Chronology of events of the India’s single largest defence deal

Aging of “MiG-21”- the supersonic jet fighter- 1999

With the aging of MiG-21, in 1999, the Indian Air Force (IAF) understood the need of revamping its fleet of fighter jets. Hence, in order to enhance the dwindling fleet size and maintain the minimum strength of 39.5 squadrons (18 aircraft per squadron), IAF expressed its desire to the Ministry of Defence (MoD) to purchase 126 fighter aircraft in the best interest of national security and defence.

Impressed with the performance of “Mirage-2000” per Kargil War, IAF raised the demanded the same set of planes. On hearing the plead, in 2004, the NDA Government under Prime Minister Atal Bihari Vajpayee, floated the Request for Information (RFI) to invite tenders from multiple vendors.

Unfortunately, by then, Dassault Aviation, manufacturer of Mirage 2000 had shut down the assembly line and upgraded to its new product, Rafale.


Change in the Government – 2004

With the Congress led UPA Government coming into power in 2004 Indian general election, the initially floated RFI was cancelled.

The then Prime Minister Dr. Manmohan Singh asked the IAF to re-consider the procurement of the most modern fighter aircraft that would have a prolonged life cycle.

The UPA government amended the Defence Procurement Procedures “DPP 2003” (a Committee formulated by NDA in 2001 to streamline the transparency of procurement process of capital expenditure on defence equipment), twice, once in 2004 and again in 2006 and infused an “OFFSET Clause” and in 2007 Defence Minister A.K Antony gave a go ahead for the procurement of 126 Medium Multi Role Combat Aircraft (MMRCA) for the IAF.

The Defence Offset clause guidelines
In a layman language, a foreign supplier of equipment (in this case Dassault Aviation a French Company) agrees to manufacture a given percent of his products in the buying country (in this case India) which may also be in the form of Technology transfer (ToT).

As per the defence offset guide lines by MoD, “The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry and boost to local defence manufacturing.


2007-2012 The outcome of RFP: A journey that existed more than 4 long years

In August 2007, IAF sent proposal to six global manufacturers namely: MiG-35 from RAC MiG of Russia, JAS 39 Gripen from Saab of Sweden, Rafale from Dassault of France, F-16 Falcon of the United States, and Eurofighter for Typhoon.

Technical evaluations of the six aircraft were thereafter undertaken by the IAF, followed by field trials in August 2009. In 2010, the evaluation of all the aircraft was completed and in April the six firms were requested to forward their updated bids. By April 2011, two bids had been shortlisted Dassault Aviation for its Rafale and Eurofighter for its Typhoon

Finally, a long journey of four years after issuing the RFP, Dassault Aviation was shortlisted based on the lowest financial bid, amongst the above vendors.

Initial Negotiations kept on dragging by UPA government
Through a letter of intent, UPA negotiations were around the 126 aircrafts, out of which the first 18 aircraft would land in a ‘ready to fly’ condition while the remaining 108 will be manufactured in India by Hindustan Aeronautics Limited (HAL) with a transfer of technology (ToT) from Dassault, which was one of the avenue for discharging offset obligations.

Additionally, UPA wanted Dassault to ensure the quality of aircraft produced by HAL, but Dassault refused to do so. The negotiations with Dassault dragged on due to disagreements on warranty for aircraft produced by HAL. This obviously was not acceptable to Dassault Aviation, as they could not take responsibility for the professionalism and expertise of another organisation. They also had reservations about the ability of HAL to accommodate the complex manufacturing and technology transfers of the aircraft.

JPHP Chabriol, Vice president military sales of Dassault said ”When we talk about technology transfer, we mean full technology transfer and not in bits and pieces.” Read the full article below to know about the reasons for refusing to ensure quality of 108 aircraft through ToT with HAL.

https://www.domain-b.com/aero/mil_avi/mil_aircraft/20081105_dassault.html


Contract escalations under the UPA regime:
As per an IAF official 2007, when the tender floated, the cost of the programme was ₹42,000 crore. However, when the lowest bidder was declared in January 2012, the cost of the deal shot up to ₹90,000 crore, with each aircraft costing ₹746 crore approximately.
Further, the delays from 2007-2012 along with the disagreement on warranty clause of the aircraft manufactured by HAL, had escalated the price to ₹1,86,000 crore in 2014 from ₹90,000 crores in 2012.


Defence Budgetary Constraints:
“With 92% of capital budget exhausted, the military has run out of money for the fiscal year, says A.K. Antony”
In 2014, Defence Minister A.K. Antony announced that the deal negotiations were progressing well however, added that the UPA could not sign the deal in 2014 as the approved Defence budget had exhausted.


Change in the Government from UPA to NDA
With the BJP and its allies, led by PM Narendra Modi coming to power in 2014, BJP picked up the negotiations and acted swiftly to finalise the deal, the deal which aged 10 years now.
August 2014, the Defence Minister, Arun Jaitley, said the procurement of 126 aircraft with the same terms and conditions as earlier was in place.
In 2015, the Defence minister Manohar Parrikar, said the price negotiations with Dassault was rough and hence Indian-built Sukhoi (SU-30MKI) was the feasible alternative option.
To counter, Air Chief Marshal Arup Raha disagreed, as Su-30MKI and Rafale had different capabilities, they were not a substitute for Rafale.
Finally, 11-year journey came to an end in February 2015 and the negotiations so far were scrapped and cancelled as it was not feasible.


What were the reasons for scrapping the negotiations?
Éric Trappier, CEO of Dassault Aviation, said in an exclusive interview with Economic times “We were very firm on getting the deal for 126 planes and we had discussions with HAL as it was the lead production agency. He said that for the first few aircraft the responsibility lies with Dassault and then it will lie with HAL. We had an excellent relationship with HAL and we had many discussions but for some reason it did not go through.
Read more :https://economictimes.indiatimes.com/news/defence/rafale-deal-there-was-no-pressure-from-indian-side-on-choosing-reliance-says-dassault-ceo/articleshow/66371524.cms


Fate of the deal: Consummated by NDA
In his official visit to France in August 2019, PM Modi along with President Francois Hollande in a joint press statement, stated that India will purchase 36 Rafales in flying condition and citing “critical operational necessity
Later the Inter-Governmental Agreement was signed on 23 September 2016 at ₹59,000 crore to procure 36 Rafale jets. The agreement included a 50% “offset clause”, which was similar to the Offset clause during UPA regime. This required the companies involved in the agreement to invest 50% of the contract value approximately ₹30,000 crore back into India.


Allegations on NDA- “To leave no stone unturned”
Why Dassault chose Reliance over Hindustan Aeronautics Limited (HAL)?Ex- Congress President, Rahul Gandhi laid allegations on the PM Modi for favouritism of Anil Ambani and dropping the requirement of aircraft manufactured by HAL. His allegations were that the PM had pressurised Dassault Aviation to choose Anil Ambani as an offset partner. Also, when Rafale landed on 30 July 2020 Rahul Gandhi congratulated the IAF and sticked to this allegation.” Why was bankrupt Anil given a ₹30,000 Crores contract instead of HAL?


Few Facts to Clarify for this hue and cry
Sited per the Dassault Annual Report 2019 (https://www.dassault-aviation.com/wp-content/blogs.dir/2/files/2020/04/RA_VA_3-04-20.pdf)

Amongst the three groups present in India one was Dassault Reliance Aerospace Limited (DRAL), a company held at 49% by Dassault Aviation, which assembles and produces military and civil aerostructure parts and subassemblies.Further, as per the Annual report, Dassault initiated “Make in India” as part of the performance of offset obligations related to the acquisition contract for 36 Rafale by India. Accordingly, the joint venture (Dassault Reliance Aerospace Limited) created in 2017 between Dassault Aviation and Reliance Infrastructure.

Why did Dassault choose Reliance as an offset Partner?
First and foremost, DRAL is not the manufacturer of Rafale, it is an offset partner as per the agreement obligations related to 36 Rafale by India through a Joint venture created which manufactures and assembles aerostructures for Dassault Aviation Group.In an exclusive interview with Economic Times in 2018, Eric Trappier, the CEO of Dassault Aviation, had clarified that all these allegations for favouritism was baseless and incorrect.

This is what he said; “We have a partnership with Reliance that started in 2011. We signed an MoU in February 2012 (with the Mukesh Ambani-led Reliance Group), around the same time the Rafale emerged as a winner (in India), and we have continued to work together.

My purpose is and was to meet full offset obligations, to set up facilities and to make my own supply chain for the Falcon.”Further the CEO said, “In line with our share, we have invested 49% in the joint venture with a capital of Rs 70 crore. As per Eric Trappier they had already covered 40% of the offset obligations with 30 companies, Reliance (JV) holding 10% being one of them. The rest of the offset partners were in Pune, Mumbai and Bangalore.
The CEO also clarified about the confusion and talk on former France President Francois Hollande’s statement that the partnership with Reliance was compulsory for the deal, he said that they had found reliance in 2011-2012 when neither Holland was not the President and nor was Narendra Modi the Prime Minister.

The CEO also mentioned that Dassault being a private family owned company was looking for partnership with private companies and hence Reliance was their choice

Listen to the exclusive interview of CEO of Dassault Aviation https://www.ecoti.in/3SskPa

To add on as per Clause 4.3 of the Defence offset Guidelines issues by MoD “The Overseas Equipment Manufacturer, sub-vendor will be free to select the Indian offset partner for implementing the offset obligation provided the Indian Partner has not been barred from doing business by the Ministry of Defence.

Link for Defence offset rules https://mod.gov.in/sites/default/files/revised-guidelines.pdf

Also, the rules of the DPP states the choice of the offset partner belongs to Dassault and CEO also clarified when he chose Reliance as the offset partner, it was his responsibility to fulfil the obligations, to quality standards and timing.This came as a surprise to read that back in 2012 Reliance Industries and Dassault had been given a go ahead from Ministry of Defence in 2012 for establishing a new facility.

This was done under the UPA regime, and still the questions are raised for Reliance being an offset partner.

Role of DRAL?
DRAL located in Nagpur is a joint venture, (51% owned by Reliance Infrastructure and 49% by Dassault Aviation). The facility manufactures several components like Falcon 2000 as a per of the offset obligation connected to the purchase of 36 Rafales from France, signed between the two Governments in September 2016.The DRAL facility would train thousands of skilled workers in aviation assembly and integration and, leading to huge employment generation in Nagpur and its surrounding areas.

Why not Hindustan Aeronautics Ltd (HAL)?
Rahul Gandhi accused the BJP Government as to why HAL failed to become an offset partner. Dassault Aviation’s CEO said despite of Dassault being selected in 2012, they were able to finalise the HAL deal even in 2015 on account of who would take the onus of for the 108 aircraft.

The French aerospace major wrote to the Indian Ministry of Defence that if it was to shoulder overall responsibility for the project, it should be given the freedom to decide on the quantum of work to be shared between HAL and private companies in India. There were other issues too. While Dassault had provisioned for 30 million man-hours for production of the 108 Rafale jets in India, HAL’s estimate was 2.7 times higher, escalating costs manifold.

But that is the story from 126 Rafale times, why is Rahul Gandhi accusing PM Modi and his proximity with Reliance in the current situation of 36 fly away Rafale being imported?In the present scenario where 36 Rafale are to be delivered in a flyaway condition which means they are to be exported from France by Dassault and HAL or any other company cannot be the production agency for the simple reason that no aircraft are to be produced in India.

HAL was a nominated production agency for the 126 Medium Multi-Role Combat Aircraft , which never reached the contract stage.


Questions on the Price increase and why did PM Modi agree for 36 Rafale instead of 126?

Rahul Gandhi has been consistently accusing PM Modi for undue and unreasonable escalation in the negotiated price of the Rafael doubling from ₹514 crores per aircraft to the contract price ₹1,670 crores approx.

First and foremost, the Dassault’s bid in UPA regime only included the price of the initial 18 aircraft, licensing fees and the supply of parts required to assemble the remaining 108 in India. It excluded weapons, maintenance and the costs that HAL would incur for local assembly.Why isn’t Rahul Gandhi making an Apple to Apple comparison? Also, the CEO of Dassault said if the price was double, he would have sent back to France without closing the deal.

Further, he added the price was down by 9% as compared to the UPA process. For procuring Defence equipment there is a one- time “Research and Development” cost involved which accounts for a major cost component. Nonetheless, though these 36 “India Specific Enhancement” Rafale costed ₹59,000 crores, the cost will come down when additional aircrafts over and above 36 are purchased.India paid for setting up two bases and training for just 36 aircraft initially, which will come down with subsequent purchases. Hence, there was a huge capital expenditure for these 36 Rafale’s which will give huge economic benefit in the coming future as and when we purchase more Rafales.

Moreover, the decision to buy 36 Rafales was driven by an emergency-like situation. The Negotiating a larger deal involving more jets, transfer of technology and production of the aircraft in India, would have taken a longer time.

What are the bank guarantee clause in the Rafale deal?

An important clause which was added in the Rafale deal was the performance guarantee clause. A performance guarantee is a clause to protect the buyer against losses incurred in case the contractor fails to perform its obligations.Along with a ‘letter of comfort’ from France on the contract for 36 Rafale fighter jets, India also secured a €185 million (₹16,340 crore) bank guarantee from Dassault as a safeguard against any violations of the offset policy plus a special clause in the deal, which mandated that 5% of the total offset value be kept as a buffer in case of non-performance.

The €185 million bank guarantee deposited is valid for seven years.The Comptroller and Auditor General report also observed that in respect of bank guarantees, though the French government had not agreed to an escrow account, it had contended that the “guarantees already provided by the government of France were far-reaching and unprecedented.”

Final facts which concluded on the Transparency of the Rafale deal by NDA Government.

Comptroller and Auditor General’s (CAG’s), reportYes, the CAG report’s findings, corroborated the Modi government’s stand that, under the Inter government agreement (IGA), better terms had been achieved in terms of better pricing, better maintenance terms and better delivery schedule. The price of the 36 Rafale aircraft in the 2016 deal was 2.86% lower than the comparable price based on the UPA-negotiated deal, as per CAG.

Supreme Court’s clean chit to NDA; After hearing the writ petition seeking cancellation on the inter government agreement, Supreme Court asked the Central Government to submit the details of the decision-making procedure in the Rafale deal. Henceforth, after evaluating in December 2019, the court dismissed all the petitions seeking a probe into the alleged irregularities in the deal, and gave a clean chit to the Union government on all the three aspects, the decision making, pricing and selection of Indian offset partner.

Chief Justice of India Rajan Gogoi while writing the judgement for the three-member bench, ruled that, “Adequate military strength and capability to discourage and withstand external aggression and to protect the sovereignty and integrity of India, undoubtedly, is a matter of utmost concern for the nation.

The empowerment of defence forces with adequate technology and material support is, therefore, a matter of vital importance.” Conclusion Clearly, the induction of Rafale fighter jets is an unprecedented milestone under the leadership of Prime Minister Narendra Modi, in the rapidly growing India-France defence cooperation.Indeed, despite tremendous public scrutiny, an agenda driven opposition with mala fide intent and, a media that had the knives out for him, Prime Minister Modi did not blink even once.

Eventually, India won, Modi’s courage won and Rafale, is all set to become a game changer in India’s defence landscape.As the first five Rafale fighter jets landed in India recently, the nation finally has one of the latest and most potent fighter jets in its armoury. This will greatly enhance the capability of the IAF, especially when all 36 jets are delivered.

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