No real plan to Make in India

Last week, India's Defence Ministry said "the government had stated earlier and reiterates that it has no role in the selection of Reliance Defence as the offset partner" of Dassault Aviation. Ironically, the French government, too, said it had no role in choice of Indian partner. If both statements are valid, then the question is: who pushed the name of the highly debt-ridden Anil Ambani's inexperienced Reliance Defence for the job? In case it was a pure commercial decision of Dassault Aviation, there is little to trust the French defence manufacturing giant is serious on its commitment to partly manufacture in India.

The Euro 7.8-billion deal signed was between the two governments in September, 2016. Commercially, such a decision would appear to be unviable since the Anil Ambani group was probably the country's biggest debt-heavy enterprise — much bigger than the combined exposure of Vijay Mallya, Nirav Modi, and Mehul Choksi. Roughly, the Anil Ambani group carried a total debt burden of Rs.1,00,000 crore. His Reliance Infocom sank.

Earlier, his ultra-mega Reliance Power collapsed even before it was able to start. The initial public offering (IPO) of Reliance Power, some 10 years ago, was oversubscribed 73 times and garnered an astronomical $190 billion. It created many world records. It was the largest subscription of any IPO anywhere in the history of global capital markets with a record five million applicants. But, that did not save the project. Did Dassault Aviation's project consultants on India offset partners provide adequate background on the Anil Ambani group's performance before its selection of Reliance Defence as a joint venture partner?

According to data compiled by BloombergQuint sometime ago, Anil Ambani's disinvestment plan for telecom ventures in favour of elder brother Mukesh Ambani, India's No.1 entrepreneur, involves the transfer of assets such as spectrum, tower and fibre worth Rs. 25,000 crore and 125-acre Navi Mumbai land valued at Rs. 10,000 crore. The Anil Ambani group's infrastructure divestment plan in favour of the Adani group covers some Rs.18,800 crore in total deal value. Did Dassault know about these reports before selecting the heavily debt-burdened Anil Ambani group, whose shareholders in power and telecom enterprises lost billions of rupees following the failure of the concerns?

These developments suggest Dassault's choice of Reliance Defence as its important offset partner in the Rafale deal could be anything but commercial unless Dassault decided to select such an Indian partner that will help negate its outsourcing commitment from India. Yet, there remains another key question concerning the Dassault deal. Was the government of India itself satisfied with Dassault's decision to go with Reliance Defence for making in India, an important factor in the Rafale deal? It may be noted that India's first private facility for production of Rafale fighter jets and Falcon civilian aircraft was established at Mihan, Nagpur, under a joint venture between Dassault Aviation, and Reliance. This is expected to be the largest Foreign Direct Investment (FDI) in defence in India till date.

The foundation stone of the Dassault Reliance Aerospace Limited (DRAL) manufacturing facility has already been laid at Mihan, marking the beginning of the creation of the facility to manufacture important components for the 36 Rafale fighter jets which India is procuring from France. It is also supposed to establish the possibility of the final assembly of the entire aircraft.

Without going into the controversy over the pricing of Rafale jets, for which the government agreed in 2016, one thing needs to be appreciated that this is the country's first major acquisition of fighter planes in two decades. The long-awaited deal was inked in Delhi between the former Defence Minister Manohar Parrikar and his French counterpart Jean Yves Le Drian. This came after a prolonged unfruitful dialogue between France and India under the UPA regime when Francois Hollande was the President of France and Manmohan Singh was India's Prime Minister.

The choice of Anil Ambani's Reliance Defence as Dassault's joint venture partner in India for equipment supplies as part of procurement procedure has naturally become a centre of controversy between the government and the opposition Congress after Hollande allegedly told the French media that Ambani had a backing of the Modi government, which the latter denied. Ambani's involvement in the Rafale deal is at the centre of controversy. The other part of the political controversy is around the price of the fighter aircraft.

There is, however, no controversy about the need for injecting Rafale into India's fighter air power. Both the former UPA and, now, the NDA government recognise the fact that the Indian Air Force (IAF) is grappling with a drawdown of its fighter fleet. The IAF has 33 fighter squadrons, each consisting of 18 fighter planes. It requires 45 combat units to counter a combined threat from China and Pakistan. The IAF admits it does not have sufficient number of warplanes for a two-front war. The Rafale aircraft will allow the airforce to strike targets in Pakistani soil even while flying within the Indian airspace. The Centre had initially planned to purchase 126 fighter planes but later opted for just 36 jets in fly-away condition from France with Prime Minister Narendra Modi announcing the revised deal in Paris.

The Euro 7.8-billion deal has a 50 per cent offset clause, amounting to Rs. 30,000 crore which is to be executed by Dassault and its partners in India. Thereafter, Dassault and Reliance Defence announced their joint venture facility for implementing the offsets. The joint venture represents an FDI by Dassault Aviation of over Euro100 Million, the largest Defence FDI in a single location in India. How does Anil Ambani plan to fund the project? This continues to be a big question. Interestingly, the work on manufacturing 36 Rafales has already begun in France. 

(The views expressed are strictly personal)