Why Rafael Deal could be the Biggest Troublemaker for Modi Government?

Why Rafael Deal could be the Biggest Troublemaker for Modi Government?

On August 28, 2007, the Ministry of Defence accepted the proposal to buy 126 MMRC Aircrafts. After observing multiple fighter jets, on May 2011, Eurofighter Tycoon and Dassualt Rafale were shortlisted. Finally in January 2012, Dassault Fighter jets were chosen since they proposed the lowest bid. [Washington Post]

The Previous Deal

Under the negotiations with Dassault, India was to buy 126 Aircrafts out of which 18 were to be bought off the shelf, i.e. readymade from Dassault and the rest 108 Aircrafts were to be manufactured in India by Hindustan Aeronautics Limited (HAL) after the “transfer of technology” by Dassault Aviation. This “transfer of technology” clause was important because it would provide India with the mechanics to prepare the jets within the country, in case Dassault fails to deliver future requirements of the jets.

In March 2014, a Work-share Agreement was signed between Dassault & HAL, whereby it was stated the 70% of manufacturing work of 108 Aircrafts was to be done by HAL and 30 % by other Indian companies.

The New Deal

After the change of Government in 2015, the Rafale deal took a roundabout. On April 8, 2015, the Foreign Secretary produced a statement that the negotiations between the Government, HAL & Dassault are under way. However two days later, Prime Minister Modi met with French President and a joint statement was passed by both the Governments that a new deal has been sanctioned whereby 36 “off the shelf” aircrafts will be bought by the Indian Government. [MEA] The new deal was backed up by the then Defence Minister Manohar Parrikar.

On 23rd September 2016, the inter-governmental deal was signed.

The Offset Clause

An offset clause means that only net obligations must be paid, rather than full amounts, in cases where the receiving party owes money to the paying party. The offset clause provides greater flexibility should either party be unable to pay as agreed. [Investor Word]

As per the Government to Government deal for procuring 36 Rafale jets, the off-set is pegged at 50 per cent of the total cost of the contract. It is nearly Rs 60,000 crores and Dassault is contractually bound to plough back 50 per cent of the money into Indian industry. The objective is to give a boost to the domestic industries to manufacture world-class defence equipment in collaboration with the foreign vendor. [The Pioneer]

The Point of Controversy

On 3rd October 2016, Reliance Group tied up with Dassault aviation to form a joint venture called Dassault Aerospace. The National Herald report finds that Reliance Defence was incorporated on 28th March 2015, just ten days prior to PM Modi's Rafale announcement. This, the story indicates something amiss.

Although Dassault was free to invest the 30,000 Cr anywhere, after the joint venture, it stated that 21,000 Cr of the offset clause shall be invested in Reliance Defence. This has been the major issue raised by the opposition, that the Government is guilty of favouritism towards Reliance and Ambani Group.

Interestingly enough, the controversy heated up when, on 21st September 2018, the former French President (2012-2017) Francois Hollande said that the Reliance group was chosen as an offset partner by the Indian Government itself. [Hindu Business Line] However in response to this, Dassault said that it had freely chosen Reliance as the offset partner.

The Defence Ministry stated that it had no influence over Dassault while choosing the offset partner, declaring all allegations bogus.

However on 21st October 2018, Dassault CEO said that only the 10% of the offset obligations shall be invested with Reliance, the rest shall be invested with 100 different companies, which is contradicting to the above. [India Today]

Pricing of the Jets

  • Old Deal according to the Congress Party

Total Price- 54,000 Cr

Number of Jets- 126

Avg Cost – 526 Cr

Off the shelf- 18 Jets

  • New Deal by BJP government

Total Price- 56,000 Cr

Number of Jet- 36

Average Cost- 1638 Cr

This increase in cost, which is approximately thrice the prior cost, has been the centre of all controversies. On this, the Junior Minister of Defence said that the new price includes the basic cost per plane, that is 670 Cr, plus the cost of weapons, maintenance, spare parts etc. Thus, the increase in cost.

Supreme Court Judgment (14.12.2018)

The Supreme Court three-judge bench headed by Chief Justice of India Ranjan Gogoi also comprising of Justice S K Kaul and Justice K M Joseph, being satisfied with the process for procurement, dismissed the petitions seeking a court-monitored probe in the procurement.

The Court while dismissing the batch of petitions said that it finds no reason to interfere in the government contract with France's Dassault Aviation and added that the perception of individuals cannot form the basis for interference. (For detailed information refer to our news segment dated December 14, 2018 : Supreme Court Dismisses Petitions Seeking a Court-Monitored Probe into 36 Rafale Fighter Jets Deal )

What now?

Present Defence Minister, Nirmala Sitharaman has stated that due to security reasons the cost of the deal cannot be disclosed, over which the opposition is all fuelled up (obviously for political reasons).

There are a bunch of unanswered questions such:

  • What is the actual cost of the deal?
  • Why Reliance and not HAL?
  • Is there favouritism to Reliance?

This deal, could become the troublemaker for the government in this year’s Prime Ministerial Election as a lot of speculations are being raised and also an appropriate answer is yet to be provided.

(Disclaimer: The information provided in this article is given only to provide helpful information and understanding on the subject/topic of law discussed. The contents of this article are not the views of Amie Legal and Amie Legal does not take any responsibility or liability for the opinions expressed by the Author herein.)
Anil Ambani
Hindustan Aeronautics Limited (HAL)
Manohar Parrikar
Narendra Modi
Prime Minister Narendra Modi
Rafale fighter aircrafts
Rafale fighter jet deal
Rafale Fighter Jets
Reliance Anil Dhirubhai Ambani Group (RADAG)

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