Rafale Deal: Reliance Defence is a Pass-Through for Modi Govt

Reliance Communications Ltd just defaulted on a big foreign loan – its ability to fulfil Rafale offsets is in doubt.

Image used for representational purposes.

(Photo: Shruti Mathur / The Quint)

I have known and seen at least 10 prime ministers of India, and can safely testify that except for Dr Manmohan Singh, none of the others was upright. So let us not perpetuate the myth of an incorruptible prime minister. They are all men of the world.

This is why defence deals play such a major role in our politics. Like petroleum taxes, it makes for ‘easy collection’ of money.

India’s defence expenditure is expected to hit $620 billion between the fiscal years 2014 and 2022, with half of it going into capital expenditure.

According to SIPRI, India is the fifth largest military spender (2016) in the world and the largest importer of arms, accounting for 13 percent of the world’s total imports between 2012 and 2016. As much as 70 percent of India’s arms are imported.

Historical Context to Ad Hoc Defence Deals

India’s first big-ticket military purchase was for de Havilland Vampire jets in November 1948. VK Krishna Menon, India’s first High Commissioner in London, engineered this deal. After that, India ordered several hundred Ouragans and Mystere fighters from France, Fairchild C-119G Packet transports from the USA, Hawker Hunter fighter-bombers, and English Electric Canberra bombers. Most of these were ad hoc purchases, and it was always speculated that some money changed hands to facilitate these deals. The only deals that didn’t have intermediaries were the government-to-government purchases from the former Soviet Union.

1970s onwards, there was the advent of arms deals which were major sources of slush funds for buyers, sellers, middlemen and everyone else in between. The first major deal that went this way was the Anglo-French SEPECAT Jaguar deep-penetration strike aircraft in 1978, when Jagjivan Ram was the Defence Minister.

Even if the Rafale was bought in 2014 as it was cleared by the MMRCA tender for far less, i.e. USD 10.5 billion for 126 aircrafts, it would have involved under-the-table payments.

These payments typically go three ways: one tranche to the Indian decision-makers, the second to the middlemen and the third to officials in the French establishment and manufacturers. This is a well-honed European practice. But how much more are we paying for the “new” Rafale jets is important.

The Rafale 'Scam'

There is much noise about the huge costs at which the 36 Rafales have been contracted for. The comparable costs of the 126 and 36 deals can only be read when all the costs are factored in. The cost of the new deal for 36 Rafales is 3.42 billion euros – the cost of bare planes; 1.8 billion euros for associated supplies for infrastructure and support; 1.7 billion euros for India-specific changes; and 353 million euros for “performance-based logistics support” – with the weapons package of 700 million euros being the extra. What is new here are the performance-based logistics support and weapons package. So take out 1,053 million euros out and you have the comparable cost, which means it is 7.1 billion euros.

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It appears that the “fiddle” is in India-specific costs, additional infrastructure and support and performance logistics support.

The first MMRCA deal would also have included India-specific specifications, as in the case of IAF’s SU-30 MKIs. For comparison’s sake, the argument can be that 36 Rafales now cost 7.1 billion euros, while 126 Rafales in 2012 cost 7.75 billion euros. Clearly, a huge cushioning has been provisioned to meet the needs of all the parties concerned.

Look at these other facts now. According to the Ministry of Corporate Affairs, Reliance Defence Ltd was registered on 28 March 2015.

On 11 April 2015, Reliance Defence Ltd became the main partner to ensure the 50 percent offset clause under which Dassault and other related French parties would invest half the contract value back in the country.

Offset Policy

Government officials insisted that 74 percent of the offsets would be exported, earning 3 billion euros for the country in the next seven years. The experience with all offsets suggests that this is far-fetched. It has not happened so far. In the AgustaWestland offsets, investigators discovered money trails from Mauritius, Singapore, the UAE, Tunisia, the UK and British Virgin Islands linking the agents and the manufacturer. I will bet that Reliance Defence, a company registered just 14 days before the Modi-Hollande deal, was meant to create a pathway for “offsets” to come back into Indian hands for politics and business.

Incidentally, Anil Ambani’s flagship company Reliance Communications Ltd (stylised as RCom), just defaulted on a major foreign loan – its future ability to fulfil its Rafale offsets commitment should now be in doubt.

Recently, IDBI Bank filed an insolvency application before the National Company Law Tribunal seeking debt resolution of Reliance Naval and Engineering, the shipbuilding Anil Ambani company, under the Insolvency and Bankruptcy Code. Yet, Reliance Defence is so confident about fulfilling its Rafale-related obligations. I suspect there are no obligations. Reliance Defence is just a pass-through.

(The author is chairman and founder of Centre for Policy Alternatives. He tweets at @mohanguruswamy. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)