The $40-million India-Israel fund “for research and development in innovation” got a front page six-column-spread headline in The Hindu on Thursday while Nandan Nilekani’s $100-million fund for innovative start-ups gets a few lines in an inside page. This is reflective of the hype surrounding Narendra Modi’s three-day visit to Israel that started on Wednesday – the first to that country by an Indian prime minister.

Nilekani’s fund, which is called Fundamentum, aims to invest in “consumer technology-focused businesses, particularly ventures that are trying to solve problems unique to India”. The focus will be on scaling up start-ups, an area that India lacks. Fundamentum will start off with a $100-million corpus and the founders hope to scale it up to $200 million in a few years. Clearly, there is huge excitement emerging from huge spin.

But let us get a little realism into this I4F – or Israel India Innovation Initiative Fund – business. First of all, the fund is for only $4 million or about Rs 26 crores a year and after five years, it will total $20 million or half of what the spin suggests. The joint statement states quite unambiguously: “The two nations agreed to put $4 million a year for five years into the Israel India Innovation Initiative Fund, or I4F.”

Modi, with his flair for word play, coined the term “I4I” or “India for Israel and Israel for India”, in response to the slogan his Israeli counterpart Benjamin Netanyahu came up with: “I squared T squared”, which means “Indian talent with Israeli technology equals India-Israel ties for tomorrow”.

The I4I fund has now become the I4F. The memorandum of understanding, between the Indian Department of Science and Technology and Israel’s National Authority for Technological Innovation, expects it “will play a seminal role in enabling Indian and Israeli enterprises to undertake joint R&D [research and development] projects leading to development of innovative technologies and products that have potential for commercial application”. But it seems neither country is putting its money where its mouth is.

The Israel-United States Bi-national Industrial Research and Development Fund, or Bird, is the model for I4F. Bird was set up in 1977 and has spawned successful ventures in several sectors, notably in life sciences, energy conservation and information technology. Bird obviously factored the involvement of Israelis and American Jews in the high-tech start-up space, notably in California. Just the kind of role Indians play in the United States. But to think that 14F will do what Bird did for America and Israel is a bit imaginative. Let us hope it works.

Military ties

On Wednesday evening, a television anchor extolled Israel for giving us arms whenever needed, saying the relationship between the two countries was indeed special. I had to tell him we paid for everything in hard cash and nothing was given away. Israel sells arms and technology to whoever can pay. It has collaborated with China on the development of fighter aircraft with an Airborne Warning and Control System (Phalcon). The Chinese Chengdu J-10 aircraft is a derivative of the Israeli Lavi, whose designs and technology were sold to China for a reported $500 million.

The Phalcon deal began in 1994 and was finalised during Prime Minister Netanyahu’s visit to Beijing in 1998. It was, in some ways, meant to be the capstone of the economic and military relationship between the two countries. In return, Israel would receive a defence contract worth $1 billion to $2 billion for providing the planes. However, the Phalcon sale was dropped after the United States objected to certain proprietary technologies being transferred to China. Modi’s visit comes 17 years after the then Chinese President Jiang Zemin undertook a six-day visit to Israel in April 2000. At a press conference during Jiang’s visit, the then Israeli Prime Minister Ehud Barak proclaimed: “We attach a great deal of importance to our relation with China and our credibility.” Yet, the following year, Israel terminated the Phalcon deal. China was incensed but has since been somewhat mollified with other military deals.

Incidentally, one of the drone models we buy from the Israel Aircraft Industries is sourced by it from a small company in Israel owned by Sudhir Choudhrie, a London-based arms dealer blacklisted by India. Another non-resident Indian arms dealer, Vipin Khanna, is being investigated by the Central Bureau of Investigation for kickbacks in the 2001 Barak missile deal with Israel. There is also a Russia connection. Many of the Israeli arms technologies are of Russian origin and from companies set up by Russian military research and development people who now live in Israel. Many large Russian companies like to subcontract from them, as it is a reliable conduit for kickbacks. We must wonder why the modernisation of India’s MiG-21 fighter jets was pointed towards Israel by the Russian state-owned military aircraft manufacturer MiG-MAPO? I have often described the India-Israel military relationship as one strongly cemented by kickbacks. Last year, India imported $5.7 billion worth of arms from Israel.

Craftsmen work at the polishing department of a diamond processing unit in Surat. Gujaratis and Jews dominate the global diamond business and they make for good partners. (Credit: Amit Dave / Reuters)

Hard cash and Israeli guile

The really big Israel-India business, or should I say Israel-Gujarat business, is the diamond cutting trade. We import about $1 billion worth of diamond roughs from Israel and export about $1 billion worth of polished diamonds to it. This represents a value addition of a mere $50 million but the business directly and indirectly employs almost a million people. Just by way of contrast, Indian information technology services have a value addition of over $100 billion but employ only about 4 million.

Low labour costs are the big attraction. It costs about $10 per carat to polish and cut diamonds in India compared to $17 in China and $40-$60 in South Africa. One hallmark of the trade in gem-quality diamonds is its remarkable concentration: wholesale trade and diamond cutting is limited to just a few locations, mostly the Belgian city of Antwerp, New York, and Surat in Gujarat. In 2003, 92% of the world’s diamonds were cut and polished in Surat. Over 80% of sales of diamond cutting machines made by Israel’s Sarin Technologies are to India. Rightly so, Jews and Gujaratis dominate the global diamond business and they make for good partners.

I have been to Israel several times and have some very good friends there. It is a beautiful country and they are a great people who have successfully transplanted a piece of Europe into Asia. They have high standards of technical and medical education. Their dairy and horticultural industries are top class. But little is replicable here. However, farmers such as Sharad Pawar and Parkash Singh Badal can get high, and hence tax-free, yields with Israeli farming technology.

Of course, there is much to learn from Israel. But they do not do us or anybody any favours. It is all hard cash and the rest is Israeli guile. Let us never forget the import of the Jewish prayer: “If I ever forget thee O Jerusalem, let my right hand lose its cunning.” It is the right hand that plays the harp and it is the right hand that holds up the merchant’s scales. We, too, must learn some cunning while making music.