By Ajai Shukla
Business Standard, 22nd Apr 16
Illustrating the problems in concluding a pricey contract with French company, Dassault, for 36 Rafale fighter aircraft, Defence Minister Manohar Parrikar on Thursday distanced himself from an earlier claim by the ruling party that the deal had been “finalised at $8.8 billion” (Rs 59,000 crore at current exchange rates).
Speaking to journalists in New Delhi, Parrikar issued a measured clarification that the deal is at “an advanced stage”, and the government intends to “close it quite soon”.
The defence minister is some distance from the ruling Bharatiya Janata Party (BJP), which has already claimed the Rafale contract as a victory. On Tuesday, the party had tweeted: “Rafale deal: ‘Strengthening defence capabilities’ – Modi government saved $3.2 billion out of $12 billion deal.”
The party tweet was accompanied by an elaborate graphic that stated: “The deal to buy 36 state-of-the-art Rafale aircrafts (sic) from France at $12 billion (around Rs 80,000 crore) was re-negotiated and finalised at $8.8 billion (around Rs 59,000 crore).”
The BJP tweet referred to the Rafale contract as a done deal, with negotiations in the past tense.
Parrikar today contradicted that, stating: “I still can’t say that negotiations are totally cleared until we sign the deal, or at least the deal is forwarded to the Cabinet for approval.”
This is the heart of the contradiction: The BJP, facing flak for being weak on national security after its outreach to Pakistan, needs to brandish a high-profile defence procurement success like the Rafale. However, government negotiators and decision makers know they could face years of awkward questions over a price tag that is hard to justify.
The $8.8 billion tag, distributed over 36 aircraft, puts the cost of each Rafale at $244 million (Rs 1,640 crore). That is more than thrice as expensive as the highly capable Sukhoi-30MKI, which costs Rs 450 crore; and about six times as costly as The Rs 275 crore Tejas LCA Mark IA, which is scheduled for production in 2018.
Senior defence ministry sources that are close to the negotiations speak of deep disquiet amongst negotiators at the pressure to conclude the contract. The negotiators point out that Dassault had quoted $18-20 billion for 126 Rafales in its commercial bid in the medium multi-role combat aircraft (MMRCA) tender. Even accounting for inflation, negotiators say an $8.8 billion bid for 36 fighters is hard to justify.
In fact, that is Dassault’s selling price, given that the Rafale is being built only in small numbers that do not allow economy of scale. The French air force and navy slashed Rafale orders to just 180 aircraft, of which barely 140 have been delivered.
Foreign orders have been painfully slow in coming. Early last year, Egypt ordered 24 Rafales for $5.9 billion --- a price tag in line with what India is being offered. That was followed last May by an order from Qatar for 24 Rafales for $7 billion, a cost that included missiles to arm the fighter.
In comparison Eurofighter GmbH has orders of some 600 fighters (almost 500 delivered) from six countries, with more orders in the pipeline. Similarly, there are more than 500 American F/A-18 Super Hornets already in service; Boeing is pitching strongly to build these in India for an estimated cost per fighter of just over $100 million.
What is especially worrying to defence planners, though apparently not to the Indian Air Force (IAF), is the long-term cost of the Rafale. Analysts cite the thumb rule that the cost of operating a fighter through its three-decade service life cycle is about 6-10 times its procurement cost. That means the IAF would pay Rs 354,000-590,000 crore, in current rupees, as the Rafale’s operating cost over 30 years. Annualised, this amounts to Rs 11,800-20,000 crore per year, far more than what the IAF can afford.
“In the final balance, the government will have to decide whether it can afford to pay so much for political posturing on defence. If it abandons fiscal prudence in the belief that this would be someone else’s problem in the future, future governments will pay for the Rafale from some other -- probably more critical --- defence head. Ultimately, funds for defence are finite”, says a prominent aviation analyst, speaking anonymously.