Basics on Rafale deal

  • In April 2015, Prime Minister Narendra Modi had announced that India will buy 36 French-manufactured Rafale fighter jets off-the-shelf from Dassault, the French aircraft builder and integrator. The Rafale was chosen in 2012 over rival offers from the United States, Europe and Russia. The step was needed to upgrade India’s ageing fleet.
  • The original plan was that India would buy 18 off-the-shelf jets from France’s Dassault Aviation, with 108 others being assembled in India by the state-run Hindustan Aeronautics Limited or HAL in Benguluru.
  • The present government, however, rowed back from the commitment of the last UPA government to buy 126 Rafales, saying the twin-engined planes would be too expensive and the deal fell through after nearly decade-long negotiations between India and France.
  • There were a lot of hiccups over costs of the aircraft. However, faced with the dipping number of fighters and a pressing need to upgrade the Indian Air Force, Prime Minister Narendra Modi intervened and decided to buy 36 “ready-to-fly” fighters instead of trying to acquire technology from Dassault and make it in India.
  • In January 2016, India confirmed order of 36 Rafale jets in defence deal with France and under this deal, Dassault and its main partners – engine-maker Safran and electronic systems-maker Thales – will share some technology with DRDO (Defence Research and Development Organisation) and some private sector companies and HAL under the offsets clause.
  • Finally in September 2016, India signed an inter-governmental agreement with France, dubbed as “Rafale deal”, in which India will pay about Rs. 58,000 crore or 7.8 billion Euros for 36 off-the-shelf Dassault Rafale twin-engine fighters. About 15 percent of this cost is being paid in advance. As per the deal, India will also get spares and weaponry, including the Meteor missile, considered among the most advanced in the world.
  • In November 2016, however, a political warfare over the Rafale deal began and the Congress accused the government of causing “insurmountable loss” of taxpayers’ money by signing the deal worth Rs. 58,000 crores. It also claimed that the Anil Ambani-led Reliance Defence Limited had been unfairly picked to be the French firm’s Indian partner. The Congress alleged that the cost of each aircraft is three times more than what the previous UPA had negotiated with France in 2012.

Findings of CAG and its relevance

Pricing

Government: The previous government base price per aircraft was Rs 737 cr. The present is Rs 670 cr. That is at least 9% less

Opposition: Price of 36 Rafale jets was 55% higher than the UPA era

CAG: The contract was concluded at 2.86% lower cost than the earlier deal CAG demolishes government argument that price of basic aircraft was 9% cheaper, says it was the same under UPA, but savings accrued as cost of India specific enhancements reduced.

Offsets

Government: The offsets have been planned in line with older policy laid down by the UPA, 50% offsets clause in the deal

Opposition: Govt favoured Reliance Defence for the offsets, made it a condition to signing the deal

CAG: The issue has not been addressed in the report Official information on offset partners to come from French side only by October this year. Will be audited separately at a later stage.

Delivery Schedule

Government: We signed the deal in better terms and conditions, aircraft will come five months in advance

Opposition: No benefit to the Air Force, jets with Indian enhancements will take longer to deliver

CAG: Disagrees with government but says slightly better delivery schedule, one month saved. Notes apprehensions of Indian Negotiating Team on achievement of the tight schedules French side assures the first fighter, a twin seat trainer, will be delivered in October. However, options of imposing penalty in case of late delivery unclear.

Safeguards and Guarantees

Government: The deal has been signed under an inter-governmental agreement with the French govt assurance that all conditions will be met & the project overseen by Paris

Opposition: Govt diluted safeguards against corruption by waiving off the integrity pact and not holding the French side liable by including bank guarantees

CAG: Notes that in case of a breach of agreement, Indian side will have to settle arbitration directly with French vendors. If India wins the case and the French cos do not honour the award, only then French govt will make payments CAG says that costs saved by Dassault Aviation because of waiver of banking and performance guarantees should have been passed over to India, would have lowered price further.

Relevance of findings

  • The CAG report, which has some stinging remarks, says that the Rafale contract consisted of six different packages with a total of 14 items. The contracted prices of seven items were higher than the “aligned price”, the price at which the contract should have been signed after adjusting price variation between 2007 and 2015.
  • It says that three items in the Rafale deal including the basic aircraft were procured at the same price. Four other items were purchased at lower than the aligned price making the 2016 contract 2.86 per cent cheaper than the previous cost.
  • The defence ministry has been arguing that the 2016 contracted price of 36 basic flyaway Rafale aircraft was 9 percent lower than the 2007 price. However, the CAG audit report found that the basic flyaway aircrafts were bought at the same price as that of 2007.
  • However, the CAG report highlighted, the 2007 offer by Dassault Aviation provided performance and financial guarantees, which was about 25 per cent of the total value of the contract. There was no such guarantee or warranty in the 2016 contract. The auditor observes that this led to a saving for Dassault Aviation that was not passed on to the Indian government.
  • In the face of opposition criticism that government paid more in the reworked Rafale deal, the Centre has argued that the 2016 contract had more India-specific enhancements. However, the CAG report says that four of the India-specific enhancements were “not needed” at all. The Indian Air Force had stated the same in its technical evaluation in 2010. But those specifications were included in the Rafale deal.
  • The CAG report states that the 2007 offer for 126 Rafale aircraft included transfer of technology or licence to the Hindustan Aeronautics Limited (HAL) for the production of 108 fighter jets. But no such transfer of technology was provided under the 2016 contract.
  • On the issue of sovereign guarantee, the CAG report says the French side did not agree to India’s demand. The defence ministry sought a sovereign guarantee from the French government in lieu of bank guarantee from Dassault Aviation. India had to settle with a Letter of Comfort from the French government. The Congress has made it another point to target the government saying that the new Rafale deal was not secured financially.
  • The government has defended the 2016 Rafale deal on counts including faster delivery of the fighter jets. It has defended the deal saying that the air force needed immediate supply of the fighter jets and hence the deal could not have been delayed any further. However, the CAG report observes no big difference in the delivery deadlines for the Rafale fighter jets. Under the 2007 deal, the first 18 flyaway Rafale fighter jets were to be delivered by the 50th month from the date the contract was signed. Under the 2016 deal, the Dassault Aviation is required to supply first 18 aircrafts by the end of 53rd month.
  • The CAG report is critical of the defence ministry for signing the Rafale deal on “non-firm and fixed price”, which is vulnerable to price escalation depending upon the price index. The ministry found it cheaper than the “firm and fixed bid”. The government claimed “saving” by adopting this approach but the CAG report says, “Audit does not find this claim valid because” the same advantage was applicable even in the case of 2007 deal.
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