New Delhi: “I also feel like having a BMW and Mercedes. But I don’t because I can’t afford it… So, 126 Rafales was economically unviable. It was not required,” defence minister Manohar Parrikar was reported to have said last year, when asked about the previous government’s plan to buy over a hundred Rafale fighter jets.

Parrikar’s bluntness was an echo of Prime Minister Narendra Modi’s ambitious plans for India’s defence industry. In a speech early last year Modi announced that not only did he want India to stop being the world’s number one defence importer but that over the next five years, nearly 70% of the country’s military needs would come from domestic production.

And yet, while today’s signing of the $8-billion dollar Rafale deal is a significant development and is India’s first major aircraft acquisition in nearly two decades, the deal’s twists and turns over the last two years also indicate how much work the Modi government has ahead of itself. In particular, the Rafale deal shows how much work needs to be done in overhauling the UPA government’s onerous acquisition processes, in setting up solid product road-maps and in ensuring ‘Make-in-India’ and co-production.

Product road-map concerns

The origins of the Rafale deal go back nearly a decade ago, to 2007, when the Indian Air Force (IAF) kicked off a process to replace many of its MiG aircraft squadrons.

“At that time itself, there were many concerns over the safety record of the MiGs and the fact that some of them were ageing quicker than expected. The initial tender process saw a number of companies participate, the most important of which were Dassault, Lockheed, Mikoyan, Saab and the consortium behind the Eurofighter Typhoon. At the time Mikoyan was avoided, because of the safety concerns with the MiGs, while the bids from Saab and Lockheed were not overly serious. It is only the last two years that proposals from Lockheed and Boeing became more concrete,” a former defence secretary, who helped oversee military procurement, told The Wire.

According to industry experts, Dassault’s Rafale was almost the perfect medium multi-role combat aircraft, not only because of its nuclear-strike variant (which is currently being touted as the strategic factor behind the Rafale deal), but because it was generally seen as “low-maintenance” and possessed many similarities with the Mirage aircraft that the IAF already operated.

While price concerns, as Parrikar pointed out last year, dictated that the Rafale purchase was scaled down heavily from the initially envisaged 126 aircraft to a mere 36, it has also directly and indirectly upset a long-standing demand from India’s defence companies: a well-defined product-procurement road-map that would allow them to invest in specific areas and scale up appropriately.

It’s simple math, defence analysts insist. IAF currently has 30-32 squadrons of fighters, with each squadron consisting of anywhere between 18-21 aircraft. Depending on who you talk to, the country needs anywhere between 40-42 squadrons to adequately protect its borders against Pakistan and China.

“In another four years, we will lose another 12-14 squadrons as we start decommissioning different variants of the MiG fighters. The 36-fighter Rafale purchase counts to around two squadrons and is a tiny attempt at plugging our future requirements. But domestic manufacturers, who could have tried to forge ventures with global giants or scale up to help out with the Tejas aircraft production, didn’t know the Rafale order would be scaled down until early 2015. That’s around eight years that they could have spent in scaling up or increasing investments in areas that could help in joint aircraft production,” Anand Bhatia, a senior defence analyst told The Wire.

In 2015, Parrikar also suggested the Rafale order could be scaled down without worry because future gaps in the IAF’s fleet could be plugged with indigenous light combat aircraft. This line of thinking has been vehemently opposed by large sections of the IAF, with former Air Chief Marshall PV Naik publicly stating last year that the indigenous LCA fighter (Tejas) “would have a different role and should not be confused with the requirements of a medium multi-role fighter” like the Rafale fighter jets.

What then will fill the IAF’s future requirements? The defence ministry’s logic here is fuzzy at best, according to experts. One option is to scale up the LCA Tejas production project, which as Naik has made clear, has its own issues. Another option is to look at other medium multi-role fighters such as the Saab Gripen E7, which industry rumours state that if chosen, could be manufactured in India with the Adani Group as a joint venture partner.

The last choice is to look at the top-end category of fighters, those futuristic aircraft whose capabilities exceed the LCA and medium multi-role fighters. The seeds of this ‘fifth-generation fighter’ were sown only a few months ago when India and Russia agreed to kick off the joint Sukhoi-HAL fifth generation fighter aircraft, also known as the “perspective multi-role fighter”. This option is more than 6-7 years way, according to defence experts.

Why then, did the Rafale deal go through at all? There are two major reasons. One, as author and defence journalist Sushant Singh has pointed out, is that the jets will be used in a strategic role, to deliver nuclear weapons. However, this argument seems slightly weak once you consider that the current aircraft that deliver nuclear weapons for India (the upgraded Mirages) are only set to be phased out from 2030 onwards. Secondly, as a number of defence experts have pointed out, scrapping the whole deal would not only send out wrong signals but also hurt any chances of future French investment and possible co-production opportunities.

Indian production lines and pricing

The Rafale deal also deeply emphasises the problems in securing Indian production centres and the pricing issues associated with defence imports.

“As of now, the Rafale gap is a stop-measure. It is great technology, no doubt. But much of the back-and-forth over the last two years was how much production could be done in India, specifically the setting of a third production line in India,” said the senior executive of an Indian firm that had been involved in joint production talks for the Rafale jet in early 2015.

According to industry sources, the companies that were in talks with Dassault and the Indian government in early 2015 were Bharat Electronics, Noida-based Samtel and Anil Ambani’s fledgling Reliance Defence Systems.

“Until around June 2015, many of the discussions were on whether a production centre would be set up in India for future orders and for export. By the middle of the year, this was shelved and by the end of the year talks mainly focused on what else could be gained from the off-the-shelf purchase such as technology transfer and how big the offset clause should be,” a Dassault executive who declined to be identified told The Wire.

The inability to secure an India production centre underscores the difficulties of the ‘Make in India’ defence initiative to this date – although as two defence experts pointed out to The Wire, as talks got delayed and the order was scaled down heavily it was clear that an off-the-shelf purchase would be the only option. “Even if India exercises its option to purchase more Rafale aircraft it is unlikely they will be produced in India, although nothing should be ruled out,” said a senior defence analyst.

From late 2015 to April 2016, however, the issues of pricing dominated discussions. One defence ministry official who was part of these negotiations said that “it was clear that the French side had deliberately kept pricing on the higher side, far beyond what would have been offered elsewhere”. A large part of this aggressive pricing was fuelled by India reducing the order. Even though the eventual price reportedly dropped from $10-12 billion to the current $8 billion, defence analyst Ajai Shukla points out how the year-long negotiation still didn’t ensure that the price came “on our own terms” as Parrikar claimed it would.

Shukla’s calculations are simple: While the order of 126 aircraft worked out to around Rs 715 crore per fighter (after adding all costs), the 36-aircraft purchase works out to around Rs. 1,600 crore. Though Shukla acknowledges that the current contract includes elements not in the original 126-fighter tender, it still works out to around Rs. 1,000 crore per aircraft — which is roughly the cost of two-and-a-half Sukhoi-30 MKI fighters.

“If anything, the drawn-out nature of the pricing negotiations, and how it may have ended up being quite expensive, underscores Modi’s mission to reduce our defence imports. The Rafale deal in this regard is a very costly acquisition that not only doesn’t fulfil all of our requirements but also shows us how desperately we need to boost indigenous defence production,” a senior executive of an Indian company that manufactures avionic components told The Wire.

Offsets and technology transfer

Despite this, however, there are a number of silver linings in the Rafale deal. The Indian defence ministry delegation spent most of January-May arguing for a higher offset clause (a percentage of the acquisition amount that France would agree to invest in the Indian defence ecosystem). France finally agreed to a 50% offset clause – it had been arguing for 30% which will see 3 billion euros flowing into India.

According to media reports, a good amount of of the 3 billion euros (roughly 1 billion euros) is specifically earmarked to revitalise India’s stalled combat engine jet project.

“At the end of the day, it’s the first serious aircraft purchase in almost 20 years. It is a sign that things are moving. The final deal has a certain amount of technology transfer that will help scale up the production of the indigenous Tejas aircraft. The Kaveri jet engine project may get restarted with the help of Safran. It is certainly a time for celebration,” a defence ministry official, who declined to be identified, said.

Heads of Indian companies The Wire spoke to, however, indicated that the defence ministry needed to kick matters into over-drive. “Where is the final strategic partnership chapter of the government’s procurement policy? It still is yet to be notified even though there were two government panels over the last three months that have looked at it. We hoped to have it by September. The Rafale deal is only a small milestone in what needs to be achieved,” a senior executive said