All you wanted to know about the Rs 58,000 cr Rafale deal

The Rafale is making news again thanks to the sensational revelations by former French President Francois Hollande. A ready reckoner on the major players involved in the controversial deal

Normally, Prime Minister Narendra Modi is all fire and brimstone as he trains his guns on the Congress. But he is strangely silent on the one issue that the entire Opposition expected him to make a statement on or provide an explanation – the controversial Rs 58,000 crore Rafale fighter jet deal between the Indian government and Dassault Aviation, France. His silence is that much more inexplicable after former French President Francois Hollande’s recent revelation that the Indian government had “suggested” that Anil Ambani’s Reliance Defence be made the offset partner in the deal.

Suddenly, the aircraft contract is not only back in the headlines but it has also given an opportunity to his detractors to accuse Modi of being corrupt and failing to deliver on his promise of transparency in defence procurements. In fact, there are many who even see ‘a Bofors in Rafale’ after Hollande’s sensational disclosures.

Congress President Rahul Gandhi certainly sees “a big scam” in the contract because central to it, he alleges, is the PM. This is a view suddenly shared by other Opposition leaders as well. Their reasoning is that though the Rafale deal may have been formally inked by then Defence Minister Manohar Parrikar and his French counterpart Jean-Yves Le Drian on September 23 2016, it was actually initiated by none other than Narendra Modi during his April 2015 Paris visit.

In fact, it was the PM who had worked out an understanding with the French and announced India’s intent to procure 36 Rafale fighter jets in a fresh government-to-government deal. This would be entered into after scrapping the earlier Rafale contract drawn up by the UPA which had stopped short of being inked because of the 2014 elections and a change of government.

Amidst all the allegations and counter allegations, it must be pointed out that there are no two opinions about the strike capabilities of the Rafale. Experts are agreed that it is a top rung fighter aircraft. However, there are questions about the deal the Indian government entered into with Dassault Aviation which needs serious explanation

The players, facts and figures

Even as the new deal was announced it raised several eyebrows in the defence community because it was felt that the cost per aircraft was far higher than earlier negotiated. Also, the new contract crucially did not have the transfer of technology clause in the previous arrangement. Many were left wondering as to why Modi had chosen to renegotiate the contract, although questions were not raised then at the political level.

So, what is the Rafale controversy all about? Here is how the deal evolved and why it has turned contentious: It all kicked off in March 2014 when after two years of negotiations, the United Progressive Alliance (UPA) II government finalised the draft contract for the procurement of 126 Rafale jet fighters for the Indian Air Force at a total cost of $10.2 billion (Rs 54,000 crore by 2012 conversion rates). The agreement was however not inked but put on hold since the model code of conduct had come into force for the general elections in April-May 2014.

At that time the pricing and terms of agreement drawn up were seen in defence circles as favouring India. Of the 126 aircrafts contracted for Rs 54,000 crore, 18 would be made in France in a ready to fly condition. The rest of the 108 planes would be mainly manufactured in India – Dassault had agreed to a transfer of technology arrangement under which 70 % of the work would be carried out at the Hindustan Aeronautics Ltd (HAL) facility in Bangalore. It was seen as a big boost for HAL.

But a little over a year after the Narendra Modi government came to power in May 2014 the deal was scrapped. The government instead decided to buy only 36 ready to fly Rafale jets. The price negotiations began all over again and in September 2016 the deal was signed for 36 jets at a price of $ 8.7 billion (Rs 58,000 crore by current conversion rates).

The comparison between the two deals arithmetically was this:
UPA II deal: 126 jets for Rs 54,000 crore with transfer of technology. Final price per aircraft with added costs: approximately Rs 530 crore.
NDA’s renegotiated contract: 36 jets for Rs 58,000 crore. Price per aircraft: Rs 1,611 crore. No transfer of technology.

As was implicit in the new arrangement, HAL did not figure in the contract. Instead the French company, under the offset obligation, agreed to invest about Rs 30,000 crore of the contract value in India. Offset obligations are factored into arms deals to gain economic benefits when a government places huge defence orders from foreign suppliers.

The offset deal

Dassault Aviation reportedly invested part of its offset obligation in Dassault Reliance Aerospace (DRA) – a joint venture company it had floated with Anil Ambani’s Reliance Defence Ltd (RDL). In less than two weeks after Parrikar and his French counterpart had inked the jet procurement contract on September 23 2016, DRA announced that it would be the key offset partner for the Rafale deal. It would be manufacturing aero structures, engines and electronics at its proposed facility in Nagpur.

But prior to this on June 24 2016 the government through a notification had amended the rules pertaining to Foreign Direct Investment (FDI) in the defence sector. Under the new regulation, up to 49 % FDI was allowed through the automatic route. In short without any government clearance.

When critics of the Rafale deal alleged that FDI had come to DRA without any clearance from the Cabinet Committee on Security (CCS), as was the norm in defence deals, the Anil Ambani group issued a press statement citing the June 24 2016 amendment which did not make CCS clearance necessary for either setting up the joint venture company or for it to receive 49 % FDI. It also stated that DRA was only the “key beneficiary” of the offset obligations and that there were other companies as well which would benefit.

Ever since the controversy came into focus, the move by Dassault to invest in an Indian partner with virtually no experience in aircraft manufacturing led to allegations that the deal was re-worked to favour the Indian corporate. Incidentally, Anil Ambani was in Paris when Narendra Modi initiated the Rafale deal with the French government in April 2015.

Campaign against the old deal

While there were no answers as to why the NDA government decided to scrap the first deal and rework a new and more expensive one, what we know is that a systematic campaign was launched through the media to rubbish the earlier contract formulated under the UPA government.

It all began soon after the Modi government took charge in May 2014. The Rafale acquisition, which till a few months ago was considered a favourable procurement, suddenly began to be painted in poor light. This official view was reflected in the larger India media (business dailies, defence publications and national papers included) which quoted “reliable sources” in the government as saying that Dassault had escalated the price of its jets by as much as 100 % and that buying 126 Rafales at the new price was not viable.

Then Defence Minister Manohar Parrikar joined the chorus by declaring that the Rafale jets were too expensive and the revised prices were unreasonable. He even advocated that the Russian SU-30 MKI manufactured by HAL could be a viable alternative to the Rafale once its electronic weapon system was updated.

Since the controversy came into focus, the move by Dassault to invest in an Indian partner with virtually no experience in aircraft manufacturing led to allegations that the deal was re-worked to favour the Indian corporate. Incidentally, Anil Ambani was in Paris when Modi initiated the Rafale deal with the French government in April 2015

Pricing was initially cited as the main concern. But did Dassault really raise the price for its fighter jets? In February 2015, the company’s CEO Eric Trappier in a briefing to the Press Trust of India (PTI) in Bangalore stated categorically that there was no question of his company having upped the rates it had agreed upon. “The pricing issue is very clear. Our pricing remains the same from day one. So, there has been no change on that front,” Trappier said.

He also cleared the air about reports in the Indian media which suggested that Dassault had no option but to raise the price of the Rafale since it had recently sold 24 fighter aircrafts to Egypt for $ 5.9 billion. This was much higher than the $10.2 billion quoted for 126 Rafales for India. “There is no price hike. Don’t forget what has been published in regard to Egypt contracts for 24 aircraft, frigates and missiles for the frigates. It is not only aircraft,” Trappier clarified.

But despite that, stories about cost escalation continued in the Indian press. For all practical purposes the Rafale deal was seen as good as over till the PM’s Paris visit. Subsequently, the same media which had been critical did a U-turn and praised the reworked and more expensive deal as one best suited for the requirement of the Indian Air Force!

It was argued that the new deal included weaponry, spare parts and an offset guarantee of investment in India which the old one had not factored in. But those in the know of the proposal submitted by Dassault to the UPA government point out that adequate supply of spares for the lifetime of the aircraft (40 years or 6,000 flying hours) and weapons system costs were incorporated into the first agreement as well. Even the investing of 50 % of the contract as offset obligation was very much there in the original costing. The difference was that it would benefit HAL and not a private player. So where was the advantage?

Amidst all the allegations and counter allegations, it must be pointed out that there are no two opinions about the strike capabilities of the Rafale. Aviation experts are agreed that it is a top rung fighter aircraft. However, there are questions about the deal the Indian government entered into with Dassault Aviation which needs serious explanation.

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