Calculated political push, not regular process led to Rafale deal; all you need to know
After a series of twists and turns, a multi-billion dollar deal for new fighter jets for the Air Force has hit the last mile with the NDA government determined to iron out differences and wrap up negotiations with an out-of-the-box solution to end a two-year deadlock.
A test of political will to find an innovative approach to ink a contract that was threatening to get out of hand, but one that had significant strategic and geopolitical implications, has been on display in the lead up to Prime Minister Narendra Modi’s visit to Paris, where the Rafale deal has been firmed up along with a memorandum of understanding on joint defence production in India.
The reworked deal—buying 36 fighters outright with the option for more could work out to up to $7.5 billion and scrapping an earlier requirement to manufacture 108 jets in India—has the potential to pump in at least $2.3 billion into the Indian defence manufacturing sector, a major chunk of which will go to the private industry.
While the mega deal—initiated in 2007 with six competitors—had been chugging along since 2012 when Dassault’s Rafale was declared the winner, signs had appeared in the past few weeks that for the first time since coming to power, the NDA government was looking at walking the distance, provided New Delhi did not have to make significant concessions.
Dassault had been struggling to get the contract through in the last year of the UPA, which had gone slow on all defence procurements. The newfound political will in New Delhi, as well as a strong diplomatic push from Paris, offered the final chance to bag an order that was widely classified as the world’s biggest open tender for fighter aircraft.
While many differences had been sorted out, a deadlock persisted for almost two years on two major sticking points. Innovative solutions were needed for both, something that the NDA government is not known to shy away from.
The easier one to sort out was liability for quality and delays in production. As per the original terms, French manufacturer Dassault had responsibility for timely delivery of the fighters as well as technical defects. But as the final negotiations started, the French firm raised the point that in case of delays by Hindustan Aeronautics Ltd—nominated to produce the fighter in India—penalties would be unfair.
The other sticking point was pricing. The deal is complex—it involves the calculation of life cycle costs, carries a major technology transfer component to HAL and has a clause that requires Dassault to invest half the value of the contract in India. After negotiations on the transfer of technology and the setting up of a production line in India with HAL, it emerged that the cost that Dassault had projected for the India-made Rafale would be surpassed. The Indian PSU would be required to purchase more equipment, facilities and technology than anticipated to deliver the fighter on time, escalating the costs. Again, a novel solution was needed. One proposal was to divide the cost of the production line as Dassault had offered to use it to make different platforms such as its Falcon executive jets and unmanned aerial vehicles, which are churned out of the same line in France. This would potentially lower the per-unit cost of the Rafale fighter.
While in 2007, the government had assessed the deal at $10 billion, the cost of 126 Rafale fighters had swelled to an estimated $22 billion by 2014.
What worked was a commitment by the government for the outright purchase of 36 jets. This would keep the French company in profit, do away with HAL’s liability issues and meet the operational requirements of the Indian Air Force, which is battling a crisis with obsolete fighter aircraft.
Going the final mile on the deal meant that some concessions have to be granted by both India and France. Dassault is likely to bend within reason, adhering to the commitments required by India on a fair price for the fighters, even at the cost of a dip in profit. For India, the outright purchase comes at the cost of the Make in India concept.
When it started in 2007, the fighter deal was touted as pivotal to moving modern aerospace and military technology to India. As per the original contract, the winner would have to set up a production line here. The outright purchase of 36 jets with the option for more means that will not happen immediately, although the option remains to manufacture subsequent orders in India.
However, caught between a rock and a hard place—the urgent need for new fighters and the inability to write off exceptions and concessions for the French firm, many of them made by the UPA—the Modi government has gone for the out-ofthe-box solution.
The scrapping of the original contract for 126 fighters is also a subtle message by the government about the UPA’s inability and bungling in dealing with a complex matter. An argument being made is that it would have been impossible to sign the deal in the form that was presented to the NDA government.
There were too many concessions and deviations from the original terms and conditions, which the bureaucracy would have been reluctant to sign off on. This would have forced a political directive or the scrapping of the deal. To offset criticism that the deal does not bring manufacturing and jobs to India, the government is likely to insist that the French company invest 30-50% of the contract value in India and rope in the Indian private sector as a major, global chain supplier to Dassault and its associates. The government also says that manufacturing of greater number of these jets in India is still not ruled out and talks on that could continue over the next few months.
Most of the investments that Dassault will need to make are likely to go to the Indian private sector— from the supply of sub-systems for the Rafale to linking into the global supply chain of Dassault for other products such as commercial jets and combat unmanned aerial vehicles. By conservative estimates, the amount that Dassault is likely to invest to meet offset obligations over the next 5-6 years would be over $2.5 billion.
Other lucrative contracts for maintenance and overhaul of the fighters in India would also be up for grabs—something that HAL and the private sector will need to fight for. Beyond the strategic need for new fighters that will enable the Air Force to maintain a combative edge in the region, the Rafale deal had implications for bilateral relations with France, which has been a reliable partner for India.
The partnership goes beyond defence and extends to civil nuclear cooperation and space. All these aspects were kept in mind while seeking a middle path on the deal—buying the fighters and scrapping the complex process initiated by the previous government.
One thing is clear: The deal has been decided by a carefully calculated political push, not by the regular process or bureaucratic approval.