Modi government’s extraordinary ineptitude can only be explained by the circumvention of laid down procedures in the Rafale deal.

by Srinath Raghavan

The Rafale deal is back in the news. Writing in The Hindu, its former editor N. Ram has shown why the BJP government ended up paying substantially more for 36 fighter aircraft. The article has drawn the ire of the government’s votaries and their responses merit scrutiny. But we also need to go beyond the question of costs and look at the causes and consequences of the decision to scrap the older process for acquiring 126 aircraft.

Although the government has resolutely refused to share the full details of the costs of the deal, the broad figures have been in the public domain from the time the agreement was inked. As early as 24 September 2016, Ajai Shukla reported that the average cost of each of the 36 bare-bones aircraft was €91.7 million (in all, €3.3 billion). In addition, there were costs of India-specific enhancements (€1.7 billion), spares (€1.8 billion), logistics (€350 million) and weaponry (€700 million).

Drawing on official documents, The Hindu article shows that the cost of these enhancements is actually €1.3 billion. In its original bid for 126 aircraft, Dassault Aviation had pegged the design and development costs of these at €1.4 billion. In the negotiations for the new contract, this came down a bit to €1.3 billion. Because this fixed cost would now be spread over 36 aircraft instead of 126, the cost per aircraft in the new deal was naturally higher.

When the bids for the older tender had opened in 2011, the price of each of the bare 126 aircraft quoted by Dassault was €100.85 million (including the price escalation from €91.75 million in 2007, as claimed by Dassault). The cost of development and design for each of the 126 aircraft worked out to €11.11 million. So, the total cost of each aircraft stood at €111.96 million. By contrast in the new deal, the government procured each bare aircraft at €91.7 million. But the costs of development and design amounted to €36.11 million, taking the total price of each of the 36 aircraft to €127.86 million. In short, the government obtained a 9 per cent reduction in the price of the bare aircraft, but ended up paying substantially more owing to the fixed costs of development.

The difference in price per aircraft could actually be higher as the government dropped the standard ‘options’ clause that allows it to purchase an additional 50 per cent of the aircraft under the same terms and conditions. In other words, the costs of design and development in the older process could have covered not 126 but 189 aircraft, bringing the average cost of each plane further down.

Critics have claimed that the comparison is misleading because these 36 aircraft will come with additional capabilities beyond those specified in the older tender. This is true, but beside the point. The salient fact is that there is no increase in India-specific enhancements sought by the Indian Air Force. As the ministry of defence’s spokesperson notes in his response to The Hindu report (circulated to a few journalists): “These were part of the 2007 bid and continued to be part of the 2016 deal.” The additional weaponry and logistics performance now sought by the Air Force are calculated under separate heads of costing. Bringing them in does not in any way detract from the point that the government has ended up paying more owing to the fixed costs of design and development of India-specific enhancements.

This extraordinary ineptitude can only be explained by the circumvention of laid down procedures. The Prime Minister evidently took the decision to scrap the older tender and purchase 36 Rafales without consulting the Air Force or the ministry of defence. According to the procurement procedure, a declaration of intent to buy any defence equipment can happen only after the government approves the Acceptance of Necessity (AoN) for the equipment in the specified quantity. This is done by the Defence Acquisition Council (DAC), chaired by the Raksha Mantri, after a statement of case is moved by the concerned service headquarters.

The government has informed the Supreme Court that the DAC approved the AoN for 36 aircraft on 13 May 2015, although Prime Minister Modi had announced the deal during his visit to Paris on 10 April 2015. Had due process been followed, the Air Force’s statement of case would have been scrutinised by financial experts in the defence ministry, who would have pointed out the costly error in going for just 36 aircraft. As it happens, the decision was taken at the highest level and presented as a fait accompli to the Air Force and the defence ministry. Still, there were serious differences in the negotiating team on whether this high cost of development was worth paying for 36 aircraft.

No wonder the government continues to adopt an implausible stand. The MoD’s spokesperson insists, on the one hand, that “the deal for the purchase of 36 Rafale fighter jets in 2016 achieved the objectives of better price, better delivery period and better terms compared to the earlier proposal”. But, on the other hand, he claims that “to compare the cost for the MMRCA contract which never materialised with the cost of the 36 aircraft procured in 2016 is fallacious.”

The style of decision-making in Rafale is strikingly similar to that in demonetisation. In both cases, an excessively centralised and secretive approach coupled with a limited grasp of technical issues, disdain for expertise and a penchant for public positioning led to grievous outcomes.

The consequences of the decision are plain. The Air Force has to make do with far fewer aircraft than it needs. A Request for Proposals for another 110 aircraft has been put out last year and the process is likely to go on for some years. Further, in the absence of any technology transfer, India has not only lost access to crucial technology but also the opportunity to acquire manufacturing skills. This will have long-term repercussions for our defence industrial base.

The parsimony and incompetence of the Modi government have dealt a deep blow to India’s military modernisation. Future historians are likely to judge this episode in the words of Joseph Fouché: It was worse than a crime—it was a blunder.

The author is Professor of International Relations and History at Ashoka University and a Senior Fellow at Carnegie India. Views are personal