Today India’s Finance Minister presented the interim budget ahead of the May 2014 general elections. The latest spending plan hikes defense expenditure by 10%.

What sounds like a good news for Israeli Defense Industry, actually isn’t. For Israel, India’s second-largest arms supplier, the devil lies in the details.

The value of Indian currency has fallen sharply in the 2013/14 fiscal year, reducing actual defense budget of $37.7 billion down to roughly $30 billion. Moreover, a large part of the proposed hike is going towards the retirement benefits of defense personnel, a critical electoral group the government wants to woo ahead of the general elections.

Going by the opinion polls, even if the hawkish Centre-Right alliance (BJP) manages to form a government, it will have to deal with the challenges of stabilizing the currency, reducing the fiscal deficit and reviving slowed growth, before it can focus on defense procurement.

Israeli firms in India are gearing up to deal with a phase of declining defense sales and beating the tough economic times with new strategies.

In the era of economic liberalization India’s security doctrine is still driven by the desire to maintain greater “self-reliance”, a term embedded in India’s socialist past. However, India’s volatile currency gives this age old doctrine a pragmatic make-over. India’s premier Defense Exhibition DefExpo 2014 (February 6-9, 2014, New Delhi) pressed home this message yet again. India is increasingly looking at domestic arms manufacturers for defense procurement.

Despite promising developments in its manufacturing sector, India is well aware of the limitations of the domestic suppliers. India is promoting and financially incentivizing Joint Ventures and tie-ups as way to fill this perceived strategic gap.

Israeli Defense Companies have taken a lead in this new ball game. Israel Aircraft Industries and Rafael recently tied up with India’s Defense Research & Development Organisation (DRDO), Bharat Dynamics Limited (BDL) and Bharat Electronics Limited (BEL) to build an integrated anti-missile system, a $2 billion project.

However, there is a still a neglected piece on this board game, namely the small- and medium-sector Indian companies. Israeli companies might not be able to beat competitiveness of local manufacturing units, on grounds of their cost-effectiveness in labor and logistics; but tying up with them would capture untapped segments in Indian market. Innovation- and technology-driven Israeli Companies are ideal for tie-ups with Indian manufacturers.

Despite the challenges of Indian Market, India will remain a key strategic partner for Israel’s Defense Industry for years to come. India is tipped to spend $150 billion by 2017 to modernize defense capabilities and a good portion of this spending would go to small ticket items (McKinsey & Co. 2013, et al).

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