Building Fences -- And Growing Closer

From security to information technology, business ties between India and Israel are proliferating

The disputed state of Kashmir couldn't look less like the narrow strip of desert that forms most of Israel. Peaks in the territory rise to more than 8,500 meters, and the area is known for its lush valleys and remote Himalayan beauty. Israel's Magal Security Systems Ltd., though, feels right at home in the thin mountain air.

The company, best known for its role in building a security fence dividing Israel from the West Bank, is providing technology such as cameras and motion detectors for a similar barrier in Kashmir. The 150-kilometer fence is aimed at keeping terrorists from crossing the Line of Control, the de facto border between the Indian- and Pakistani-administered portions of Kashmir. So far, Magal's technology has been deployed on just 5.5 km of the project, but the company is aiming to get a much bigger share of the barrier being built along the 740-km border. "India is a great market for Israeli companies," says Magal's president, Izhar Dekel.

AIRCRAFT AND ASSAULT RIFLES. Plenty of Israeli companies apparently agree. Bilateral trade between India and Israel has soared from $140 million in 1990 to $1.6 billion in 2003 -- and that doesn't include arms deals, which Israel doesn't report. Business is so brisk that during a recent three-day visit to India, Israel's Foreign Minister, Silvan Shalom, announced his country would reopen its consulate in Bombay and met with his Indian counterpart, Yashwant Sinha.

Officially, India was Israel's eighth-largest export market last year. But when you add in an estimated $4 billion in Phalcon aircraft, Tavor assault rifles, and other hardware that India has contracted to buy, the country in coming years will likely be among the top four markets for Israeli goods, defense officials say.

India and Israel have long had cordial relations. But both sides kept quiet about it, worried about alienating India's 160 million Muslim citizens and damaging India's strong ties with the Arab world. Now the friendship is finally coming out of the shadows. In the wake of a series of assaults on India attributed to Pakistani-backed militants, the latest intifada in the Middle East, and September 11, the two countries perceive that they have a common enemy: Islamic terrorism. "India and Israel are natural allies," says New Delhi defense analyst Maroof Raza.

So it's no surprise that the relationship emphasizes security. Last year, India, the U.S., and Israel held a trilateral security conference where intelligence and military brass discussed common threats. A second such meeting is scheduled for Feb. 15 in Israel. In fact, Washington may be encouraging stronger ties between its two allies so it can nurture its fragile relationship with Pakistan. Buying arms from Israel "gives the Indians access to the most sophisticated Western military technology," says Gerald M. Steinberg, a political scientist at Israel's Bar-Ilan University, while letting the U.S. avoid the appearance of arming Pakistan's rival.

That's leading to a booming arms trade. After peaking in 2002, Israel's defense exports declined by 37% last year, but in 2004 they're expected to grow again, largely because of sales to India. This year, India has earmarked an extra $5.5 billion to buy new materiel from abroad, making it one of the world's largest arms buyers. Israel is India's second-largest weapons supplier, after Russia. At the Defexpo India arms fair in New Delhi in early February, Israel had the second-largest delegation after Great Britain, with companies such as Israel Aircraft Industries and Elbit Systems pitching everything from radar to pilotless aircraft.

So far, the growing ties haven't jeopardized India's relations with the Arab world. Last summer, Indian Prime Minister Atal Bihari Vajpayee visited Iran, Syria, and Libya to reaffirm old friendships, and was warmly welcomed. Nor has the Kashmir fence endangered the tentative peace process between India and Pakistan that was set in motion in January.

Meanwhile, commerce in nonmilitary sectors is expanding. The number of Israeli companies with offices in India has doubled since 1998, as they seek both to sell their goods and to use India as a production base. Shipper Zim Israel Navigation Co. in February added a third weekly run to its Western Europe-India cargo route. Last year, Israel's Teva Pharmaceuticals Ltd. spent $8.7 million to buy J.K. Drugs & Pharmaceuticals, an Indian maker of bulk formulas. Looking to benefit from India's skilled programmers, Tel Aviv-based Ness Technologies, Israel's largest IT services outfit, in July acquired Indian software developer Apar Infotech for $78 million. Apar's 1,000 engineers and programmers in Bangalore and Bombay now provide research and development for Ness. "Our Indian experience has worked out far beyond our wildest dreams," says Ness chief executive Raviv Zoller. Tel Aviv's Magic Software, which has been in India since 1997, is planning to add another 25 engineers to its 100-person development center in Pune this year. And Israeli flag carrier El Al Airlines has seen cargo traffic to India increase sixfold in the past three years. In November it added a third weekly passenger flight to the subcontinent, though it can still be tough to get a reservation. "I can't even get a business class seat to Bombay, and now have to go via Europe or Jordan," grumbles Anat Bernstein-Reich, a Tel Aviv consultant who advises companies on doing business in India.

SAVE WATER AND POWER. Israeli companies are also helping modernize India's archaic agricultural sector. Tel Aviv-based Netafim, the world's biggest drip irrigation company, in January signed a two-year, $20 million contract with the southern state of Andhra Pradesh to help improve crop yields while saving water and power. An earlier, smaller project was so successful that some farmers using the drip technology are growing pickling cucumbers for export. Israel Chemicals Ltd., meanwhile, supplied $80 million in potash and other fertilizers to India in 2003, up by 25% over the past two years.

Investment, though, remains mostly a one-way street. Other than about 30 Indian diamond merchants who main- tain offices in Tel Aviv, Indian investment in Israel is minimal, says Satish Mehta, India's commercial attaché in Israel. But, he says, India is doing what it can to boost the two-way flow of investment and expects it to grow as India continues to liberalize its economy. In May, the Indian embassy is sponsoring a biotechnology conference so that "Indian and Israeli companies can get together and explore business opportunities," says Mehta. Similar conferences in Tel Aviv last summer on telecommunications and agriculture both produced a flurry of deals.

Culturally, the two countries are coming closer together, too: The beaches of Goa are increasingly popular for young Israelis after they finish their three-year military service. And once-scarce Bollywood musicals are seen more often in Israeli cinemas these days. With help from fence-builders and other businesses, barriers between the two nations are falling fast.

By Manjeet Kripalani in Bombay and Neal Sandler in Jerusalem

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