The Economics of Rafale

What is it all about?

The Government of India signed an Rs.58,000 crore deal with Dassault Aviation to purchase 36 Rafale jets in 2016.

This is a hotly debated topic these days, with the opposition claiming that the jets were purchased at 3 times the price negotiated by the UPA government earlier. 

But why would a government do so? Do you think it would have got the defense ministry’s approval and the Supreme Court’s go ahead if it had purchased it at such a high cost?

Confused? Read on ahead to get to the bottom of it!

Breaking it Down

The UPA government, as per the requirement of the Indian Air Force had released a tender in 2007 to purchase 126 fighter jets and those offered by Dassault were the lowest in cost.

As per the original deal, 18 of the 126 aircraft were to be flown ready-made by Dassault and the rest 118 of them were to be assembled in India by HAL(Hindustan Aeronautics Limited).

Further complications, such as Dassault not offering a bank guarantee to deliver the jets on time and not ensuring the quality and standard checks for the aircraft made in India by HAL, led the deal to collapse.

There have been speculations that HAL, even though manufacturing aircraft for years, didn’t possess the requisite capability to manufacture the Dassault planes in India.

What did the NDA Government Do?

Now, India needed the jets. Either they purchase from Dassault or from any other company.

Also, there were additional requirements of installing India Specific Equipment(ISE) in these aircraft by the Indian Air Force. ISE consisted of 13 specifications which would make the Indian Air Force’s jets stand out from the rest of the world.

Also, the ISE cost is a non-recurring cost of 1.3 billion euros, that is, it is not dependant upon the no. of aircraft purchased.

Now, customization demands a price and due to these additions, the cost of the 126 aircraft (non-customised) came out to be around 9% higher than that of the 36 aircraft.

Hence, the price of every aircraft increased by 41.42%. (The cost of the ISE spread over 36 jets)

Also, they would be delivered in 2019-22. India is currently short of 90 Aircraft and may face a severe shortage in the airspace in the years to come.

These aircraft would be manufactured in France only and would be ready to fly into India.

It is not that the aircraft were purchased at thrice the cost, as claimed by the opposition. The ISE costs have been ignored while stating their facts.

Has our National Security been compromised?

Although the 36 aircraft would be flown in directly from France, the future aircraft to be manufactured in India is what is going to make the economy boom.

As per the MOU signed between India and France, 50% of the cost of the deal had to be invested in India in some form.

30% would be invested in research and technology development while 20% would be used as part of a joint venture between Reliance Aviation(The Company selected instead of HAL due to its lower manufacturing cost) and Dassault Aviation, although political connections make this another debatable topic.

This is likely to make our economy more technologically advanced and we would further have the means to make these aircraft in our own country instead of purchasing them.

Further investment in research is going to drive jobs and boost our GDP, making India’s position stronger on the global front.

With the US, Russia, China having the best of aircraft and equipment with them, India is not lagging far behind and is likely to catch up with them in the coming years.

Why should we worry about it?

Also, the Indian Government doesn’t have any bank guarantee in case the fragile financial conditions of Rafale leads to its default in the delivery or delay in it.

A letter of comfort on behalf of the French government is hardly a comfort in such a big deal.

As citizens of our country and particularly students of business and economics must be aware of the situation in the country at hand and not be swayed by the arguments of either side.

Our facts must be crystal clear in order to ensure that the right people guide this country ahead in the desired manner.

Disclaimer: The above article has been written just to state the facts and figures related to the controversial Rafale deal. It is not politically motivated and doesn’t intend to influence your decision to vote in the upcoming elections. As a responsible citizen, the correct information must be made available to us so that we can make a rational decision for the benefit of our country for years to come.

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