Military & Aerospace

Rafale Deal and the Offset Jigsaw
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Issue Net Edition | Date : 06 Oct , 2018

In this era of connectivity, media explosion and awareness, one did not need the Air Chief and senior serving officers to bat for the Rafale fighter jets, which unquestionably are state-of-the-art; albeit recent assertions that DCAS headed CNC for such high priced deal instead of MoD heading it is rather strange, to say the least. The need for the IAF to get the Rafales earliest to partly make up their critical voids and dated weapon platforms is equally unquestionable, even if we fail to read why China is  devoting so much energy and finances into areas bordering India and is developing underground bunkers for its fighters in Lhasa and other forward airfields. As to the comparative strengths and quantum capabilities of the PLA Air Force (PLAAF) and the IAF, these may be of little interest to the MoD manned by bureaucrats, especially with China having pulled wool over the eyes at Wuhan.   

The brouhaha about the Rafale deal that has been hogging headlines is about the pricing, but more about the joint venture (JV) between Dassault Aviation and Reliance Defence owned by Anil Ambani under the offset clause. In April 2015, when Prime Minister Narendra Modi announced purchase of 36 x Rafale in Paris, he had bypassed the Cabinet Committee on Security (CCS). The inside news then also was that the then RM and EAM were taken by surprise. Former French President Francois Hollande dropped a bombshell (for whatever reason) when he disclosed Indian Government had given instructions that Dassault Aviation should partner with Reliance Defence for the JV. There is massive Congress-BJP dogfight who gave those instructions to the French, when, and in which year, why Anil Ambani in Paris was when Modi announced import of 36 Rafale and what not.

The Reliance Press Release of 2016 had read: “On 23 September 2016, India and France signed a purchase agreement for supply of 36 Rafale fighter jets at a value of Euro 7.87 billion, or about Rs 60,000 crore. The contract includes a 50% offset obligation to the tune of approximately Rs 30,000 crore, which is the largest ever in the history of India. DRAL will be a key player in the execution of offset obligations”. The mention of “Euro 7.87 billion” should put to rest the curiosity about the price per unit.  As per media reports of March 2018, the French have now offered a 25% discount and as per French estimates the overall cost for 36 x Rafale is not expected to cross $8 billion.

The offset clause has immense benefits for the ‘Make in India’ projects. It breaks the monopoly of the governmental defence industrial complex that remains largely laid back by design. Offsets encourage private sector participation in defence, which is very essential because if India is to become self-reliant in defence requirements, the defence-industrial base must include as much of the private sector as possible; extending various concessions to the Indian private companies till the defence-industrial complex comes of age; till we become self-reliant in defence and global manufacturing hub for defence products. Hollande has since retracted his statement which is understandable because he would have realized / or may have been sensitized this could amount to loss of credibility for the Indian Government facing elections, and more importantly, much financial loss to France if the deal got nixed amidst the global trade war.

If France indeed was told that Dassault Aviation should go for JV with Reliance Defence, this may remain mystery. But in the heat of mudslinging, no one is discussing the one possibility, where Dassault Aviation could have been told to partner Reliance Defence. There have been multiple defence scams in India, none of which have been probed fully – none manning MoD even questioned. It is known practice that before any deal is signed; the Defence Secretary / DG Acquisition make sure kickbacks reach intended beneficiaries. In such environment, asking the foreign vendor ‘in private’ which IOP to partner for JV is no big deal. If France was asked for Dassault Aviation to partner Reliance Defence, as was Hollande’s initial assertion (we didn’t have a choice), it would have been verbal, which can’t be proved.

It is interesting to note that HAL was being hailed by the government till now despite every project delayed by years. On July 1, 2016, Prime Minister Modi hailed the induction of the first squadron of Tejas with just two fighter aircraft into IAF at Bengaluru, terming it as a matter of “unparalleled pride and happiness” and a step which illustrates the skills and strengths of Indian scientists. “Induction of indigenously made Tejas fighter jet into the Air Force fills our hearts with unparalleled pride & happiness”, he had tweeted. Another news report of July 2016 read: “In a display of high technical competence and self-dependence, India has successfully upgraded the Mirage 2000 fleet of the Indian Air Force. The mid-life Final Operational Configuration (FOC) upgrade was done in a record time of eight months by HAL.CMD HAL had said, “We have done it again on time. It proves HAL’s capability of mid-life upgrade of platforms to overcome obsolescence issues, enhance the reliability and maintainability of these aircraft. The introduction of state of the art facility created for this project ensures the timely upgrade of the Mirage fleet.” Incidentally, India ordered 40 x Mirage-2000 in 1982 and HAL was to license manufacture another 110 of these aircraft with transfer of technology (ToT). But the idea was dropped after India bought the MiG-29 from the Soviet Union. Then in 1986 and in 2004, India placed orders for 10 more Mirage-2000s, each.

But now suddenly HALs inadequacies are being brought to the fore only when the Dassault Aviation-Relaince Defence controversy arose. But when Defence Minister Nirmala Sitharaman decried HAL’s inadequacies for the JV in instant case, no one questioned why HAL is in this state despite its management overseen by the MoD since 1947, and what about other white elephants like DRDO and Ordnance Factories? Don’t we know how indigenous projects are deliberately delayed from within HAL and from outside to facilitate imports. 35 years after approval of Tejas project in 1983, Tejas missed yet another deadline of getting its final operational clearance (FOC) by June 2018. The project cost had already crossed Rs 7,399.69 crore (US$1 billion) in 2015. The first squadron of LCA Mk I commissioned in a hurry had just five aircraft. IAF ordered 40 x LCA Mk I aircraft, which are getting inducted. An interim variant evolved is LCA Mk 1A, IAF having committed for 83 LCA Mk IA but Tejas appears years away from obtaining the FOC due costs and operational concerns.

HAL seeks Rs 463 crore for each Tejas Mark 1A, (Rs 100 crore more than Tejas Mark 1) compared to: SAAB quoting Rs 465 crore for Gripen and Lockheed Martin Rs 380 crore for the F-16.  Moreover, HAL charges Rs 415 crore for its indigenous Sukhoi-30 MkI, while each unit imported from Russia would cost Rs 330 crore.  MiG is offering an improved MiG with better performance and 20% cheaper than other competitors. But while HAL was found inadequate to absorb the offsets JV of the Rafale deal, how capable is Reliance Defence? Readers can draw their conclusions from a post on Facebook that reads: “The performance of Reliance Naval, sister company of Reliance Defence is pathetic; deliveries not being made and delayed by couple of years, finances in shambles, already an NPA, IDBI has filed case against the company, promoters almost bankrupt, share price came down from Rs 80 to Rs 11 since take over by ADAG. A failed company involved in manufacturing of defence ships and equipment. Reliance Defence; no infrastructure, no expertise, just brought in existence to bag Dassault Rafale contract under political patronage. Crony capitalism does not help. Lackadaisical attitude of the government is ruining the country”.

Another senior IAF veteran queries, “What has happened to HAL in the last two years, from 2016 to 2018, to be condemned as not capable of handling Rafale, manufactured by the same Dassault which produced Mirage 2000? In the words of Sherlock Holmes: There is mischief afoot, Watson”. But while HAL suddenly is under attack, shouldn’t successive governments of India take the blame for:

  • Not sacking CMD and Directors if performance was falling short.
  • Not questioning production targets and demanding better performance when approving annual budget including sales and profits by the Board which has members from Department of Defence Production (DoPD) and Defence (Finance).
  • Locating new factories on political considerations, not technological merit. Lack of trained workers and delays in supply chain hobble performance.
  • Making HAL jack of all trades without excellence in any. Instead of focusing on aircraft for better results, HAL is involved in variety of products for which private sector could have been co-opted in big way; engines, avionics and multiple instrumentation.
  • Little or no follow up on CAG reports and vigilance by CVC.
  • Quota system of SC/ST – the roadmap of India for lowering standards across the board with lowered parameters for entry. Now quota in promotions also will make it worse.
  • No scope for divestment of peripheral or nonviable businesses, formation of JVs or acquisition of companies in India or abroad without government  approval which typically takes 3-5 years, which private sector does in six months.

At the same time, it must be appreciated that India cannot afford to keep importing weapon systems as we would go bankrupt in the process. Here we see on one hand HAL is found incompetent (through sustained complicity of governments and mass media blitz) and has been charging inflated costs again with government complicity, as is the case with entire governmental-defence industrial set up because of endemic corruption, on the other hand Reliance Defence has little expertise, even if the JV includes other smaller entities also. Anil Ambani’s lack of business acumen is known. But as a veteran-scholar points out there are other companies like Tata Advanced Systems, L&T, Bharat Forge, Samtel, Alpha Design, Cyient, Godrej, Walchandnagar and many more that deserve an opportunity. Everyone talks about is ‘Make in India’, but at the heart of the problem is how to make ‘Make in India’ a success. We nether have the will nor the inclination of cracking the whip, like China, on the governmental-defence industrial set up to make them cost effective. Arun Jaitley, as Defence Minister made a feeble effort to privatize some DPSUs but quickly withdrew when threatened by workers unions.

Countries like US and Japan don’t have white elephants like HAL, DRDO, OFB and DPSUs and yet are far advanced in defence manufacturing. India must emulate US-Japan, privatizing the governmental-defence industrial set up which are the largest scams of India milking the country’s economy. A cohesive ‘Make in India’ roadmap must be defined and executed, integrating the complete private sector.  No doubt it would be very painful because the cozy corruption in making big underhand money and individual under the table monthly pay packets would vanish, but there is no other salvation from massive defence imports which the country cannot afford anymore. Concurrently, the Department of Defence Production (DoPD) should be moved out from MoD and placed under the Department of Commerce and Industry.   The question is whether the national set up steeped in corruption since Independence can take this radical but necessary step?      

Favouritisms in defence deals have been the hallmark of all Indian governments and will continue in foreseeable future. In January this year, government cleared procurement of 72,000 assault rifles and 93,895 carbines for the Army at estimated cost of Rs 3,547 crore. Concurrently, Russia’s Kalashiknov proposed to MoD joint venture with the Adani Group which has recently entered the defence sector, to produce the 7.62×39 mm calibre AK-103 assault rifles to not only cater for balance requirement of the Army but also for the 1.3 million strong central armed police forces (CAPF); the combined Army and CAPF requirement maybe to the tune of Rs 24,000-26,000. The Army has already set the ball rolling for the acquisition of 6.5 lakh new 7.62×39 mm caliber assault rifles under what will eventually be an over Rs 12,000 crore ‘Make in India’ project.

However, MoD has told Kalashiknov cannot partner Adani Group for a JV but should partner the OFB. Posts on social media argue this is not a case of offsets, which is true, but when we already have L&T producing artillery guns in partnership with a South Korean company, why direct Kalashiknov to tie up with only OFB; is this not clear favouritism? It may be recalled that the Dhirendra Singh Committee had recommended strategic partnership specifically between Indian private companies and foreign vendors. But MoD cunningly brought in the governmental defence-industrial complex from the backdoor. Possibly government was cautious that in wake of the Rafale controversy alleging favouratism to Reliance Defence, Kalashiknov-Adani Group JV would raise cries of favouring the Adani Group.

The irony is that on one hand Defence Minister Sitharaman calls HAL not good enough, but on the other hand directs Kalashiknov to tie up only with OFB whose record in producing small arms has been wholly pathetic despite crores of rupees pumped in over the years. While this type of skullduggery can be expected to continue endlessly, hopefully interests of Armed Forces will not continue to be compromised in terms of quality and time delays.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Lt Gen Prakash Katoch

is a former Lt Gen Special Forces, Indian Army

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2 thoughts on “Rafale Deal and the Offset Jigsaw

  1. after reading this article , what is pleasantly to be noted here, is that the “Hawks” in the defense establishment are seeing clearly that they were taken for a ride by “feku” 4 years earlier – by assertions (both overt and covert) , of a muscular policy , justice toward “jawans” , teaching Pak ( BJPs fav whipping horse) a lesson , and generally filmy “dhamakedaar” dialogues during campaigning…

    realities, as are seen from this article, are worse than the Congress…

    Congress did have Indira Gandhi … (the matriarch of a modern Indian intelligence structure). Whatever her faults and political mis-steps, she was much more muscular and sensible in her defense policies without lowering political discourse and campaigning standards.

    keeping her example in mind the defence-pundits and strategists should remember, that one does not need to be divisive , nor anti-minority , nor pro-quota, nor a bad-mouth , to be pro-defense/ pro-India.

    the current dispensation are merely spin-doctors. please take their campaigning with a pinch of salt.

  2. A very well researched article by Gen Prakash Katoch, which has hit the nail on the head on many issues pertaining to defence acquisitions, DPSUs poor performance, MOD lackadaisical attitude about defence matters, govt’s lack of will to modernise Armed Forces and above all corruption and owning responsibility by MOD and successive govts since independence.
    My complements to the author.

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