U.S. Seeks Billions in India Deals

Source :SOURCE :THE WALL STREET JOURNAL : ASIA NEWS:OCTOBER 17, 2010

The U.S. is aiming to sell up to $5.8 billion of military-transport aircraft to India and secure other major deals when President Barack Obama travels to New Delhi early next month, a visit that will seek to alter the tenor of an increasingly tense commercial relationship between the world's largest democracies.

India is set to buy 10 Boeing Co. C-17 transport aircraft in the country's largest military transaction yet with the U.S., people familiar with the matter said. The exact price is still to be determined. The total value of deals agreed to during the trip could reach $10 billion to $12 billion, including pacts for India to buy military jet engines from General Electric Co., freight locomotives and reconnaissance aircraft, these people said.

Mr. Obama's trip from Nov. 5 to 9 is meant to deepen America's ties with an Asian ally whose economic and military rise has made it a strategic counterweight to China. The U.S. also must balance relations between India and Pakistan, traditional enemies, both of which hold significant regional influence as the U.S. plans for a post-war Afghanistan.

India has been warming to American defense suppliers in the past several years. It is planning to spend tens of billions of dollars over the next several years to modernize its military and replace aging Russian-made equipment. Seeking the most advanced military technology, India is turning to American contractors and also those from France, the U.K. and elsewhere. Boeing andLockheed Martin Corp. are among the bidders for a planned $10 billion purchase of 126 multirole combat aircraft.

The visit comes as some Western companies that have made big bets in India—or plan to—are growing increasingly frustrated with restrictive regulations in sectors such as energy, technology, retail, health care and banking. The government also hasn't enacted long-planned reforms such as allowing greater foreign participation in the insurance and retail industries.

Mr. Obama is likely to raise concerns about market access—among other issues—during his visit, a White House spokesman said Sunday. He declined to provide further details.

India's stock market is sizzling, attracting billions in foreign funds. Bilateral trade with the U.S. has risen in recent years and now stands at $37.6 billion annually. Yet there is a growing perception among U.S. and other foreign businesses that India isn't living up to its hype as a destination for foreign direct investment and that India is using the attraction of its close-to-9% annual economic growth to dictate the terms of entry.

"India's pretty cocky right now," said Charles Maddox, a professor of corporate law at the Jindal Global Law School outside New Delhi, who studies foreign direct investment in India. "They're playing a brinksmanship game with the United States."

Topping the list of U.S. concerns ahead of Mr. Obama's trip is the countries' teetering civil nuclear-energy partnership, people familiar with the matter say. Though a 2008 deal ended U.S. sanctions against India imposed after its past nuclear-weapons tests, U.S. firms including GE aren't selling nuclear technology here yet. They are worried about a recently passed Indian law that exposes them to accident liability, deviating from the practice in most countries, where nuclear plant operators assume all liability. "We will not be able to support nuclear programs in countries where the nuclear liability regime is not consistent with international norms," said Michael Tetuan, a spokesman for GE.

High-level discussions within the Indian government and between the U.S. and India are continuing, people familiar with the matter say. India is hoping to assuage U.S. firms through the regulations it writes to implement the law, but U.S. officials and companies want the law revised and the liability provision stripped—a political nonstarter in New Delhi, where it would be seen as caving to U.S. pressure.

India's Commerce Department also is weighing a plan to give greater scrutiny to foreign investments in health care, a sector now open to 100% foreign ownership. The department is debating rules that would force foreign drug makers to license patents to generics makers.

"They're saying, 'Whenever we're unhappy with the price, we can issue a compulsory license and expropriate the technology,'" said Greg Kalbaugh, director and counsel at the U.S. India Business Council, which lobbies for American firms in India. "That has created vast uncertainty among investors. A lot of people are uncomfortable."

An Indian Commerce Department spokesman couldn't be reached to comment. A spokeswoman at the U.S. Embassy in New Delhi declined to comment.

Some of India's recent moves in other sectors also have worried U.S. officials. Technology firms including Google Inc. and Canada's Research in Motion Ltd., maker of the BlackBerry, face new and confusing demands to comply with government surveillance and censorship requests.

GE Chief Executive Jeff Immelt has complained in recent months that leaders of France, Germany and Russia lobby for their nation's corporate interests abroad, suggesting the Obama administration hasn't done as much as it could to stoke sales for American firms abroad in businesses such as nuclear equipment, energy turbines and health care.

Making tax-free acquisitions in India also will be tougher after the government's fight with the U.K.'s Vodafone Group PLC over its $11.2 billion acquisition of India's second-largest cellphone company in 2007. India says Vodafone owes as much as $2.6 billion in taxes that it should have withheld as part of that deal. Vodafone says the transaction was between two overseas legal entities that aren't subject to India's jurisdiction.

"It would be a very bad signal for all multinationals if you start using whatever method you can to get money out of people who actually have invested in the country," Vodafone Chief Executive Vittorio Colao said in a recent interview.

Foreign companies that want to invest in Indian roads and other infrastructure complain the government's bidding rules are too complex and that land acquisition takes too much time. Financial-services companies like Citigroup Inc. and HSBC Holdings PLC are limited by regulators to opening no more than a few new bank branches each year. Citigroup's Citibank unit attempted to get around the restriction by entering the less regulated consumer-finance business, but found more Indians than it had expected defaulted on credit-card payments and consumer loans.

Foreign direct investment into India has expanded significantly in recent years, though growth has decelerated from 146% in 2006 to 6% in the year ended March 31, when inflows were $37.2 billion.

U.S. officials acknowledge they would like to see market-opening changes faster. Still, they note, measured over the long term, commercial relations have improved dramatically.

"In any relationship where you have growing commercial activity, you're going to have challenges and disagreements," said Francisco Sanchez, U.S. undersecretary of commerce for international trade, in a recent interview in New Delhi. "But the advancement over the last 20 years has been significant. We need to keep plugging away."

—Eric Bellman, Paul Sonne, Paul Glader and Michael Phillips contributed to this article.

Write to Amol Sharma at amol.sharma@wsj.com