom, while accusing India of being slow and inflexible on issues relating to pricing. In order to make their energy cooperation more significant, India and Iran have to reach a common understanding that addresses the interests of both countries.

    The Afghanistan Situation

    During the visit, Zarif raised the issue of the Afghan conflict and stressed the need to strengthen bilateral cooperation on regional security issues. For both countries, the situation in Afghanistan is a matter of acute concern. In the 1990s, they, along with Russia, had played a role in preventing the complete takeover of Afghanistan by the Taliban. But now, the two countries have diverging views on issues concerning Afghanistan.

    Firstly, their views differ on the role of the US in Afghanistan. India considers the US presence in Afghanistan as a net benefit. But Iran is of the view that the presence of US troops has only contributed to the deterioration of security and stability in Afghanistan.

    Secondly, India and Iran have differing views on the Taliban. Like Russia, China and the US, Iran views Taliban not only as a problem in Afghanistan but also as a solution. Iran’s position is that it would be impossible to have a stable Afghanistan without a role for the Taliban in governance. In January 2019, a high-level Iranian delegation affirmed Tehran’s influence over the Taliban and offered to use that influence for New Delhi. However, India is apprehensive and fears that Taliban returning to power will lead to a spike in extremism in the region.

    Lastly, Iran, as much as it is appreciative of India’s role in Afghanistan, is also trying to engage with Pakistan. During his visit, Zarif alluded that Islamabad is trying to play a positive role in getting the peace process underway and sees extremism as an existential threat. India, of course, does not see Pakistan’s role in Afghanistan as being positive. It remains to be seen how India and Iran address their divergences on the Afghan conflict in order to strengthen regional security cooperation.

    Prognosis

    Javad Zarif’s visit to India can be viewed as an attempt to re-energize economic and security cooperation. While the payment mechanism and banking issues seem to have been resolved with the implementation of the barter system and the decision to establish an Iranian bank of Pasargad branch in Mumbai, issues relating to shipping and insurance need immediate attention. Further, India and Iran must coordinate with other countries like the European Union, Russia and China to find an arrangement to circumvent US sanctions. On regional issues like Afghanistan, India and Iran need more engagement to gain a better understanding of each other’s viewpoints and further cement their partnership. Overall, Zarif’s visit has created a better environment to take the relationship forward. But the challenge lies in sustaining the current momentum.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    Note: This commentary has been amended. The US legislation under which the country-specific waiver for India and other countries was provided was originally wrongly specified as the Iran Sanctions Act of 2006. The waiver is provided under Section 1245 of NDAA 2012. The relevant sentence has been amended.

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    Defence Budget 2019-20: The Slide Continues Vinay Kaushal February 04, 2019

    Defence capability building and capability sustenance have been adversely affected over the past decade because of inadequate allocations and the status quo approach of the Defence Services.

    The public discourse in the recent past has been focussed on one particular defence acquisition and speculation as to the reasons why the number originally decided was changed. As a result, what has become lost sight of is the single most important constraint confronting the armed forces, namely, the defence budget. Defence expenditure as a percentage of the Gross Domestic Product (GDP) has been declining steadily during the last several years. In the interim budget for 2019-20 presented to Parliament on February 1, this trend continues. (See Chart 1).

    Chart 1: Defence Expenditure as a Percentage of GDP

    Chart 1 retains the consistency of what is recognised as defence expenditure, notwithstanding rationalisation in the demands in Budget 2016-17 and some reversals in 2017-18. It does not mean that the absolute amount allocated has been reducing, only that the increase has not kept pace with the growth rate of economic activity (see Table 2). As mentioned by the Finance Minister in his speech, the defence budget will be crossing the Rs 300,000 crore mark for the first time.

    Table 2
    Year Defence Expenditure GDP
    2011–12  

    170913

    8736329

    2019-20 (BE)

    305296

    21007439

    Percentage Growth over the Period

    78.63

    140.46

    But this increase in the absolute amount of allocations has not resulted in an increase in the purchasing power of the resources for three main reasons. Firstly, changes in the exchange rate of the rupee influences the purchasing power of the capital budget whether the acquisitions of weapons and equipment are made from external sources, which have to be paid for in foreign exchange), or Defence Public Sector Undertakings (DPSUs), which import the material required for producing defence use items, or even private sector companies which have to be reimbursed for Exchange Rate Variation (ERV) between the time a contract was signed and the time when they procure the material from foreign sources). Further, a major part of the non-salary portion of the revenue budget, i.e., stores and fuel, is also impacted by the exchange rate for the same reasons mentioned above with respect to the capital budget. Table 1 below indicates in percentage terms the year-on-year increases in the defence budget as well as the variation in percentage of the annual average exchange rate of the US Dollar.

    Table 3: Increase in Percentage over Successive Years

     

      2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 (RE) 2019-20 (BE)
    Defence Revenue 8.02 11.77 10.00 6.67 13.34 12.53 2.85 5.47
    Defence Capital 3.82 12.24 3.49 -2.36 8.02 4.72 3.92 10.00
    Total 6.36 11.95 7.47 3.29 11.46 9.85 3.20 6.96
    Dollar Rupee exchange rate 13.54 11.20 1.06 7.07 2.45 -3.90 8.30  

    Secondly, during 2016-17 and 2017-18, the arrears of the 7th Central Pay Commission were disbursed and had to be absorbed within the allocated budget. Hence in real terms the purchasing power of the resources available for building and sustaining defence capability has been reducing every successive year.

    Table 4: Share of Pay & Allowances of Army, Navy and Air Force as a percentage of Defence Revenue Expenditure pre and post 7th CPC
      2015-16 2019-20 (BE)
    Defence Revenue Expenditure

    145936

    201902

    P&A - Army, Navy & Air Force

    82828

    121252

    Percentage

    56.76

    60.05

    The third factor that has contributed to reducing the purchasing power of the funds allocated for defence is actually an outcome of the policy changes effected to incentivise Make in India. In 2015-16, with a view providing a level playing field to the domestic private sector vis-à-vis public sector defence entities, the government withdrew the excise duty exemptions that were until then made available to the Ordnance Factory Board (OFB) and DPSUs, as well as the exemptions from countervailing duty (CVD) and special additional duty (SAD) that were until then permitted for DPSUs, OFB and primary contractors of the Ministry of Defence.

    Consequently, excise duty at the rate of 12.5 per cent became chargeable on spares parts; and the impact of customs duty was 18.50 to 29.74 per cent on the material cost component. The exemption from customs duty of direct imports by the MoD was also withdrawn through the Finance Bill, 2016-17, and basic customs duty (BCD) of 5 to 10 per cent, CVD of 12.5 per cent and SAD of four per cent began to be levied from 1 April 2016. The impact of this too would be in the range of 18.50 to 29.74 per cent. The result of all this was that the sale price of supplies ex-DPSUs and OFB went up in 2015-16 and the price of direct imports also went up from 2016-17. This placed a substantial additional financial burden on the scarce capital budget. It also impacted the revenue budget. In addition, the implementation of the Goods and Services Tax (GST) has increased the service tax on defence-related items repaired or overhauled by DPSUs and OFB to 18 per cent, an increase of six per cent over the previous rate. In effect, well-meaning policy changes have increased prices over and above inflation and placed additional pressure on the allocated resources.

    Conventionally, a country’s defence expenditure is seen as a percentage of GDP. The primary reason for using GDP as the denominator is that it has a consistent definition followed by all countries, international financial institutions as well as the United Nations. Even the North Atlantic Treaty Organization (NATO) countries, which, with the exception of new members like Ukraine, have no physical threat to their territorial integrity, and despite the United States’ (US) assurances, feel the need to spend two per cent of their GDP on defence. Some experts argue that defence expenditure as a percentage of GDP is not the right measure since GDP does not mean resources available with the Government and, therefore, the relationship between defence expenditure and central government expenditure would be a better indicator. Others argue that Defence Pensions need to be included in addition to what is traditionally regarded as defence expenditure. Table 5 below addresses these reservations.

    Table 5
    Head

    ACTUAL EXPENDITURE AS PER ACCOUNTS AT A GLANCE OF CGA MoF

    BUDGET 2019-20

     Defence Expenditure 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 (RE) 2019-20 (BE)
     Revenue 111277 124374 136807 145936 165410 186129 191431 201902
     Capital 70499 79125 81887 79958 86371 90445 93992 103394
     Total 181776 203499 218694 225894 251781 276574 285423 305296
     Total expenditure of GOI                
     Revenue 1243513 1371772 1466992 1537761 1692986 1878835 2140612 2447907
     Capital 166858 187675 196681 253022 286282 263140 316623 336293
     Total 1410371 1559447 1663673 1790783 1979268 2141975 2457235 2784200
     Defence Capital Expenditure as a % of total Govt Capital Expenditure 42.25 42.16 41.63 31.6 30.17 34.37 29.69 30.75
     Defence Expenditure as % of total Government  Expenditure 12.89 13.05 13.15 12.61 12.72 12.91 11.62 10.97
     Defence Pension 43368 45500 60450 60238 87826 92000 106775 112080
     Defence Pension as % of Govt expenditure 3.07 2.92 3.63 3.36 4.44 4.30 4.35 4.03
     Total 15.96 15.97 16.78 15.98 17.16 17.21 15.96 14.99

    The continuing slide in defence allocations puts a strain on sustaining and building the capability of the armed forces. Resource constraints are a challenge and opportunity for the MoD and the Defence Services to urgently initiate reforms – structural, procedural and administrative – to optimise expenditure and apportion a greater portion of the resources allocated for capability building (capital budget) and capability sustenance (operations and maintenance expenditure).

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

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    One Year of Pashtun Tahafuz Movement Zainab Akhter January 28, 2019

    Although the Pashtun Tahafuz Movement has been able to mainstream the Pashtun issue and has inspired popular empathy, its anti-establishment thrust has made it a soft target for the pro-establishment media and political actors.

    The killing of Naqeebullah Mehsud, a young Pashtun from Waziristan in Karachi on January 13, 2018, opened the floodgates of protests by the Pashtuns, giving rise to the Pashtun Tahafuz Movement (PTM), which roughly translates into ‘Movement for Safety and Security of the Pashtuns’. The movement’s main aim was to highlight the plight of the Pashtun community, the second largest ethnic group in Pakistan, constituting nearly 15.42 per cent of the population. 

    Since its beginning, PTM has organized protest rallies in most of the major cities including Quetta, Peshawar, Lahore, Swat, Karachi, Dera Ismail Khan, Swab and Bannu. The latest rally was held in Tank, Khyber Pakhtunkhwa, on January 13, 2019, to observe the first anniversary of the  killing of Mehsud. Against the backdrop of the tight scrutiny from the government of the media coverage of the PTM protests and arrest of Pashtun leader Alamzeb Mehsud on January 21, 2019 under the provisions of the anti-terrorism law, this article seeks to place in perspective the significances of PTM in Pakistan’s overall political landscape.

    Pashtuns mostly occupy the north-western part of the country and have the second largest representation in the Pakistan Army as well. As an ethnic community straddling two sovereign countries — Pakistan and Afghanistan, Pashtuns share common nationalist feelings. Given persistent ethnic and familial ties between the Pashtuns in both countries and intermittent demand from Afghan leaders for a greater Afghanistan comprising of the Pashtun areas in Pakistan, any manifestation of Pashtun nationalism in Pakistan is a point of worry for the Pakistani authorities, as it is often construed as a potentially disintegrative development. 

    The Af-Pak border region has been in turmoil since the days of the Afghan jihad, when the Pakistani tribal areas along the border hosted the mujahedeen fighting the Soviet forces. Post-9/11, the tribal areas again came under focus as Al Qaeda terrorists and Taliban cadres fleeing Afghanistan landed up there forcing the Pakistan Army to launch multiple operations to either eliminate or flush out these elements. In the days since, the whole area dominated by the Pashtuns has witnessed armed action leading to death, deprivation, disappearances and large-scale displacement of civilian population. The resultant anxieties and concerns have naturally flown into the movement that we see today in the shape of the PTM.

    The movement led by Manzoor Pastheen gained lots of traction in January 2018 and triggered protests in big cities like Lahore and Karachi where PTM leaders addressed huge public rallies. This was seen as the largest non-violent protests in Pakistan and thus attracted considerable international attention. Although there was only sporadic and controlled reporting of the movement in the Pakistani media, the international media covered the issue in greater detail. This encouraged PTM members to organize more rallies and reiterate their demands, which included the removal of the draconian Frontier Crimes Regulation (FCR), the release of missing persons, stopping the humiliation of Pashtuns at security checkpoints, and removal of landmines in the Federally Administered Tribal Areas (FATA).

    The pressure on the Pakistan government was such that it had to give in to some of the movement’s demands. Firstly, it agreed to no longer impose curfews in the region and promised to develop a mechanism to find the missing persons. Most important of all, the FATA Interim Governance Regulation 2018, signed by the President of Pakistan on May 28, 2018, replaced the FCR and outlined how FATA would be governed, "within a timeframe of two years", even as the region is merged with Khyber Pakhtunkhwa (KP).

    Interestingly, this new interim regulation placed a check on the actions of the security forces that previously operated in the backdrop of the prevailing lawlessness in the region.  Thanks to the PTM, the public pressure around the Naqeebullah case was such that the then Senior Superintendent of Police of Karachi's Malir District, Rao Anwar Ahmed Khan, who led the fake encounter of Mehsud, was forced to go into hiding. The movement became so prominent that some analysts in Pakistan as well as outside predicated that it could turn into a political party. Riding on the high tides of the PTM, Pashtun leaders Mohsin Dawar and Ali Wazir fought the general elections of 2018 as independent candidates and secured their respective seats in the parliament. They kept supporting the PTM and voiced the rights of the Pashtuns at the political level and therefore faced the wrath of the PTI government.

    By over-emphasizing the negative role of the Pakistan Army in the region, the PTM unwittingly let the movement lose steam a few months later. The overuse of the term, Yeh jo dehshat gardi hai, iss ke peechhay wardi hai (‘Behind this terrorism is the uniformed army’) by PTM protesters irritated the Pakistan Army, which, in turn, accused the PTM of being a tool of anti-Pakistan forces at the regional and international levels, alluding to the involvement of Indian agencies. Therefore, rather than addressing PTM’s genuine grievances, the then PML-N government went on the defensive. With Imran Khan’s government, which assumed power in August 2018 and is regarded as an extension of the Pakistan Army, there is very little attention being paid to PTM and its demands.

    Charging the PTM of being supported by an external hand, Pakistani authorities have restricted the coverage the movement’s activities get, both in local as well as international media. Radio Mashaal, a Pashto language broadcaster funded by the US, was banned and blocked for covering PTM’s activities. Voice of America’s Urdu Language website, Deewa, which primarily catered to the Pashto-speaking audience in the border regions near Afghanistan, was sporadically blocked in October 2018 and then permanently dropped by various service providers in December 2018. Additionally, various police cases were filed against journalists covering the local rallies of the PTM.

    These bans and coercive scrutiny of the media came at a time when the Pashtun activists were charging that freedom of expression in Pakistan was under severe attack. Mohsin Dawar and Ali Wazir were stopped from travelling to Dubai to attend a Pashtun Cultural event and their names were put on the Exit Control List (ECL). The recent arrest of Alamzeb on the pretext of rioting and inciting hatred at a PTM protest demonstration in Karachi yet again reflects the coercive strategy of the government to muzzle the movement.

    The balance sheet of PTM after one year of rallies and protests is not as impressive as it promised to be. Although it has been able to mainstream the Pashtun issue in Pakistan and inspired popular empathy, its anti-establishment thrust has made it a soft target of the pro-establishment media and political actors. The perception created by the state that it is acting as a proxy of outside powers, especially India, to de-stabilise Pakistan, has made it lose steam too soon. Even if the allegation has no evidence whatsoever, it has deep resonance in Pakistani society, where anti-India sentiments have been periodically mobilised by the security establishment as a rallying point to stave off the efforts of ethnic groups demanding their rights.

    While Manzoor Pastheen and PTM were given wide space in the Pakistani media initially, there was a complete ban on the coverage of its rallies after rumours of it being sponsored by foreign agencies did the rounds. The international media was not granted access to the Pashtuns. Soon, the PTM’s demand to try and punish Rao Anwar, who led the fake encounter of Naqeebullah Mehsud, was ignored by the media. Instead of taking any action against the erring policeman, the state has allowed him to go underground. Rao Anwar has been allegedly provided a safe haven by the Army, according to Pakistani media.

    Against this backdrop, the recent protests in Tank, KP, was a bit of a surprise. The massive gathering of Pashtuns in Tank to observe the first anniversary of the murder of Naqeebullah Mehsud signalled the persistence of Pashtun nationalist sentiments and the continued existence of a sense of grievance among the Pashtuns vis-à-vis the state of Pakistan. Addressing the gathering, Manzoor Pastheen reiterated his resolve to continue the protests “even if it takes hundred years” to seek justice through peaceful means.

    However, predictably, there was no coverage of the event in the Pakistani media. The international media also seems to have lost interest in the issue. Only sporadic amateur videos shot by the protesters are available in the social media in Pashto language. In an interesting article in Al Jazeera, Taha Siddiqui, who fled the country after abduction attempt, and is now living in exile in France, argued forcefully that efforts by the Pakistani government to silence the movement have backfired. He stressed that as a “result of this state-led harassment campaign, the PTM gained more traction and its gatherings are becoming larger than ever”.  He cautioned the government that this movement, although nonviolent until now, has the potential to become violent, if the government continues with its heavy-handed tactics to suppress it.

    At the political level, the PTI governments in KP and in Islamabad have raised the aspirations of the people but not done anything to fulfil them. The presence of a large number of protesters in Tank may also indicate popular disillusionment with the way the present government has treated the Pashtuns. In this context, it remains uncontested that the PTM is a grassroots movement of the Pashtuns demanding basic rights within the constitution. It thus has the potential to transform itself into a political party. But if the Pakistan government continues to handle the Pashtun issue with an iron fist, the movement has the potential to transform into a violent struggle in an environment where gun-culture reigns supreme. A lot will thus depend on the state’s overall policy towards the Pashtuns in general and the PTM in particular. 

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

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    The New Saudi Initiative of ‘Arab and African Coastal States of the Red Sea and the Gulf of Aden’ Prasanta Kumar Pradhan January 15, 2019

    Facing huge political and security challenges in the Arabian Peninsula, Saudi Arabia now looks westward to the Red Sea and the Gulf of Aden coast for a new regional security arrangement.

    A meeting of the foreign ministers and representatives of seven coastal countries of the Red Sea and the Gulf of Aden – Saudi Arabia, Yemen, Jordan, Egypt, Sudan, Djibouti and Somalia – was held in December 2018 in Riyadh. An extremely significant outcome of the meeting was the decision to establish a new entity in the region – the Arab and African Coastal States of the Red Sea and the Gulf of Aden (AARSGA) – to coordinate and cooperate on political, economic, security, cultural and environmental issues.

    Concerns among the aforesaid countries bordering the Red Sea and Gulf of Aden regarding piracy and maritime security is nothing new. There have been several meetings in the past among these countries to discuss the common security challenges facing the region. But the latest Saudi initiative to establish a new entity in order to bring together the countries of the region into a regional framework of cooperation is distinctly new. At the end of the meeting, the then Saudi Foreign Minister Adel Al Jubeir stated that this initiative “is part of the kingdom's efforts to protect its interests and those of its neighbours.…and to create synergies between the various countries” and added that “the more cooperation and coordination that you have among the countries of this region, the less negative outside influence will be on this region.”1 The meeting and Jubeir’s statement are also reflective of the emergent security and strategic concerns of Saudi Arabia in the region.

    The region on the western side of the Red Sea and the Gulf of Aden is critically important for Saudi Arabia. In recent years, Riyadh has made conscious efforts to engage with the countries of this region. Saudi Arabia recently mediated between Ethiopia and Eritrea, ending a decades old conflict. It has good ties with Djibouti where it is building a military base. Additionally, Riyadh has the financial power to provide developmental aid and assistance to the African countries.

    Saudi Arabia’s outreach to the African side of the Red Sea and Gulf of Aden is driven by its desire for security in these waters including safety of the sea lines of communications (SLOCs) in view of threat from piracy and terrorism. At the same time, the growing influence of its regional adversaries such as Turkey, Qatar and Iran in the region has also emerged as a key strategic challenge for Riyadh. Given the strategic location of the region, Riyadh’s engagement has not been proportionately resolute and extensive. Concerned about long strides taken by the rivals in the region, Saudi Arabia seems to have come up with the idea of establishing a new regional entity to protect and promote its national interests.    

    The Houthis capturing power in Yemen has emerged as a direct national security challenge for Saudi Arabia. To the ultimate trepidation of the Saudis, the Houthis not only have launched rockets towards Riyadh but also have attacked Saudi oil tankers in the Red Sea. The Houthis were in control of the port city of Hodeidah till recently before they withdrew in December 2018 as per the ceasefire agreement with the United Nations. But the situation in Yemen is far from stable. Saudi Arabia has major ports along its Red Sea coast, which are used for trade and commerce.

    The continuing presence of Houthis in Yemen close to the waters of the Red Sea is therefore an obvious security threat for Saudi Arabia. In the face of security challenges emanating from Yemen, the safety of the SLOCs in the Red Sea, Strait of Bab el Mandeb and the Gulf of Aden has emerged as an area of priority for Riyadh. Saudi Arabia has alleged that Iran has been supporting the Houthis by providing them with funds, weapons and political support, an allegation that Iran categorically rejects. Iran has often threatened to close the Strait of Hormuz in case of any conflict with the Gulf Arabs. Further, as the world’s top oil supplier, and its economy heavily dependent on petroleum sector, any threat to these choke points would directly affect its national economy.

    Besides, and as stated earlier, a number of regional contenders of Saudi Arabia have stepped up their engagement with the countries in the region. In recent years, Turkey has expanded its relationship with Sudan. Turkish President Recep Tayyip Erdogan visited Sudan in 2017 and both countries have signed a number of agreements including on security, trade and investment. Importantly, as per an agreement, Turkey would be rebuilding the Sudanese port of Suakin on the Red Sea. Both countries have also conducted joint military exercises and Turkey also provides training to the Sudanese police officers. Also, in the Gulf of Aden, Turkey has a strong presence in Somalia with its largest overseas military base located in Mogadishu.     

    Besides Turkey, Qatar is also strengthening ties with Sudan. For Sudan, Qatar is the most supportive country in the region. Emir of Qatar Sheikh Tamim has supported Sudanese President Omer Al Bashir who is facing popular protests. Qatar has signed a military agreement with Sudan and is a key investor in the country. Qatar also enjoys immense goodwill as it mediated between Sudan and the Darfur rebels. Somali President Mohamed Abdullahi Farmajo had visited Doha in 2017 and again in 2018.   

    In this backdrop, the recent Saudi initiative is an effort to build bridges across the Red Sea with its western neighbourhood as it faces compounding challenges in the Arabian Peninsula. Saudi military operations in Yemen against the Houthi rebels have not yielded desired results. Rather, it has faced global criticism as it has been accused of causing civilian deaths and the ensuing humanitarian crisis in the country. The cracks within the Gulf Cooperation Council (GCC) that began with the diplomatic boycott of Qatar in June 2017 also continue to widen. The unity of the GCC, the regional organisation where Saudi Arabia once played the most dominant role, is now under severe stress. Further, Qatar has been strengthening ties with Iran and Turkey – two major regional challengers of Riyadh.

    The regional geopolitics is getting redefined post the Qatar crisis: Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt and Jordan on one side, and Qatar, Turkey and Iran on the other. Thus, with the GCC as an organisation divided, Qatar swiftly moving closer to Iran and Turkey, and the Houthis fighting stubbornly in Yemen, Saudi Arabia is looking westward to establish a new regional arrangement. The formation and successful operationalisation of such an entity would likely bring a new dimension to the geopolitics in the region.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

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