Leaders acknowledge difficulties over Rafale's high cost

For months, it has been whispered that New Delhi is unwilling to pay the price that French company Dassault Aviation is demanding for the 36 Rafale fighters that Prime Minister Narendra Modi had asked for in Paris last April. On Monday, Modi, and visiting French president, François Hollande, both confirmed those rumours.

After bilateral talks in New Delhi on Monday, Modi admitted that "financial issues" had to be sorted out, which would be resolved quickly.

Speaking after Modi, Hollande stated: "There are some financial issues that will be sorted out in a couple of days, but the memorandum has been signed."

The French president was referring to an Inter-Governmental Agreement (IGA) that was inked on Monday. An IGA is a high-level expression of intent that does not have the force of a contract. Several IGAs signed by India are languishing - such as the Indo-Russian IGA, signed in 2007, to develop a multi-role transport aircraft.

There are two major hurdles to the contract. First, New Delhi and had Paris agreed the price of the 36 Rafales would be less than what Dassault had quoted in response to the Indian tender of 2007 for 126 medium multi-role combat aircraft (MMRCA). Of those 126 fighters, the first 18 were to be supplied in "flyaway condition", i.e. fully built. Since 36 Rafales are now being bought in "flyaway condition", their per-piece price must be lower than what Dassault quoted for those 18 fighters.

In Paris last April, Modi and Hollande "agreed to conclude an IGA for supply of the aircraft on terms that would be better than conveyed by Dassault Aviation as part of a separate process underway [ie the MMRCA contract]".

Media reports put Dassault's quote for 36 fighters as $7-9 billion (Rs 47,500-60,000 crore). That figure would include the cost of an initial scale of weaponry and spare parts, as well as hangar facilities. That is an astronomic Rs 1,320 - 1,660 crore per aircraft.

"The government would find it extremely difficult to justify that price. For the cost of a Rafale, the Indian Air Force (IAF) could buy 4-5 Sukhoi-30MKI, or 10 Tejas light fighters," points out Bharat Karnad of the Centre for Policy Research, who has been critical of the MMRCA procurement.

The second hurdle to buying 36 Rafales in flyaway condition is the abandonment of any "Make in India" component. To bring in an element of that prime ministerial initiative, the defence ministry would have to strictly enforce a 50 per cent offsets clause, which would raise Dassault's cost further.

"There are quite clearly serious complications in negotiating this deal," points out Pushpinder Singh, editor of the authoritative aerospace trade journal, Vayu.

Dassault had, on January 31, 2012, been declared the winner of India's tender for 126 MMRCA aircraft. After exhaustive trials, the IAF chose the Rafale over five other fighters - Boeing's F/A-18E/F Super Hornet; Lockheed Martin's F-16IN Super Viper; Saab's Gripen NG; RAC-MiG's MiG-35 and Eurofighter GmbH's Typhoon. However, in protracted price negotiations that followed, the defence ministry found that Dassault's payment would amount to more than what its commercial bid initially suggested. The United Progressive Alliance government dragged on the negotiations. The National Democratic Alliance government chose to abandon the MMRCA tender altogether, and instead buy 36 Rafales over-the-counter.

The IAF insists it needs the Rafale, since it now operates just 34 squadrons against the 45 squadrons needed for a two-front war.

Critics of the Rafale procurement object, first, to its price; but also point out that the IAF already operates seven fighters - Sukhoi-30MKI, MiG-29, MiG-27, MiG-21, Mirage 2000, Jaguar and Tejas LCA. Buying an eighth fighter would require major expenditure on depots, maintenance infrastructure and spare part stocks.

Furthermore, the multi-billion dollar MMRCA contract was to be a springboard for galvanising India's aerospace industry. Buying 36 fully built Rafales would only benefit that of France. The India contract is vital for Dassault, which provides 11,600 French jobs and earned ^3.68 billion in revenue last year. But critics wonder what part of India's defence industry stands to benefit.