A Boom in Israel's Exports to India

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Housing for India's Middle Class

The latest to jump on the bandwagon are Israel's real estate developers. In the past two years they have committed billions of dollars to projects in India and are counting on its fast-growing economy to offset the slack from slowing markets in the U.S. and Europe. Property & Building Corp. (PTBL.TA), Electra Real Estate (ELCRE.TA), Elbit Imaging (EMITF), and Gindi Group are constructing everything from housing to hotels and shopping malls.

"We were debating between India and China and decided to go with the former because conditions there for foreigners to operate were a lot easier," says Segi Eitan, CEO of Property & Building. The company has bought land in four sites and is planning to build thousands of housing units for India's expanding middle class in Chennai and Hyderabad.

Even El Al (ELAL.TA), Israel's national airline, has felt the change. The carrier has beefed up capacity to Mumbai, and business class seats to India are hard to come by these days.

Israel's Largest Defense Customer

As for defense, India now has supplanted the U.S. as Israel's largest customer for weapons systems ranging from aerial reconnaissance planes to missiles and unmanned aerial vehicles. That has translated into growing sales for state-owned and private companies such as Israel Aerospace Industries (IAI), Rafael Advanced Defense Systems, and Elbit Systems (ESLT).

News reports earlier this month said that the Indian Cabinet Committee on Security had approved a new $1.5 billion contract for IAI to develop and upgrade the Indian Navy's Barak missiles. The deal had been held up for more than a year because of accusations that former Indian Defense Minister George Fernandes had accepted a kickback from IAI—charges that both Fernandes and IAI have denied.

"This is the largest single deal ever for an Israeli defense company and underscores the critical importance of India for our industry," says the Israeli defense industry source. In February, IAI also signed a deal with the Indian industrial conglomerate Tata Group to set up a joint venture that will develop weapons systems for the Indian market.

To be sure, Israel can hardly expect to compete with bigger global players in the Indian market. Products from Israel accounted for less than 2% of India's $230 billion in total imports last year. But in key fields such as defense, agriculture, water, and high tech, Israel has what India is looking for. For such a small country, the benefits of the relationship are immense—and becoming even more so as Israel's traditional export markets in Europe and the U.S. flirt with recession.

Sandler is a correspondent for BusinessWeek in Jerusalem .