The correct answer is option 3, USA. The `Red Flag` joint exercise is a military training exercise that takes place between the Indian Air Force and the United States Air Force. It aims to enhance the interoperability and cooperation between the two air forces.

Option 1, China, is incorrect. Although India and China engage in military exercises together, `Red Flag` is not one of them. India and China participate in joint exercises like `Hand-in-Hand` and `Yudh Abhyas`.

Option 2, Saudi Arabia, is also incorrect. While India does engage in defense cooperation with Saudi Arabia, `Red Flag` is not a joint exercise between the two countries.

Option 4, Japan, is likewise incorrect. Although India and Japan have been strengthening their defense ties in recent years, `Red Flag` is not a joint exercise between the Indian Air Force and the Japanese Air Self-Defense Force.

In conclusion, the correct answer is option 3, USA, as `Red Flag` is a joint exercise between the Indian Air Force and the United States Air Force.