Will the IAF not get its Rafales?

With the Rafale fighter deal stuck over price, can the prime minister step in and find a way out for both countries?
Claude Arpi examines the issue.

During last week's Indian Air Force drill ('Iron Fist Exercise 2016') in Pokhran, Rajasthan, attended by President Pranab Mukherjee and Prime Minister Narendra Modi, Air Chief Marshal Arup Raha declared: 'This demonstration is the tip of an iceberg when compared to the overall capability of the air force.'

Well, it is a melting iceberg, with the Indian air fleet rapidly reducing.

'The IAF has flagged concerns about the shortage of fighter jets,' the air chief admitted, 'and the process for the acquisition of 36 French Rafale fighter aircraft is still underway.'

What does 'underway' mean?

Let us do a flashback to January 25, 2016.

As Defence Minister Manohar Parrikar and his French counterpart Jean-Yves Le Drian signed a MoU for the purchase of 36 Rafale aircraft, President Francois Hollande of France said to the national and international media at Hyderabad House, that the 'real' deal would be inked 'dans les jours prochains (in the coming days).'

Later Dassault Aviation, the aircraft manufacturer, clarified that it would take about four weeks. The French officials, including Le Drian, accompanying the French president during his State visit were quite optimistic that this could be done.

On February 18, during an interview with Karan Thapar on the India Today channel, Parrikar stated: 'Price is the only issue left now.. an agreement on 50 per cent offsets has been reached.'

News appeared that Dassault would have quoted around $9 billion (around Rs 60,300 crore/Rs 603 billion) for the 36 jets while South Block was expecting a much cheaper price.

The final deal would include two types of missiles and bombs, training of pilots and two base facilities for the planes.

Incidentally, the latter creates a huge problem for the French Air Force, already overstretched with a growing number of overseas military interventions and a shrinking budget.

The Rafale deal, if it comes through, like the previous ones signed with Egypt and Qatar, is not a boon for the FAF, which will be responsible for the training and setting up of the bases. It will be a huge success for the rather unpopular French president and France's economy.

As talks were going on, a report in the Indian press pointed out to several loopholes, apparently earlier overlooked by the Modi government.

The Union law ministry would object to some clauses in the January MoU; they could 'compromise' India's interests, it says.

First let us recall that the initial Request for Information had been issued in 2001. Fifteen years ago! The Request for Proposal was only issued in 2007, as the then defence minister A K Antony wanted to add new clauses, such as the total life-cycle costs, in the Indian defence procurement policy.

The 'complications' had started. Finally, in January 2012, the French firm Dassault Aviation was selected for supplying 126 planes to the IAF.

In April 2015, realising the difficulty with the transfer of technology to Hindustan Aeronautics Ltd and to avoid going back to the starting blocks, Modi, during a visit to Paris, opted for 36 'off-the-shelf' planes only.

The French had probably not realised that 'off-the-shelf' can be rather complicated in India.

The main sticking points raised by the law ministry, touched upon the issues of liability, bank guarantees, arbitration and a higher-than-usual offset clause.

A senior official involved with the matter (how a babu can freely speak to journalists is a mystery which should be inquired into) told The Indian Express: 'While many senior government functionaries, including those in the ministry of defence, have favoured out-of-box thinking to take the deal forward, when we examined the draft inter-governmental agreement and the draft supply protocols, we were left wondering as to how India could agree to all the stipulations suggested by the French side.'

'In our opinion, the two documents were not drafted with the interest of the Government of India in mind.'

What is strange is that while the minister says that only the price needs to be discussed, the babus speaks of the conditions which 'are being heavily loaded in favour of the French nation.'

The Indian Express source asserted that the French government has refused to give any bank guarantees; instead, it has offered to provide a 'comfort letter' from its prime minister. It is apparently what was accepted during Hollande's visit to Delhi in January.

The babu&'s mindset is also manifest when it objects that while the deal had agreed on Geneva (Switzerland) for arbitration proceedings, the MoD should have pressed for having India as the seat of arbitration.

All this just shows the bureaucrats' deep frustration: they had not been kept in the loop; as a matter of fact, it was precisely why the prime minister decided for an 'out-of-the box' solution for 36 instead of 126 jets.

On March 10, Defense News, a usually well-informed Web site, reported that Dassault Aviation was negotiating with Delhi the possibility to build 90 more units with potential local partners.

The Web site quoted the company's chairman Eric Trappier saying: 'Dassault seeks to set up "a real partnership" with Indian industry rather a conventional offset, which requires investing in unrelated sectors.'

'That partnership approach would see Safran, Thales and other French suppliers working with local partners on the Rafale if New Delhi agreed the order for 36 and followed up with a further 90 units.'

'That second order was needed as the former figure was too small to justify a local build.' In other words a 'Make in India' scheme.

In the meantime, Dassault is talking to Canada, which may drop out from the F-35 programme with the US and also Switzerland trying to replace its F-5 and F-18, as well as Belgium, the United Arab Emirates and Malaysia.

The problem for India, as well as for other potential buyers, is that the annual output of the assembly line of the Rafale workshop near Bordeaux is 11 units, or one a month, (in August, France does not work); the output could rise by three units, if India and other countries signed up for the fighter, explained Trappier; further Dassault needs to deliver six Rafales to the FAF in 2016 and one in 2017.

A few days later, while confirming that the Rafale deal with Dassault was still on, Parrikar boasted to be a 'tough negotiator,' wanting the 'best price' for Rafale fighter jets.

It is fine to be a tough negotiator, but Parrikar should not forget that Dassault too is a hard bargainer. Further, the position of the French consortium is not the same as two years ago: Their order book is full and first ordered, first served, remains the rule.

Last week, defence analyst Ajai Shukla, commented in Business Standard: 'Paris is beginning to acknowledge the possibility that India might not buy the Rafale fighter because of sharp differences over the price, and New Delhi's insistence on enforceable guarantees regarding the fighter's delivery, performance and availability.'

Quoting a senior French official, Shukla wrote: 'If some people in the MoD do not want to allow the Rafale deal to go through, so be it. We are currently building it for Egypt and Qatar, and we could have another customer in Malaysia.'

It is clearly a poker game, with each party sending 'feelers' and vague threats though the media.

But who would be the loser if the deal does not come through?

Undoubtedly both France and India, particularity the IAF, with Air Chief Raha's melting iceberg melting further due to the change of the 'bilateral' climate.

Quite worryingly, some news, which passed unnoticed in India, created waves in France: It is the awarding of the Legion d'Honneur, the country's highest honour, to Saudi Crown Prince Mohammed bin Nayef. It sparked a huge controversy in France.

Why honour the kingdom? The Web site Intelligence Online had perhaps the answer.

In January, it titled: 'Riyadh wants to lure Paris with a contract for the Rafale.' It quoted a source saying that Prince Mohammad bin Salman, Saudi Arabia's defence minister, appealed to Paris to submit a proposal for the supply of fighter aircraft Dassault Rafale 'in the coming weeks.'

Are 72 jets not worth a small medal?

And if the Prince decides, no bureaucrat in Riyadh will block the contract... and no problem of cash either.

That would mean that the 'Indian deal'is further postponed for several years.

Let us hope that once again the prime minister stepS in and find a way which will be a win-win solution for both countries.