“Make in India” on the guillotine

By Ajai Shukla

Business Standard, 14th Apr 15

“Make in India” has a nice patriotic air to it, especially when Prime Minister Modi tells an international audience at the Aero India 2015 show in Bengaluru that “India will emerge as a major global centre for defence industry”, with aerospace the sun that lights this new dawn. Successive Congress-led and Bharatiya Janata Party (BJP)-led governments have looked to $10 billion worth of offsets arising from India’s tender for 126 Rafale fighters to galvanise India’s aerospace ecosystem. Indian negotiators had made it clear to Dassault that it must lower prices and increase indigenisation to win that tender. Yet, it is now clear this is not to be. With Dassault reeling on the ropes, Mr Modi last week scuppered the negotiations by presenting France with an order for 36 Rafale fighters. His apparent wish for a successful summit drove three weeks of frenetic New Delhi-Paris talks that handed a delighted Dassault an unexpected knockout victory.

Essentially, Dassault has dragged out negotiations until New Delhi’s need increased, and the wish to seem strong on defence converged with the desire to make a diplomatic splash in Paris. At that point the French were rewarded for their obstinacy with exactly what they wanted --- an order for fully built aircraft without the need to transfer technology. Says a keen observer of Indian defence procurement: “All vendors are now clear that ignoring India’s demands long enough ends in a reward that makes all Christmases come at once. This doesn't bode well for New Delhi in that next negotiation on whatever.”

Effectively, New Delhi, Paris and the IAF agreed that a bird in the hand was worth two in the bush. Inking a government-to-government agreement to bypass the deadlocked negotiations for 126 Rafales, the IAF would get 36 fully-built Rafales and, inevitably, buy 18 more as “options”, settling for three Rafale squadrons instead of the six squadrons of medium multi-role combat aircraft (MMRCA) earlier visualised. Done away with was the tiresome prospect of building 108 of those 126 fighters in Hindustan Aeronautics Ltd (HAL). Instead, New Delhi followed the Mirage 2000 model of the 1980s, when an initial purchase of two squadrons in 1983 was followed up with a few more aircraft to make up a third squadron. The Mirage 2000 was never built in India, just as the Rafale will never be.

After three days of silence, Defence Minister Manohar Parrikar on Monday stated the tender for 126 fighters was dead, and procurement would continue on the government-to-government route alone. His ministry tweeted: “G-2-G route [is] better than the [open tender] path for acquisition of strategic platforms”. It is unclear whether this puzzling statement means that Indian defence procurement would henceforth follow only the G-2-G route; or whether he means that his ministry retains the discretion to arbitrarily scrap a tender at any time and follow a different path. For the spurned aircraft vendors, who had each spent an estimated $50 million on the tender processes and trials, this is an important question.

In any case, the figures had already made clear that further purchases were a pipedream. Each of the 36 Rafales now requested would cost some $150-180 million dollars along with its basic armaments and payload. Even if we accept the bare-bones figure of $125 million that government spin-doctors will put out, 36 Rafales would cost $4.5 billion, and 54 Rafales $6.75 billion. Paid out over seven years, that would add Rs 4,000-6,000 crore annually to the IAF capital budget, which already accounts for a third of all modernisation funds (Rs 31,818 crore out of 94,583 crore in 2015-16). With this already a stretch, where is the scope for another $18-20 billion contract for 126 more Rafales, which would add another Rs 15,000 crore to the IAF’s annual procurement budget.

To divert attention from this the government insinuates Paris was pressured into selling 36 Rafales at a (so far, inexplicably, secret) price that is cheaper than the one being negotiated in Delhi. This is laughable. Even a defence novice knows that buying off-the-shelf is inherently cheaper; since the vendor is no longer required to supply proprietary technology or intellectual property, and is spared the risk, effort and expense of establishing production abroad and standing guarantee for products built there. New Delhi has spared Dassault all this, ensuring in the process that Indian defence industry (especially HAL) derives no technology benefit from buying the Rafale. The IAF will remain dependent on Dassault for maintenance and spares and, two decades hence, when the Rafale needs to be modernised, India will pay more for the upgrades than it paid for the Rafale itself --- just as the IAF is currently doing for upgrading the Mirage 2000.

To justify handing out billions to a French company that is struggling to survive, rather than directing the money towards India’s fledgling aerospace industry, the government has deployed the tired bogey of national security, citing “the critical operational necessity of fighter jets in India”. Defence Minister Manohar Parrikar had declared that these 36 Rafales would enter IAF service within two years. Apparently the government has a two-year threat assessment that requires two squadrons of Rafales so urgently that we must abandon a decade-long (and widely-praised) selection process right at the point of culmination.

What remains unclear is how Mr Parrikar imagines these 36 Rafales would be delivered to the IAF within two years. Currently, Dassault is building barely one Rafale every month for its sole customer, the Armee de l’Air, as France calls its air force. Ramping up fighter production requires a lead time of at least 18 months, during which Dassault’s sub-vendors --- Thales, Safran and some 500 sub-contractors --- would ramp up production of engines, avionics, etc to meet India’s demand (and Egypt’s contract for 24 aircraft, when signed). Only after this supply chain cranks into higher gear will the Rafale roll off the lines faster. Given France’s desperation to export the Rafale, it is entirely possible that the Armee de l’Air suspends its own requirements and diverts Dassault’s entire production to India (and Egypt). Even so, it would be a manufacturing miracle if the IAF receives its 36 Rafales in less than four years. On August 8, 2014, then defence minister, Arun Jaitley, told parliament that Dassault would take three to four years to deliver 18 Rafales in flyaway condition. Mr Parrikar inexplicably promises twice that number in half the time.

Another troublesome question hanging over this handsome present to Dassault is: once Mr Modi decided to bypass the deadlocked August 2007 tender, why was Dassault awarded a “single-vendor” contract? The Eurofighter Typhoon had met every IAF requirement in its evaluation trials. At the very least, Eurofighter should have been invited to submit a parallel bid for 36 Typhoons in flyaway condition. Apart from the possibility of getting the Typhoon cheaper and more quickly than the Rafale, introducing competition into the bidding --- as the defence procurement procedure explicitly recognises --- would almost certainly have driven Rafale’s bid lower.

Like in all defence deals, the market place is abuzz with speculation. Anil Ambani, who attended Mr Modi’s meeting with defence CEOs in Paris, reportedly held a long discussion with Dassault chief, Eric Trappier. With the procurement of 36 Rafales not bound to HAL as the tender for 126 fighters was, how are new players positioning themselves to benefit from New Delhi’s turnaround. The coming days will tell.