Saturday, October 1, 2016


Authors: Bharat Anand Partner
Kabir Bogra  Associate Partner

Khaitan &  Co 

With the conclusion of the contract for supply of 36 Rafale Medium Multi-Role Combat Aircraft (MMRCA) to the Indian Air Force (IAF) for approximately $8.8 billion, the focus of the discussion has now shifted to what the deal means for India and the development of the Indian defence sector.

In terms of the immediate prospects for the defence industry, the deal offers limited scope for the defence industry. The “fly away” nature of the aircraft imply implies that no part of the manufacture of the aircraft would be undertaken in India. However, the defence industry can hope to play some part in the two MRO centres and the 50% offset that France has committed for the deal. While the offsets alone would constitute business worth at least 3 billion Euro (approx. INR 22,000 crore), it is a far cry from the aspirations of the industry to participate in the manufacture of the aircraft itself.
The deal has evoked mixed reactions from defence analysts as well as the public. It is undisputed that the IAF has critical capability gaps and the 36 aircraft, which would comprise approximately two and a half squadrons, would immediately address some of these concerns. On the other hand, analysts have pointed out that the agreement is a stop-gap solution that does not address India’s long term vision of building domestic capability in defence manufacturing. While these perspectives are relevant, the deal should be seen from the perspective of achieving two primary objectives – immediately bolstering air capability and committing funding for a series of large acquisitions in the immediate future.

The primary motivation behind the deal is Dassault’s performance record and the IAF’s vast experience with Dassault platforms since the acquisition of Mirage 2000 aircraft in the 1980s. The comfort and satisfaction of the IAF with Dassault aircraft is evident from that fact that it has repeatedly sought to procure more aircraft and has also undertaken a comprehensive overhaul of the existing Mirage fleet to keep them relevant and up to date. It is pertinent to note that India is not alone within the developing country community in opting for the Rafale over other offerings. Egypt and Qatar have utilized the Mirage 2000 platform since the 1980s and have also opted for the Rafale over EADS, Boeing and Lockheed products.  
The deal also exhibits the government’s commitment to put money on the table to strengthen defence capability and augurs well for future acquisitions. It is relevant to highlight that the IAF has a requirement for at least 84 aircraft in addition to those procured under the Rafale deal. The government is also actively pushing the Indian Navy to consider the Dassault Rafale M series aircraft for its aircraft carrier tentatively named the INS Vishal, with a capacity to carry 54 aircraft. This itself totals to 138 aircraft with a value proposition of anywhere between USD 30-40 billion at current prices.
The commitment to large capital acquisitions is also crucial to stem the diversion of funds from capital purchases to revenue expenditures. A continued concern under the government’s fiscal accounting has been the balancing act to reallocate unspent funds towards avenues that require more funding, which sees between 25-40% of the military capital expenditure budget routinely being reallocated to revenue expenses. With the Rafale deal, plans to purchase up to five hundred utility helicopters, armored infantry vehicles, artillery and warships can also expect concrete funding commitments.
To keep the focus sustained on completing crucial acquisitions, the government needs to ensure that its policy framework enables meaningful participation by the domestic industry. Under the revamped Defence Procurement Procedure 2016 (DPP 2016) and the Strategic Partner (SP) model envisaged by the government, the domestic industry plays a leading role in acquisition of technology and domestic manufacture in India. These reforms have not resulted in concrete measures in terms of implementation and identification of SPs for key platforms such as aircrafts and warships. Since both the DPP 2016 and the SP model envisage sweeping changes to the current procurement framework, it is likely the same will suffer from several teething issues. Therefore, it is imperative that the government moves quickly to implement the same to ensure that key stakeholders are identified early and can begin collaborations with foreign vendors.
The Rafale deal should encourage the defence sector and there is reason to be optimistic. However, the window of opportunity is small and shrinking. The government has essentially another fourteen months to push reforms on the sector for economic activity to commence, since thereafter the general elections are bound to push these initiatives to the backburner.

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