Rafale jet deal to boost Indian manufacturing in long run

The Indian Air Force's (IAF) quest for a modern fighter jet involved a long-drawn acquisition process lasting more than a decade and logjam in negotiations. However, the end, when it came, was unexpected, and swift.

When Prime Minister Narendra Modi said in Paris on April 10 that India will buy 36 Rafale jets from Dassault Aviation in the "ready-to-fly" mode, many accused the government of sacrificing its 'Make in India' dream at the altar of convenience.

While it's true that the original deal for Medium Multi Role Combat Aircraft (MMRCA), which seemed to be headed nowhere, involved purchase of 18 fighters in a "fly-away condition" and making of the rest by state-run Hindustan Aeronautics (HAL), critics of the latest deal may be overreacting.

"The delay had created ill will. Giving Dassault double the original order of 18 is a good way to break the stalemate," says Amber Dubey, Partner and Head of Aerospace and Defence, KPMG India.

India, say many experts, has a lot to gain from the deal in view of the IAF's depleting strength and promise of domestic manufacturing in the form of offsets, joint ventures and contracts for purchase of components.

When inducted into the IAF in two years, Rafale will be India's most advanced fighter. "The deal addresses the IAF's immediate requirements," says Air Marshal M.Matheswaran, who retired in March last year as Deputy Chief of Integrated Defence Staff. The IAF's fighter strength now stands at 34 against a sanctioned 42 squadrons. "The government will now get time to address Make in India issues," he says.

Though the details are not known yet, either this deal or follow-on deals should have a 'Make in India' component. Analysts say this is a "sweetener" deal with a lot of give and take opportunities in the future. "There could be transfer of technology, more collaboration and use of India as a global supply base for Dassault products. Dassault can also set up a joint venture here. That would be real 'Make in India'," says Dubey of KPMG.

Rahul Gangal, Partner, Roland Berger Strategy Consultants, says the deal will create offset opportunities for Indian companies. The offset policy was introduced as part of the Defence Procurement Procedure 2005.

Most defence deals signed by India with foreign companies have an offset clause under which the foreign supplier has to procure a big chunk of inputs - 30 per cent to 50 per cent depending on the deal - from local suppliers. Till date, 24 offset contracts amounting to $4.87 billion have been concluded. Some analysts project an offset opportunity of $3.2 billion for Indian manufacturers if the government goes ahead with a follow-on order for another 36 jets - which is 72 Rafale jets in all. According to some industry watchers, there is a possibility this could happen.

Air Marshal Matheswaran says the cost of each jet was "guesstimated" at $70-80 million when the request-for-proposal was being prepared. Analysts now peg it at $90 million. This implies payment of $3.2 billion for 36 jets and $6.4 billion for 72. The best-case scenario in offsets opportunity is $3.2 billion, where nearly 50 per cent is sourced from Indian vendors. Some of India's big manufacturing houses could be in business. Dassault had already identified its sourcing partners when the previous Rafale negotiations were on.

"It will be a great opportunity for 'Make in India'," says Gangal. "You will get global aerospace and defence supply chains to set up supply bases and capability in India. While this one is a 'fly-away' deal, for Dassault, India is now a primary entity in the portfolio. It will develop the local industrial base in the hope of negotiating the next big deal," he says.

India's quest for a modern fighter has a long history. The request for information for the aircraft came in 2001, tenders for a competitive bid were issued in 2007. In 2012, Rafale edged out Eurofighter Typhoon jets after emerging as the lowest bidder. But the negotiations made little headway after that. It is believed that the cost of making these fighters changed drastically after 2007. Also, India pushed Dassault to take complete ownership of the 108 fighters HAL was to make. Dassault, as was expected, resisted.

Realising that the country could not wait forever for modernising its air force, India directly negotiated with the French government and signed the deal, prompting critics to claim "an unexpected knockout victory" for Dassault as it will not have to transfer technology now. Some called the decision arbitrary and questioned the French jet's performance.

Some even questioned the "handing out of billions to a French company that is struggling to survive." In 2014, the company's sales fell 20 per cent to 3.68 billion while profits fell 18 per cent to 398 million. On April 9, the day before Modi announced the deal, its stock closed at 1,142 on the Euronext. On April 15, it was at 1,224. Investors are perhaps viewing the deal as a lifeline for Dassault.

While India has "given", all eyes are now on the "take" part of the equation. The French have been supplying military hardware to India for quite some time now. Hyder Ali, the Sultan of Mysore (1721-1782), received French equipment to fight the British. Perhaps the French will now look at India differently, beyond its large market.