Defence deals, crony capitalism and PM Modi: Did India’s ‘nationalist’ government compromise national interest?


Did Prime Minister Narendra Modi junk the UPA’s defence deal with the French company on 126 Rafale fighter jets with transfer of technology to India to help friend Anil Ambani? His decision cost India thousands of crores and resulted in the loss of technology that could have secured the indigenous manufacturing of these fighter aircrafts in future?

On 1 June this year, during a keynote address at the Stigler Center’s conference on the political economy of finance, former RBI Governor Raghuram Rajan said that exclusionary policies were “the first step toward crony capitalism.”









“If you can pick and choose who belongs amongst communities, you can also pick and choose who belongs within communities, and it leads to a breakdown of the market system. We’ve seen this happen in South Africa and Malaysia. Identity-based politics eventually go towards crony capitalism,” he added.

In a nutshell what he said was aptly headlined in this article, “Populist Nationalism is the first step towards crony capitalism.”

Raghuram Rajan did not take the name or example of India, but we Indians can easily relate ourselves to the examples he was citing from our experiences in the last three and a half years.

What Rajan said then will make sense now in the context of India’s famous Rafale purchase and other business deals that raise some serious questions;

  • What is the personal interest of our PM in Rafale and other defence deals?
  • Did the original Rafale negotiation under UPA regime actually collapse or was it a smoke screen to bring Adani group and Anil Ambani in to combat aircraft manufacturing?
  • Is it wrong to think just one deal has been broken into different pieces to cater to the business interests of Mr. Modi’s billionaire cronies?
  • Did the PM himself take the call on defence deals? If not who are the people behind this?
  • Did a certain section of the Indian media play conduit in pushing a fake narrative against the UPA deal on Rafale?

We have their answers for you below. Keep reading.

Enigma of Rafale Deal

Though there are enough examples that openly tell stories of crony capitalism under all governments, the Rafale deal assumes more significance because it is the story of national security outlined by a political party which rakes up ultra nationalism at the drop of a hat.

Many articles and blogs have been written on the purchase of 126 Medium Multi Roll Combat Aircraft (MMRCA) Rafale from France’s Dassault Aviation. The Indian Air Force had carried out one of the longest and most rigorous field trials of six players namely Boeing F/A-18E/F Super Hornet, Dassault Rafale, Eurofighter Typhoon, Lockheed Martin F-16 Fighting Falcon, Mikoyan MiG-35 and Saab JAS 39 Gripen who responded to India’s RFP.

In the final stage only two players were left – Eurofighter Typhoon and Dassault Rafale. The reason being that both these aircrafts have twin engines. After two long years of price negotiations and discussions on other terms and conditions, as late as March 2014 the government of India finally sealed a work share agreement with Dassault Aviation. Under the agreement, 70% of the work of the 108 jets that were to be manufactured in India would be undertaken by the Hindustan Aeronautical Limited (HAL) while the rest would be done by Dassault.  That was the last month of the previous Congress-led UPA 2 government. After the general elections in May 2014, BJP and allies led by Narendra Modi came to power with a historic mandate.

But we did not hear about the Rafale deal till August that year. Let us fast forward to 2015. Prime Minister Narendra Modi visits France in April 2015 and on the very first day of his visit he signs a deal with France to purchase 36 Rafale fighter jets on a government to government deal. As expected, the Indian media went ballistic with the news and did not leave a chance to praise the swiftness of the PM on ‘clinching’ the deal. It was said that the details and the pricing will be decided later by the officials and a formal order will be signed once the price was settled.

And finally, on 23 September 2016, India formally signed the contract for the deal with a price tag of 8.7 billion US dollars. From this point, we have to go back to the process of the price negotiations and other details of this deal.

Rafale deal and PM Modi’s billionaire businessmen friends 

On 31 January 2012, Dassault Aviation won the bid to supply 126 Rafale to the Indian Air Force. Out of this 126, 18 had to come to India from France in flyaway condition (manufactured in France according to IAF specifications specified in the RFP and bid documents) and the rest 108 had to be assembled at HAL in India after a technology transfer. In essence, this was UPA government’s Make in India initiative.

Dassault aviation won the bid in the financial round as the lowest bidder. When the IAF calculated the life-cycle maintenance cost and incorporated that to the price of the aircraft, Rafale was cheaper by 5 million US dollars compared to the nearest competitor, Eurofighter Typhoon. The IAF was of the opinion that the ongoing upgradation of Mirage 2000H, manufactured by the same company – Dassault Aviation – will simplify its logistics chain as both fighters share many common weapons and parts. And India was really satisfied with the support France and Dassault Aviation extended during the Kargil war when they had to adapt Israeli and Russian laser guided bombs to fighter jets urgently because the Mig fighters were not able to engage in the high altitude warfare. Further, Rafale is capable of delivering nuclear weapons and most of the weapons can be integrated easily.

India under Manmohan Singh as prime minister was a tough negotiator when it appeared that Dassault was not willing to partner with the HAL. The important reason for Dassault to be adamant on not partnering with the HAL must have been their already signed partnership agreement with Mukesh Ambani led Reliance Industries Ltd.

The fact that the partnership with Mukesh Ambani’s Reliance was forged just a week after Dassault won the bid is slightly intriguing. Later Rtd. Air Marshal BK Pandey published the details in a defence magazine.

Dassault’s reluctance to participate with the HAL was one of the main stumbling blocks in the negotiations. As reported by a section of the Indian media, once this issue was settled, negotiations got stuck on the pricing because Dassault allegedly started to ask for a higher price.

Two things have to be noted here –

  • At the time of India’s final selection of Rafale, Dassault was ready to work with the HAL. As a major international fighter jet manufacturer, it will be wrong to assume that Dassault did not try to find out about HAL’s facilities and capabilities before submitting the bid. And their change of mind came only after signing the pact with the RIL.
  • At the time when the IAF finalised on Rafale and Dassault became the L1 bidder, Dassault was financially in very bad condition and they did jot have any other order for Rafale other than from their home country, France. Not only that, but, in its 26-year-old history, Dassault could never sell a single Rafale to any other Air Force around the world other than France’s own military. Therefore, Dassault was badly in need of an Indian contract of 126 fighters for their immediate survival. That was because France had almost decided to stop the production of Rafale primarily due to the major financial constraints.

But the RIL-Dassault joint venture managed to get all the required permissions and licenses to setup a factory to produce the wings and other parts of Rafale near Bangalore.

Since the signing of the work sharing agreement between Dassault and the government of India, the price of the fighter mysteriously shot up by 100% making it financially unviable for India to go ahead with with the deal at such a staggering price tag. At least that’s what began to be reported by media in the run up to Narendra Modi’s audacious campaign to become India’s prime minister, which by then was a foregone conclusion.

Three months before Prime Minister Modi’s surprise announcement to purchase 36 Rafale from France in flyaway condition, younger Ambani brother Anil too entered the defence business by launching three new companies and one of them was Reliance Defence and Aerospace.

Once India signed the final contract with France, the same company of Anil Ambani  entered into a joint venture with Dassault Aviation to start a air-frame and engine parts manufacturing facility in India. Dassault was under the offset rule obligations to invest 50% of the total revenue in India itself and out of the total offset amount of Rs 30,000 crore, Rs 21,000 crore went to Anil Ambani’s Reliance. This came as nothing less than a windfall gain for the junior Ambani, whose business had run into serious financial crisis by then. Remember, this joint venture was formed on the 10th day after India formally signed the purchase contract!

Anil Ambani, a close friend of the prime minister, has been reportedly applying pressure on Dassault to put more money in his joint venture, which is 49% owned by the French company and 51% by him. Dassault is reportedly losing patience and has told Anil to also put money into the company, which he has not done till date.

After 20 days from the first announcement of forming the joint venture, on 23 October, another interesting news surfaced. The Dassault-Reliance joint venture would manufacture combat aircrafts for global supply. It did not end here. This year in June, a wide variety of Indian newspapers reported that the Indian Navy was considering purchase of 57 fighter jets worth Rs 50,000 crore and that they were considering only two players – Boeing with their F/A18 Super Hornet and Dassault Rafale. Boeing has a long standing tie-up with TATA group and they make air-frames and wide variety of parts for aircrafts.

Let’s now come back to the pricing of 36 Rafale that the Modi government decided to purchase. For this, we have to find out what happened between January 2014 and 10 April, 2015 till PM Modi announced the off the shelf purchase and from then to 23 September, 2016 till the final agreement was signed.

In January 2015, Parrikar said that Indian built SU-30MKI was adequate instead of Rafale and the price negotiation with Dassault went in to rough weather. After two weeks, he once again said that the Indian built SU-30MKI was a viable alternative for the French fighter especially when the HAL was overhauling the Sukhois with state of the art electronic warfare system.

Parrikar with his the then French counterpart Jean Yves Le Drian

In February the same year, an unnamed MoD official told Business Standard that the Rafale deal was “effectively dead”. It was reported in the same month that during the three year price negotiations between the Dassault and the Contract Negotiation Committee, the latter reportedly realised that Rafale price was higher than that of Eurofighter Typhoon.

Dassault’s reply is very important and to be noted. They said, they never changed the price since RFP. The next we know is Modi’s announcement from France to purchase 36 Rafale in flyaway condition on 10 April. France reportedly offered these 36 units at the same price as they pay to purchase for their Air Force. Later in May Manohar Parrikar said that India will buy only 36 fighters from France as 126 Rafale is “economically unviable and not required”.

In 2016 January, French president Francois Hollande said that further discussions needed on the inter government agreement signed between the two countries at the time of Modi’s visit to France for the purchase of 36 fighters and price negotiations are still on. As late as February 2016, Parrikar said India will not sign the contract till the price was right. In March 2016, the Indian Law Ministry too questioned several clauses in the multi billion dollar deal saying that it would compromise India’s interests. French replied that if India’s MoD was not interested to conclude the Rafale deal, then they didn’t care anymore as they had orders from Qatar, Egypt and expected orders even from Malaysia. In the very next month, reports came that the final price would be slightly less than 8 billion Euros.

Was BJP IT Cell responsible for fake price hike story?

Before going in to the price comparison with the earlier deal, which was under negotiation for 126 fighters under the UPA 2 and the final price in which the deal was signed for 36 fighters, we have to look at what was the objections of Ministry of Law on the clauses of the deal and how our pliable media relentlessly reported about the fake 100% price hike since 2012.

Two main points red flagged by Law ministry were the reluctance of France to give a bank guarantee. Instead, according to the law ministry, France was offering a letter of comfort by the French prime minister. Second issue, as reported by the Indian media, was the Liability Clause which was highly one-sided favouring France. Indian Express accessed documents related to this but their detailed questionnaire to MoD went unanswered.

Further, the same report claimed that the Ministry of Law advised GoI to change the seat of arbitration from Geneva to India. We don’t know whether these suggestions were incorporated or not. If not, certainly these are against the interests of the country.

Another objection was on paying huge amount of money to France in advance without getting the product delivery. But this was not taken care of. India has already paid two tranches to France and we don’t know who vetoed the Law Ministry’s objection.

As mentioned earlier, we have to check how Indian print media reported the price escalation issue when the deal was negotiated for 126 fighters. The first one was Zee owned DNA when, quoting an unnamed MoD official, its report said that the price had gone up by 100% to reach almost 28-30 billion US dollars. A flurry of media reports followed over the next one year. Indian Express, Financial Express, Business Standard, Economic Times and Times of India reported 20 billion US dollars, The Hindu was more economical at 18 billion US dollars along with Hindustan Times and Live Mint. But what was the actual price being negotiated?

We have to go backwards from the sealed price for 36 fighters. India closed the deal at 8.8 billion US dollars for 36 units. One ET report mentioned that higher price of the deal was circulated by BJP and advertised by BJP IT cell. But the story appears to have been taken down by Economic Times now.

A Business Standard article pointed out the French claim that they never changed the price since they started negotiations. Once ET clarified that, it began to make sense and put everything in right perspective. The actual price was Rs 90,000 crore. That is 14.1 billion US dollars as on today’s exchange rate. And this figure – Rs 90,000 crore – was disclosed by none other than the then Defence Minister Manohar Parrikar on Doordarshan. Later he told ET that buying 126 Rafale would have cost India a whopping Rs 90,000 crore. With 36 units India will pay only around Rs 25,000 crore to Rs 30,000 crore and will, therefore, save Rs 60,000-Rs 65,000 crore. So, was he right? The short answer is NO. You will see below. Modi had actually agreed to pay France  Rs 952.52 crore more for each of the 36 aircraft ordered.

Price comparison of UPA deal vs BJP deal- A scam?

Parrikar’s statement implied that the Modi government was following the same pricing what the UPA was negotiating. The UPA negotiated price would have been higher because it included Transfer of Technology (ToT) to an Indian company. Now just think for yourself. A 126 fighter jet deal was stuck on the negotiation table for more than three years because France was not willing to do the ToT to HAL and the quoted price was Rs 90,000 crore. The final outcome is India will be paying Rs 60,000 crore for 36 fighter jets without ToT. This is simple mathematics. As per the deal done by Modi government, 126 Rafale would have cost Rs 210,000 crore!! Don’ get confused. What you read is correct. That means, in earlier deal for 126 fighters when India was paying approximately Rs 714.14 crore per Rafale, in the currently concluded deal, India is paying Rs 952.52 crore higher. In other words, the current price per unit is Rs 1666.66 crore. Immediately after the announcement of the conclusion of the deal by PM from Paris, defence analyst and expert Ajai Ahukla called it a Parisian Blunder.

Shukla summed it up India’s blunder when he said, “At that point the French were rewarded for their obstinacy with exactly what they wanted — an order for fully built aircraft without the need to transfer technology.”

One still doesn’t know why PM Modi did not go for the UPA deal that would have allowed him to further boost his Make in India initiative because it included the transfer of technology other than the deal being cheaper by over Rs 900 crore per aircraft.

Let us put it very simple words – This deal appears to be the scam of the century. Many BJP supporters tried to argue that the price difference is because of the arms incorporated in to the original equipment. But the fact is that the IAF specifications were never changed since the beginning.

The ruling party supporters and Prime Minister’s fans on Twitter said that the depleting strength of IAF was the reason for Mr. Modi to order 36 Rafales in flyaway condition from France. Many Indian media houses published the same story. Even if we take that at face value, that complete order (two squadron to be precise) will not be in service before 2022.

Manohar Parrikar’s spectacular U-turn

It does not finish here. The same Defence Minister who in 2015 January said that increasing the production of upgraded Sukhoi in India was more economical and cost 50% less started to talk about another 200 single engine fighters.

But, no one knows when IAF placed the request for such an option. If the IAF needed only a single engine fighter, why did they finalise the twin engined Rafale and Eurofighter?Various reports suggest that under the Make in India programme, these jets will be manufactured in India with foreign companies joining hands with Indian partners and the major players are American Lockheed Martin with F-16 and Swedish SAAB with Gripen E. These were the two which IAF had rejected in their field testing when they were finalising MMRCA. Once rejected how come they become eligible now?

If technical upgradation is the answer, all technological products get upgraded over time. But how’s going to single engine a technology upgradation? Also, since when did our civilian governments start to decide what kind of products our defence forces should use?

It is a dangerous precedent the so-called nationalist government has set in. Who is advising this government on such issues? How can a civilian government take unilateral decision on the quality of the product to be purchased by a defence service? Why our media houses are silent on such an important issue related to national security? And more crucially, why did so many news outlets agree to push the Modi government’s agenda even at the cost of the antional security?

Soon after this announcement by Parrikar, Lockheed Martin and Saab shown interest to set up their manufacturing  facilities in India. Lockheed Martin joined hands with Tata Group and Saab signed a JV with Adani Group. Remember, F-16 was rejected by the IAF on the pretext that Pakistan had the same machine. The IAF insisted on Rafale for the ease of maintenance Dassault can give for Mirage and the track record of the French company particularly at the time of Kargil conflict.

In January 2017, Indian Navy invited tenders for an RFI from combat aircraft manufacturers world over asking them to submit the proposals as per the specifications mentioned in the RFI. Certain conditions are very interesting. Here offset is not 50%, but only 30%. Section iv/9(i) asks “Can the aircraft wings be folded? If so, does the aircraft have to be powered up for wing folding and extension? Can it be done using alternative means?”

Another condition is that the product would be in service in the Naval Force of the country of origin. Another report came in almost a month after the RFI, that Navy was looking at only twin engine fighters. Instead of saying directly that Navy and government were considering only two players – i.e, Tata Boing JV and Reliance Dassault JV, they put the conditions in such a way that only two players will be meeting the said criteria except that Rafale doesn’t have foldable wings.

When IAF finalised with 126 Rafale (7 squadrons) they had looked at the ease of serviceability, Dassault being single vendor. IAF had faced enough difficulties earlier with different vendors and different products. Just by spoiling this particular deal in to multiple products, our current government spoiled that convenience in single stroke. For example, US imposed sanctions against India immediately after the 1998 Pokhran test. But France kept themselves away from such a diktat. Still, if India is keen to consider Lockheed Martin and Boeing above Rafale, it is too much optimism knowing US’s proximity with Pakistan. Whatever said and done, America will not abandon Pakistan for India.

These three deals show us clearly why our current ruling political dispensation is taking so much interest in defence deals. All the companies who are going to make or service these aircrafts are owned by our PM’s close friends. By doing all these, was our government merely facilitating business opportunities for Indian companies in India or is there anything beyond that? How come these foreign companies formed JVs with Indian companies who have no experience or technological capabilities in aircraft manufacturing or defence production? Tata Group is an exception.

I don’t see a chance of our traditional media questioning this government at least until 2019. Of course, a lot will depend on the outcome of Gujarat elections.

(Janta Ka Reporter owns the copyright of the above content. Please attribute while reproducing or using excerpts of this report. Author Ravi Nair can be contacted on twitter @t_d_h_nair)