The American eagle circles over Bangalore

Thanks to the Aero India 2007 air show, running from 7-11 February at the Yelahanka Air Force Base near Bangalore, visitors are paying up to $1000 for a night in the city's more tony hotels.

There are many more visitors than rooms and skewing the balance further is an enormous American delegation that includes five generals, 24 top-level businessmen from the business chamber US-India Business Council (USIBC) and displays from over 50 US corporations like Lockheed Martin, Boeing, Northrop Grumman and General Electric. If confirmation was required that the Indo-US nuclear deal has opened doors for business between the two countries, it is here.

More revealing than the large American presence are the objectives that the USIBC has set for itself. Beyond the rhetoric of "displaying commitment to India" and "long-term business partnerships", two strategies are guiding the US in entering the defence market in India. Firstly, close coordination between the US Department of Defense (DoD), US industry, and the USIBC. Secondly, a clear mission objective: to use the newly introduced mechanism of offsets to gain the advantage in bidding for Indian business.

Offsets are a new element in India's defence business. The Ministry of Defence (MoD) has, in its current Defence Procurement Policy of 2006 (DPP-2006), stipulated that any defence contract worth more than Rs 300 crores will automatically include a "direct offset liability" of 30 per cent, which means that the vendor will have to source from Indian suppliers components or technologies worth at least 30% of the contract value. A new MoD organisation, the Defence Offsets Facilitation Agency (DOFA) has been set up to evaluate offset proposals and to facilitate their implementation. DPP-2006 makes it clear that the better a vendor's offsets proposal, the greater his chance of winning a defence contract.

The US DoD declares that it is opposed to the concept of offsets, but has adopted a pragmatic approach to DPP-2006, letting the private USIBC do the talking with India's MoD to define offsets in ways that suit American bidders.

The USIBC has already made headway in getting India's MoD to broaden the definition of "direct offsets" to defence products not directly connected with the contract linked to the offset. In other words, a contract for Boeing aircraft need not necessarily be offset by production in India of Boeing parts. The offset could also take the form of, say, production of vehicle tyres.

The USIBC, however, has pushed for more. It has asked India's MoD to permit "offset banking", or the accumulation of offsets credits encashable later, when a defence contract is actually signed. That's not all; the USIBC wants India to accept "indirect offsets" as well, i.e. allowing joint ventures in sectors like infrastructure to be counted as offsets, bankable towards future defence contracts. And a company that banks some offsets but does not win a contract should be allowed, says the USIBC, to transfer those offsets to a company that bags a contract.

The strategy looks towards entering joint ventures with India's private sector companies in infrastructure, while using that business to build up a bank of offset credits. Ron Somers, President of the USIBC told Business Standard, "Every one of our companies are over here right now scouting for offsets projects. And guess where they are looking. They are looking into the Indian private sector, beyond the Indian public sector¿ at Indian private sector like Tatas, L&T and Reliance and Mahindras and Kirloskar; even the smaller Indian companies, the IT companies and the emerging software groups."

Indian government agencies have been discreetly supporting the USIBC in this approach. In February 2006 Defence Secretary, Shekhar Dutt met a USIBC delegation and discussed the concept of "offset banking". And at a closed door meeting with the USIBC at the Indian embassy in Washington last month, Indian ambassador Ronen Sen suggested the USIBC use the Indian private sector to exert pressure on New Delhi.

For now, Defence Minister A K Antony is both firm and flexible. At the inauguration of Aero India 2007 in Bangalore on Wednesday, Mr Antony said about the proposal to broaden the definition of offsets, "As of now, we will go as per DPP-2006 as it stands. If there is scope for improvement, we'll adjust and make minor changes to policy. Our mind is open."

Defence Ministry officials, speaking off the record, express their reservations on the banking offsets proposal. They say that if a vendor already has a big bank of offsets that could create pressure in deciding who should get that contract.