India gambles its defence interests on Reliance Group
NARENDRA MODI’S FIRST PRIME MINISTERIAL visit to France, in April 2015, came amid long-drawn negotiations over India’s purchase of Rafale warplanes, manufactured by the French company Dassault Aviation. In 2012, a Congress-led government had declared Dassault the lowest bidder in a contest to supply 126 fighter jets for the Indian Air Force. After nearly ten years of cautious planning, field trials and rigorous evaluations, the country was, by most accounts, on the brink of finally acquiring its long-awaited seven squadrons, when Modi’s government took over. Modi now had a chance to make his mark on the negotiations.
The Indian prime minister’s schedule for the first full day of his visit included, among much else, round-table discussions with French CEOs from the infrastructure and defence industries, as well as talks with the French president. Afterwards, Modi announced to the media that he had discussed a government-to-government deal—foreign military sales negotiated directly between two countries, instead of a global tendering process—to purchase 36 Rafale jets in “fly-away condition” as soon as possible.
This completely bypassed the prior acquisition process. Dassault, like any foreign defence manufacturer selling to India, has to reinvest part of the total cost of any large deal back into the country—through some combination of local manufacturing, investment and transfers of technology. Earlier, the Indian government had stipulated that, to meet this obligation, whichever firm won the competition would have to work with the state-owned Hindustan Aeronautics Limited as its main partner. Now, suddenly, HAL was no longer in the picture.
This turn of events blindsided even top officials in Modi’s own administration. Two days before the prime minister’s trip to France, his foreign secretary, S Jaishankar, told the media in Delhi that discussions on the Rafale purchase were underway between Dassault, HAL and the Indian defence ministry. A fortnight before that, Dassault’s CEO spoke publicly of his “great satisfaction to hear … from HAL chairman that we are in agreement for the responsibilities sharing,” and of his strong belief that “contract finalisation and signature could come very soon.”
Soon after Modi’s announcement, Manohar Parrikar, his defence minister at the time, said in a television interview that he did not yet know the details of the discussions. In another interview, he said, “the decision is probably the outcome of the discussion between the prime minister and the president of France.”
Within a few months, Parrikar told the parliament that the original process to acquire 126 fighter jets was officially void. In September 2016, he and the French defence minister signed a government-to-government agreement for the purchase of the 36 Rafale jets from Dassault, to be delivered between 2019 and 2022. The deal was reported to be worth €7.87 billion—roughly Rs 59,000 crore, or $8.8 billion. Dassault was required to reinvest half the value of the deal in India.
THIRTEEN DAYS BEFORE MODI announced the agreement, Reliance Group, headed by the industrialist Anil Ambani—who was also in Paris during Modi’s visit—registered a new subsidiary named Reliance Defence Limited. This was new territory for the corporation—it had no history in the defence sector, except for very recently securing a major stake in a shipyard handling military contracts. Ten days after the Rafale agreement was signed, Reliance Group and Dassault announced the creation of a joint venture, Dassault Reliance Aerospace Limited, majority-owned by Reliance Group. From having had nothing to do with aerospace before, Ambani’s corporation was suddenly guaranteed aerospace business worth thousands of crores of rupees.
The terms of the Rafale deal have set off a war of words ever since. In November 2017, shortly before he was appointed president of the All India Congress Committee, Rahul Gandhi alleged that Modi “changed the whole deal for benefit of one businessman.” Just before Modi faced a no-confidence motion in parliament in July 2018, Gandhi called out the government for its secrecy over the pricing of the deal, which the Congress maintained was vastly inflated. The party claimed that the government it led had negotiated to purchase 126 Rafales for $10.2 billion, compared to the Modi government’s agreement to get just 36 Rafales for $8.7 billion. Dividing the totals by the numbers of aircraft in each case, the Congress alleged that the current government is paying roughly three times more per aircraft—Rs 1,670 crore—than it could have, if it had followed through on the earlier negotiations. Immediately following Modi’s Paris announcement, the Indian and French sides said in a joint statement that “the aircraft and associated systems and weapons would be delivered on the same configuration as had been tested and approved by Indian Air Force”—that is, in keeping with the same specifications agreed under the original selection process. Since the deal came under scrutiny, the government has claimed that the terms of the original negotiations and the present deal are vastly different, with the latter featuring several add-ons and “India-specific enhancements,” and that their values cannot be directly compared. It has not shared any details of the new deal to prove this, only adding to the intrigue around the affair.
After the Congress questioned the Rafale deal last November, Nirmala Sitharaman, recently installed as the defence minister, vowed to release pricing details to the media, insisting that she was “not running away from giving you specific numbers.” But her ministry went back on her promise, citing a secrecy pact between the Indian and French governments. In the parliament this July, Sitharaman stuck to that line in defending the government’s silence. In March this year, however, Subhash Bhamre, a minister of state for defence, had revealed in the parliament that, under the new deal, the “cost of each Rafale aircraft is approximately Rs 670 crore,” not counting any add-ons.
The debate on price disclosure got more convoluted. After the exchanges in parliament in July, the French foreign ministry stated that the Rafale deal was indeed protected by a 2008 “security agreement, which legally binds the two states to protect the classified information provided by the partner.” The defence analyst D Raghunandan argued in an online media interview that “Rahul Gandhi had made a tactical mistake by saying there is no confidentiality agreement, which the government was able to refute.” What got drowned out is that the confidentiality pact pertained to only those aspects that may compromise national security or the aircraft’s operational capabilities. It was not clear whether this could be extended to pricing details. When I filed a Right to Information application asking about the cost of the fighters, the defence ministry responded that the information sought was “confidential in nature” and that any public revelation would have “direct bearings on the security and strategic interest of the same.” This March, the French president, Emmanuel Macron, told an interviewer that his country had no objection to the Indian government sharing, with the opposition and parliament, “some details which could be revealed.” In the same month, in a somewhat anticlimatic turn of events for the government, Dassault itself revealed the price of the Rafale deal in its 2017 financial report—Rs 55,000 crore, or $7.4 billion.
In August, two former ministers with the Bharatiya Janata Party and a prominent lawyer, Arun Shourie, Yashwant Sinha and Prashant Bhushan, issued strong words in a press conference, and demanded a probe into what they called “a major scandal here, gross misuse of office and monumental criminal conduct.” Stressing on the extraordinary nature of the misconduct, they said it was one “that imperils the security of the country.”
Even without full clarity on the two deals’ comparative prices and terms, what has come to light on the Rafale affair so far is enough cause for close scrutiny. Before the original negotiations were annulled, it had been agreed that, of the 126 jets to be ordered, 18 would be purchased directly from Dassault, and 108 would largely be built by HAL in India under Dassault’s supervision—meaning a valuable transfer of technological know-how. Under the new deal, even with Dassault’s obligations for re-investment in India, all of the 36 Rafales ordered are to be manufactured in France; the agreement does not involve any transfer of technology.
It is surprising that India let slip a major chance to further domestic defence-manufacturing; it is even more surprising that it did so under Modi’s watch. The present government has talked up defence manufacturing as a major plank of its “Make in India” campaign—an effort to boost indigenous manufacturing, particularly by bringing in foreign partnerships and investment. Yet Modi—on his own initiative, if the surprised reactions of his own officials were true—snatched away a state-owned defence-manufacturing company’s chance at perhaps the biggest manufacturing deal in its history, to replace it with an order that eventually favours a private corporation.
But it is the profile of the corporation in question that should really give the country pause over the government’s choices—and what they mean for Modi’s legacy on national security.
Reliance Group was bequeathed to Anil Ambani, after a division of his father’s Reliance Industries Limited. In 2008, two years after he established the conglomerate, Ambani’s wealth was reckoned at $42 billion—more than one-and-a-half times the size of India’s annual defence budget at the time—placing him sixth on
Forbes magazine’s list of the world’s richest people. By 2018, that wealth had shrunk to $2.4 billion—less than a third the value of the Rafale deal—reflecting Reliance Group’s nosediving fortunes under Ambani’s leadership. The latest financial figures available on Ambani’s four core listed companies—Reliance Infrastructure Limited, Reliance Capital Limited, Reliance Communications Limited and Reliance Power Limited—show a combined debt of over Rs 1 lakh crore, or around $15 billion.
The Rafale deal is a lifeline to the corporation, which is now promised a massive infusion of funds through its defence holdings. The Rafale deal requires that roughly Rs 30,000 crore be pumped back into Indian industry. Dassault has made a subsidiary of Reliance Infrastructue Limited its primary Indian partner in discharging its reinvestment obligations; last year, Reliance Group was reported to have secured business worth Rs 21,000 crore with the French company. This July, Dassault announced a €100-million investment in its joint venture with Reliance Group, also as part of its required reinvestment. Other firms that supply Dassault with components and systems for the Rafale—which must also repatriate half the value of the business that has now come their way—have also formed joint ventures or signed memorandums of understanding with Reliance Group’s defence subsidiaries.
This is only one part of Reliance Group’s larger bet on Indian defence spending. Ambani’s corporation has moved aggressively to enter military shipbuilding, and a host of other defence-manufacturing sectors. In 2016, Ambani said that, in the next decade-and-a-half, “we see an opportunity of Rs 15 lakh crore”—over $200 billion—“for the private sector in the defence area.”
Reliance Group has a history of promising much and delivering little on big deals. It failed to make good on two of three winning bids to build major power plants, for instance, and reneged on a concession to operate a line of the Delhi metro. These past failings took their toll on the public interest and the exchequer, but their effects were, at worst, regional. With Reliance Group’s entry into the defence industry, its ability to deliver is now a matter of high national importance. Given the corporation’s record, as well as its financial state, to rely on it is nothing less than to gamble with India’s ability to defend itself.
Who allowed Reliance Group into the Rafale deal is, then, a critical question. The government’s position is that it had nothing to do with this, as Dassault was free to choose its partners for its obligatory reinvestments—“offsets” in bureaucratic jargon—after the purchase agreement was concluded. A defence-ministry statement released in February 2018 said that it was still technically unaware of who Dassault was working with, as the French company only needed to report its choice of “offset partner” at a later date, when it applied “seeking offset credits, or one year prior to discharge of offset obligation.” It failed to note that this delayed reporting was permitted by a recent amendment to India’s defence procurement procedure. Foreign vendors earlier had to declare their preferred offset partners to the government for vetting and approval during the evaluation of a proposed deal, before a final agreement could be signed; the procurement procedure was amended in August 2015, five days after the previous deal was scrapped.
This is just one example of a remarkable coincidence in the initiatives of the Modi government and the interests of Ambani’s corporation. Over the course of Ambani’s foray into the defence sector, there have been many more.
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AT THE TIME OF independence, India received the military equipment and infrastructure that the departing British left behind. The new country’s approach to bolstering these resources relied heavily on state-led industrialisation, as did its entire economy at the time. But even as indigenous production increased, it struggled to outgrow dated technology. For advanced arms, the country was forced to rely on expensive imports—and the deals behind these were often influenced by corrupt middlemen, as most famously exposed by the Bofors kickbacks scandal that dethroned Rajiv Gandhi’s Congress government in the late 1980s.
These are patterns that India has still not broken, even when it allowed private participation in defence manufacturing after 2001. The country now has a large military-industrial base, including nine state-owned corporations answering to the defence ministry. But many of these state-owned manufacturers have a history of delays, budget overruns and substandard production, and few private firms have the facilities and experience needed to compete for advanced projects yet. Middlemen continue to thrive. India has been the world’s largest importer of arms for years, accounting for nearly 12 percent of the world’s imports. With the latest budget, which sets aside Rs 2.95 lakh crore for defence, India is a major player in the global arms-market, but strategically, it reduces the country’s own defence-manufacturing capabilities.
Even with the massive imports, the country’s defence needs are desperate. There are large gaps in the arsenals of all its armed forces, and much of their existing armament is almost obsolete, or already so. Current procurement procedures, although rigorous, are notoriously cumbersome, and purchase decisions can be inordinately slow. Meanwhile China, considered India’s sternest regional challenger, is rapidly upgrading and strengthening its military. It is already building fighter aircrafts and has started selling to countries such as Pakistan.
Soon after Modi came to power, he announced ambitious plans to modernise India’s military strength. Many people thought that this would be a greater opportunity to develop defence technology inside India. This, coupled with his much-hyped “Make in India” initiative, offered hope that the government would stem the dysfunction and boost Indian defence manufacturing across the board. The programme envisioned harnessing the capabilities of both the public and private sector by relaxing licencing norms, simplifying procurement procedures and increasing foreign direct investment.
On the face of it, the government seemed to be delivering on its promises. In 2016, a new category of procurement called “the indigenously designed, developed and manufactured,” was introduced in the defence procurement procedure as a bid to accord domestic products the highest priority during acquisition approvals. Along with policy measures such as raising foreign direct investment, the government also promised to bear 90 percent of the funding costs to Indian companies, including small-scale enterprises, which would commit to developing defence equipment in the country. The licencing terms to manufacturers were increased from three to 15 years. The “services” category in the offset policy was reintroduced as one of the avenues through which offset duties could be discharged.
However, despite this host of policy measures, defence manufacturers, security experts and former armed-forces officers I spoke to argued that little has changed on the ground and the country continues to prefer importing its military equipment. Ravi Naidu, a Bengaluru-based director of a company that makes antenna systems for aircrafts, told me, “
Saara technology
bahar se aa raha hai. Hum workshop ban gayen hain”—All the technology is being imported from outside, we have become a workshop. According to him, foreign companies have been using the vast platform given to them within the Indian defence industry only to assemble their own products, rather than helping with the country’s manufacturing ambitions. Bureaucratic procedures have made it nearly impossible for small-scale companies like Naidu’s to approach the government directly and secure any business from them. Further, the “no cost no commitment” clause in the procurement procedures means that manufacturers have to develop the product and demonstrate its performance at their own cost, with no commitment from the defence ministry. This means they have to put in their own resources in the manufacturing process with little guarantee that it will have buyers in the market. “Okay, you don’t invest,” said Naidu, referring to the defence ministry, “but at least give me commitment to buy it once I put my money into the manufacturing of the product.”
His sense of disappointment was palpable. The initiative had offered a lot of hope to small private companies like his, with decades of experience in building complex defence technology. However, instead of getting the boost he thought was coming, it was big private players with little experience in manufacturing who became the primary beneficiary of the initiative. Instead of furthering transparency and competition, the Modi government’s conduct has brought back old suspicions of cronyism and calculated obfuscation—with the Rafale purchase as the most prominent case study. Yet before it all came to this, the original process that led India to the Rafale deal, even if flawed, seemed to have found some answers to the country’s defence-acquisition predicament.
INDIA’S NEED FOR NEW FIGHTERS was already apparent in the 1990s, as tight defence budgets saw the country fall behind on upgrading and replacing ageing aircraft. In 2000, in the wake of the Kargil War with Pakistan, the parliamentary standing committee on defence reported that 40 percent of the air force’s planes, including both combat and transport aircraft, would soon be obsolete. The war proved to be a turning point for the defence industry and how it acquired its military vehicles and equipment. Along with opening up defence production to the private sector and allowing foreign direct investment up to 26 percent, a framework was created to regulate acquisitions. A set of procedures detailing these was set up in the form of a binding document called the defence procurement procedure in 2002.
Part of the problem had been a continuing delay in India’s push for an indigenously developed fighter. The aircraft, eventually dubbed the Tejas, had already been in the works for about a decade and had vastly overrun its initial budget, but was nowhere near ready. The air force, to fill the gaps in its fleet that the Tejas was meant to address, continued to stretch out the service life of old fighters—especially the Soviet-designed MiG-21.
The standing committee called for an upgrade programme for the existing combat fleet, which the government took up. As a long-term solution, it also recommended fast-tracked purchases of new fighters. The air force, after running its own assessments, concluded that it had an urgent need for 126 multirole combat aircraft—that is, warplanes that could act as both fighters and bombers.
An early favourite to meet this need was the Mirage-2000, also built by Dassault, which had impressed at Kargil. In 2002, the government, then headed by the BJP, approved the purchase of ten new Mirages to replace those lost in action. But amid speculation of a larger order to follow, Dassault was dragged into controversy over its alleged use of middlemen.
A Panama-based firm, Keyser Incorporated, had taken Dassault to court in France, demanding what it said was a commission due to it for promoting Mirage sales in India. The case threatened to have enormous repercussions, as an Indian law passed after the Bofors scandal blacklisted any defence company found to have been using middlemen. Dassault denied that Keyser had played any part in India’s Mirage purchases, and the court ruled that a contractual relationship between the two firms had expired at the end of 1998. The aircraft-manufacturer did not face any sanction.
In the aftermath, the government decided to open the 126-warplane order to competition. In 2004, under a new Congress-led administration, India asked interested manufacturers to submit information on suitable aircraft, in anticipation of a tender. The government earmarked Rs 42,000 crore for the deal—over $10 billion—which was to be the country’s largest-ever defence acquisition. Dassault pitched the Mirage-2000.
The government published an updated defence procurement procedure in 2005. This introduced, for the first time, the requirement for offset spending in any large foreign purchase. The latest iteration of the procedure, approved in 2016, requires at least 30 percent of the value of any deal to be repatriated, and also allows the government to insist on more.
In 2006, with India yet to move any further on the 126-jet acquisition, Dassault withdrew the Mirage-2000 from consideration. The company complained that, with the process delayed, it could not afford to maintain its production lines for the model, which had no other takers. Instead, it put forward a newer fighter, the Rafale, and immediately offered India the chance to buy 40 of the jets in what Dassault’s CEO described as a “single-source deal”—that is, a deal that bypassed the competition. The government did not take the offer.
By 2007, the air force was operating just 32 fighter squadrons, at least seven below its sanctioned strength. In August that year, the government finally invited formal proposals to fill the 126-plane order. Six models entered the fray: the Rafale, the Eurofighter Typhoon, the MiG-35, the Gripen, the F-16 and the F/A-18. The defence ministry released a description of the process to follow. “The proposals from the likely contenders would first be technically evaluated by a professional team to check for compliance” with the Indian Air Force’s operational requirements and other conditions, the document stated. “Extensive field trials would be carried out to evaluate the performance. Finally, the commercial proposals of the vendors, short-listed after technical and field evaluations, would be examined and compared.” It also laid down the guiding principles underlying this process—namely, that the “selection process should be competitive fair, transparent, so that best value for money is realised” and also that Indian defence industries should “get an opportunity to grow to global scales.”
The ministry made it explicitly clear that the winning vendor would have to reinvest half the value of the order in India. The vendors of each competing model clamoured to outdo each other with promises of what they could offer if selected. Boeing, maker of the F/A-18, proposed to collaborate with over a dozen Indian aerospace and defence companies, and many other partners. Lockheed Martin boasted that it had already established complete assembly lines for the F-16 in several countries outside its home in the United States. The consortium of European countries that makes the Eurofighter Typhoon, offered to bring India in as a partner in the fighter’s future development. Dassault, meanwhile, reported that the French government had permitted it to share sensitive technology with India under a Rafale deal. “When we talk about technology transfer, we mean full technology transfer and not in bits and pieces,” a company official told an interviewer.
In April 2009, multiple Indian newspapers reported that Dassault was out of the running after falling short of the required criteria in its technical bid. The Rafale was to be left out of upcoming field trials. A month later, though, Dassault was back in contention, reportedly with the help of some behind-the-scenes diplomacy by the French government. An anonymous defence-ministry official was quoted as saying that the defence-procurement board, under the defence ministry, had overridden the earlier disqualification since it was based on “only paper evaluation and the French company Dassault Aviation has now supplied the missing answers.”
All the contenders were tested in the Rajasthan desert and at the high altitude of Ladakh—two essential and gruelling theatres for the air force. While the Indian government deliberated, amid high-octane publicity and lobbying from the vendors and their respective governments, Dassault’s country manager, PV Rao, fell foul of the air force. Rao, effectively a local dealer for Dassault, had accused an air-force wing commander of demanding a bribe in connection with a parking slot for the Rafale at an annual defence exhibition organised by the defence ministry. The air force was reportedly irked that Rao never informed it of the incident before reporting it to an administrative officer, and barred him from dealing with IAF in the future. The wing commander was court-martialled and dismissed. Rao currently serves as a director for Dassault Aircraft Services India Limited, a wholly owned local subsidiary of the French company—an unlisted company operating in south Delhi.
In April 2011, the government shortlisted just two fighters: the Rafale and the Typhoon. Dassault and the Eurofighter consortium were asked to formulate commercial bids. This set off a string of visits by French officials to promote the Rafale deal, and from British officials—the United Kingdom is part of the Eurofighter consortium—backing the Typhoon.
That summer, the government closed a deal with Dassault to upgrade its fleet of 52 Mirage-2000s for around Rs 11,000 crore, translating to over $45 million for each aircraft. The defence columnist Ajai Shukla wrote two years later that the defence ministry had found the price shockingly high, and that air-force pilots thought Dassault had undermined its reputation by squeezing India hard over Mirage-2000 spares.
The defence ministry unsealed the commercial bids for the Rafale and Typhoon towards the end of 2011. Early in the next year, Dassault was declared the lowest bidder. The process was now to move on to commercial negotiations.
This was a huge boost for Dassault, which until then had been beleaguered. Even the French president declared, “We have been waiting for this day for 30 years.” Angelique Chrisafis, a journalist at
TheGuardian, wrote that the selection would “be a shot in the arm for the battered French economy and the country’s economic pride.” Since closing its Mirage-2000 production lines, Dassault had struggled to sustain Rafale manufacturing as well. The warplane had been developed at great expense in anticipation of orders from both France and foreign countries, but for years the foreign orders had failed to come. The Rafale had already been considered and rejected by the air forces of South Korea, Morocco and Brazil, and Dassault had been desperate for a first foreign purchase—a factor that very likely influenced its position in the India proceedings.
But even after Dassault was declared the lowest bidder, the coveted order itself was slow to come.
First, the process behind Dassault’s selection was challenged by two opposition parliamentarians. One, a member of the Telugu Desam Party, alleged irregularities in the evaluation procedure. The other, Yashwant Sinha of the Bharatiya Janata Party, questioned the inclusion of a “life-cycle cost”—an estimated price for running and maintaining an aircraft over its service life—in the evaluations. The provisions for factoring this cost in were relatively new, and therefore unfamiliar to many in both the opposition and government.
AK Antony, the defence minister at the time, described his response to these challenges when interviewed by a newspaper earlier this year. He said that before presenting the deal to the cabinet committee on security, or CCS, “I had—as per the norm—approached the finance ministry for financial approval. The finance ministry said it could not accept the life-cycle cost clause in the agreement as it was a new concept to it. Simultaneously, I also received representations from many others, including some responsible then-opposition leaders, objecting to the lifecycle-cost clause.” This clause, Antony maintained, had been included in the evaluations because the air-force had insisted on it. He decided “to call the files, and made a clear noting to the effect that the final proposal must be sent to the CCS only after the dispute over the life-cycle cost clause is settled.”
Addressing the disputes meant a delay of several months. The defence ministry finally signed off on the evaluation process in July 2012. Negotiations between Dassault and the Indian government proceeded from there—with constant diplomatic prodding from the highest levels of the French government—but hit numerous hurdles. The French company, when originally outlining its offset plans, had said that HAL would be its main manufacturing partner. After winning the bid, Dassault signed a memorandum of understanding with Reliance Industries—the conglomerate now run by Mukesh Ambani, Anil’s older brother. Then, Dassault asked for separate contracts to split responsibility for the 18 warplanes it was to build itself and the 108 that HAL was to build under supervision. Again the government resisted.
In February 2014, AK Antony told journalists that a final deal was close, but that his ministry had almost exhausted its allotted annual budget. The deal would have to wait for the next financial year, on the other side of March. But with a general election in the coming months, the deal did not move further. The Congress-led government made way for Modi’s BJP-led alliance in May.
FROM THE TIME IT took power to the moment of Modi’s Paris announcement, the new government never wavered from the position that negotiations with Dassault were proceeding on terms set painstakingly over the years. Arun Jaitley, during his stint as defence minister until November 2014, reported as much to both houses of parliament.
The vendors that were out of the reckoning watched on with interest as the negotiations stretched on, and several lobbied for reconsideration. The Eurofighter consortium even offered to reduce its price and improve its terms on technological transfer and manufacturing in India. The government, however, stood firm by the outcome of the bidding process.
Even before the change in government, reports sporadically surfaced in the Indian press claiming that, over the course of the commercial negotiations with Dassault, the cost of the deal had massively overrun what the French company had first bid. After another spate of these, Dassault’s CEO, Eric Trappier, stated in February 2015, “our pricing remains the same from day one.” He dismissed attendant questions on the fate of the deal, saying, as he would continue to until weeks before Modi’s Paris visit, that a contract was close.
After Modi’s announcement, the serving defence minister, Parrikar, pivoted swiftly from his apparent bewilderment to mocking the previous government’s delay on the Rafale negotiations. On television, he criticised AK Antony’s decision to hold back proceedings until the questions raised over life-cycle costs could be resolved. He ignored the fact that the questions had first come from a member of his own party, the BJP. Antony, when asked about his decision in the newspaper interview earlier this year, responded with the question, “Did the present government scrap the life-cycle-cost clause while agreeing to purchase 36 Rafale planes?” The current government was twice asked in parliament about what life-cycle costs, if any, are included in the Rafale purchase. Both times, it refused to disclose details, stating only that the terms of the old negotiations and the new deal are not comparable.
After the original negotiations were scrapped, the Modi government took steps to loosen restrictions on private involvement in defence manufacturing. In 2016, it allowed foreign firms to acquire up to 49-percent ownership in Indian defence ventures without the need for official approvals. This paved the way for Dassault to invest in its joint venture with Reliance. That same year, an update to the defence procurement procedures allowed expenditures on services such as engineering, design, coding and training to count towards a vendor’s offset obligations—where before the rules ensured offset spending was focussed more narrowly on defence manufacturing and maintenance. The previous government had revoked permissions for offset expenditure on such services after a corruption scandal around the purchase of Agusta Westland helicopters, meant for flying government VIPs.
The 2016 procurement procedures, when published, left room for a policy on “strategic partners and partnerships” that was “to be notified separately.” This was a brainchild of the Modi administration, and was unveiled in 2017. It called for the government to simultaneously select private Indian companies and foreign vendors who would subsequently pair up to bid for defence contracts. The government reserved contracts in four sectors—fighter aircraft, submarines, helicopters and armoured fighting vehicles—for firms operating under the strategic-partner model.
Reports emerged in July 2018 that the navy, the air force and the finance department of the defence ministry had voiced concerns about the strategic-partnership policy, and particularly about the threat of monopolisation. The defence ministry formally approved the policy that same month.
The new policy has frozen all public-sector defence manufactures out of the four sectors that it covers. These sectors all have massive acquisition drives either on the horizon or already underway. HAL, which had so far been the main partner in every one of India’s defence-aviation collaborations with foreign firms, is now not even being considered for upcoming fighter projects.
In February 2018, Nirmala Sitharaman, the defence minister, reported to the parliament that the 2016 Rafale contract did not insist on any transfers of technology or licenced production of the aircraft in India. She argued that these conditions, which were central to the earlier negotiations, were “not sought as it would not have been cost-effective for a order of this size.” (A contract for a similar number of jets, thirty Su-30 fighter jets from Russia in 1996, included indigenous production by HAL, including transfer of technology.)
It is hard to escape the conclusion that by cancelling the original procurement process, the Modi government surrendered a huge advantage. Dassault was under great pressure to deliver new orders and prove the Rafale internationally when it first submitted a commercial bid. It also had to out-compete a rival bid by the Eurofighter consortium, and share advance technology and manufacturing with HAL. The terms of the negotiations remained those set by the Indian government. The Modi government turned the tables on his own administration. With India committed to a government-to-government deal with France, Dassault knew it was guaranteed the order, and could name a new price and terms without worrying about any competitive bids. By then the company had also secured Rafale orders from Qatar and Egypt, easing the pressure on it. To add to this, the provisions for the indigenous manufacturing of the Rafale that the French company had earlier resisted, and that India had stubbornly defended, are also now gone.
In 2016, while negotiations on the inter-governmental deal were underway, officials in the Indian law ministry had reportedly objected to weak liability clauses that favoured France at the expense of India. Among other things, France was said to be reluctant to put up a monetary guarantee for the deal, and insistent that French companies, and not the French government, face primary legal responsibility for any breach of contract. It is not clear whether these provisions survive in the final agreement.
Nor is it clear to what degree, and at what points, the government was aware of Reliance Group’s involvement in the deal. The timing of the amendment in 2015 that allowed Dassault to delay an official declaration of its offset partners suggests that the government was, at the least, enthusiastic to turn a blind eye to this question. Its avowals of continued ignorance ever since are also suspect. The defence ministry stated as late as in February 2018 that “no Indian Offset Partner for the 2016 deal for 36 Rafale Aircraft has been so far selected by the vendor.”
On 12 December 2017, Anil Ambani reportedly wrote a letter to Rahul Gandhi refuting the claims the latter had made in parliament. The letter said the partnership between Dassault and Reliance was an “independent agreement between two corporate private sector entities, and Governments had no role to play in this matter.” It is disingenuous to suggest an agreement between two private companies, when dealing with defence products, has nothing to do with the government, given the complex bureaucratic regulations that govern acquisition processes. He was able to get away with it because of the 2015 amendment allowing delayed disclosure, the same one that allowed the government to maintain its plausible deniability.
But air-force headquarters, replying to a Right to Information application I submitted earlier this year, said that the offset agreement in the Rafale deal was signed on the same day as the purchase agreement itself—in September 2016.
DASSAULT AND RELIANCE GROUP held a ceremony in October 2017 to lay the foundation stone for a manufacturing facility at a special economic zone in Nagpur. A press release from Dassault stated that the facility will be run by the companies’ joint venture, Dassault Reliance Aerospace Limited, and “will manufacture components for the Legacy Falcon 2000 Series of Civil Jets manufactured by Dassault Aviation.” This is to count towards Dassault’s offset obligations, but offers little to indigenous defence manufacturing. It also announced an unrivalled foreign direct investment of over €100 million for defence in a single location. Reliance Group has not yet announced any investment of its own in the joint venture, in which it owns the larger and controlling share. Dassault has also put over €8 million into Reliance Airports Developers Private Limited, another subsidiary of Reliance Infrastructure, of which it now holds 35 percent. The Maharashtra government has contracted the company to run five airports in the state. The press release spoke of achieving, in unspecified future years, “the possible setting up of final assembly of Rafale and Falcon Aircraft.” Defence experts complain of local companies doing what they sometimes term “screw-driving”—basic assembling work that requires little new technology—instead of advanced production. (I reached out to Reliance companies and Dassault with detailed sets of questions, but have not yet received any answers.)
A former senior official close to Ambani, talking about his experience working with Reliance Group, told me that he did not think they were “suited for defence industries because that was not their DNA.” According to him, they were mainly about “trading and consumer industry.” Yet they were “playing the big game.” Neither did the company possess technical capabilities, nor a willingness to put a “strategic roadmap” in place. “They were looking at orders immediately and then based on orders looking at offsets coming in, how to use those offsets to build the capability.”
The senior official suggested that the belief that the defence industry had received a boost through Reliance’s participation in it was misplaced. “The entire thing is being controlled by Dassault. They are doing the entire work. So from a national perspective, yes, they will bring the business, people will be employed, job creation will be there, there will be some manufacturing, probably… nothing out of Reliance control because they are looking at their profit share, they won’t bother about technology development. That is the crux of the defence industry of the country.”
The official told me this is partly a game for land too.
Dassault and Reliance’s decision to set up the manufacturing facility in Nagpur came after the failure to secure land in Bangalore and Hyderabad—places of choice for defence manufacturers looking to set up shop. “It is about grabbing land first and then sitting on it and then waiting for right time for things to develop.” He told me Reliance’s effort “didn’t work in Bangalore. It didn’t work with Chandrababu Naidu [Andhra Pradesh]. They are quite cautious.” They had made it clear, according to the official, “no land grabbing, not giving any land at all unless you are serious about investment.”
The dignitaries at the ceremony included the French defence minister and France’s ambassador to India, as well as the BJP leaders Nitin Gadkari and Devendra Fadnavis. Gadkari, besides being the minister for roads and shipping, represents Nagpur, his home town, in parliament. Fadnavis is the chief minister of Maharashtra, and also hails from Nagpur. Addressing those gathered, Ambani told the story of how the Maharashtra government had come to allot to a Reliance Group company the land where the new facility was to be built.
“Initially, our French counterpart thought that we would be setting up the unit at Bengaluru or Hyderabad, where the aviation sector is well established,” Ambani said. “If not the two, they thought we may have a plant in Gujarat, for obvious reasons. But I said it’s Nagpur. I must say the first idea of coming to Nagpur was given to me by Mr Nitin Gadkari, who said that he will banish me from India if we went to any other place than Nagpur. Knowing Gadkari sahab’s persistence, commitment, vision, and his relationship with my late father, it was very difficult for me to say no to him. But I used the excuse to say, ‘Let me speak to the chief minister.’ … When I went and met the chief minister, he said, ‘So you have decided to come to Nagpur’. He didn’t even give me chance to ask him whether we should come to Nagpur. ‘Please tell me what you need, and everything you need will be done.’”
The hype and bonhomie presented at the ceremony hid the fact that Ambani’s group had defaulted on clearing payments on time for the land allotted, which led to the company incurring a financial penalty, and had faced pressure from the state government. Although the land had been allotted to the group by Maharashtra Airport Development Company, a state undertaking, in 2015, the group could only take full possession of it until 2017, once the transaction was finally complete. The company had also asked for the allotted land to be reduced from 289 to 104 hectares, for which it would have to reportedly pay a lower sum of Rs 63 crore. The senior official, who was working with Ambani during that period, told me how Reliance Group was not able to pay a second installment of Rs 38 crore on time. He wondered why the Maharashtra government continued to put its weight behind the group despite its shaky financial reputation. Indeed, not all state governments have shown the same patience for Reliance Group.
Reportedly, a proposal to create a shipbuilding facility in Andhra Pradesh, with a proposed initial investment of Rs 5,000 crore in 2016—the same year the group defaulted with its payment in Maharashtra—was hailed as one of the biggest investments the state had yet seen. However, more than two years later, media reports suggested that neither had the company shared an implementation plan with the government, nor had it made an initial advanced payment required to acquire the land it wanted. The Chandrababu Naidu government, wary of the company’s financial investors, told a media outlet that they were considering referring the company to the state’s investment board.
In July 2018, Trappier said in a newspaper interview that a larger order of some 200 Rafales would be required for Dassault to transfer technology and manufacturing to India at a “competitive level.” The French company was, in essence, dictating terms to the Indian government, in a sharp reversal of roles from the original negotiations. According to Trappier, Dassault was working with Reliance Group in place of HAL because “we were told that HAL was fully booked. We talked to Reliance and they were very keen to create such capabilities in India. They have a track record and the financial capability as well.”
However, HAL, it seems, was not overflowing with orders. Its chairman told a news channel in 2017 that the company’s “current order book isn’t encouraging.” HAL was scheduled to deliver 36 licence-built Su-30 fighters to the Indian government by the end of the 2019 financial year, and had no orders for fixed-wing aircraft beyond that. Overall, the chairman estimated, the company had enough business to last it only two and a half years.
As for Trappier’s faith in Reliance Group’s track record and financial capability, it defied reality.
{THREE}
THE DEATH OF BUSINESS TYCOON Dhirubhai Ambani in 2002 was followed by four years of bitter dispute between his two sons, Mukesh and Anil, over the fate of Reliance Industries. When their split was formalised in 2006, Anil walked away with the conglomerate’s telecom, power, natural-resources and financial-services businesses, which then formed the core of what he dubbed Reliance Group.
Anil already had a reputation for flamboyance and impetuousness, fuelled in part by his marriage to a former Bollywood actor that his father had for years refused to permit. Now, with his own corporation to run, he had a chance to prove his detractors wrong.
He started off well. When he took Reliance Power public, in early 2008, it took just minutes to sell $3 billion worth of stock in an initial public offering. But by the end of the 2014 financial year, with Reliance Group’s debt soaring, Ambani began selling off assets, and even entire businesses.
Reliance Group’s cement operation went to a rival conglomerate in 2016. At the end of the 2017 financial year, Reliance Power’s net worth had eroded to around Rs 21,000 crore—less than the $3 billion it raised in its first public offering about a decade ago. The company offloaded two major operations—power transmission in the west of the country, and power generation and distribution in Mumbai—towards the end of 2017. Recently, Reliance Power approached the courts for an increase in the amount of coal it is permitted to mine for its power plant at Sasan in Madhya Pradesh. (Of the three plants it had earlier been awarded contracts for, this is the only plant that the corporation built.) Without permission to mine more coal, the company argued in court, it faces massive losses, and might have to close down this plant too.
By June 2017, Reliance Communications alone owed over Rs 45,000 crore, prompting global credit-rating agencies to downgrade the company’s debt. It began to close down operations. One foreign lender, the China Development Bank, asked the National Company Law Tribunal to declare the company insolvent. After crisis talks in Beijing, Ambani announced that Reliance Communications would sell assets to Mukesh’s mobile network, Jio. This was delayed while other creditors challenged the proposal and began further insolvency proceedings, but the courts finally cleared the sale of some assets to Jio in August 2018. Even this was reported to have brought in less than half of what the company owed in all. Creditors continue to pursue the company.
“I think Mukesh Ambani is backing him directly,” the former senior official told me. “There is a larger family strategy.” It was Mukesh’s Reliance Industries that Dassault first proposed to partner with after being declared the lowest bidder in the 126-jet competition, in 2012. In less than two weeks after the defence ministry declared to go with Dassault, Mukesh signed a pact with the company, but subsequently chose not to pursue business with it for no known reason. In October 2016, his brother entered into a joint venture with Dassault and became its offset partner. “Dassault was with them, he”—Mukesh—“had taken control of Dassault behavior in the MMRCA related issue,” referring to the 126-warplane order. “And then suddenly he walks out of it, this guy”—Anil—“jumps in. So fundamentally it’s continuity of Reliance in the game.”
The two brothers, according to the official close to Anil Ambani, were merely “showing opposition to each other,” while actually “playing together in this process.”
Before 2015, Reliance Group had no serious investment in defence manufacturing. In the aftermath of Modi’s Paris announcement, it began pushing the idea that defence deals would stem the corporation’s head-spinning decline. Anil Ambani spoke publicly of defence manufacturing as a major driver of future growth for Reliance Group. The chairman of Reliance Infrastructure—a subsidiary of Reliance Group, which in turn counts Reliance Defence among its subsidiaries—declared to shareholders in 2016 that he saw opportunities in the defence sector worth Rs 1 lakh crore per year for the next 15 years.
The corporation assembled a team of well-known defence experts to bolster credibility. However, it soon became clear to many of them that there was no clear long-term vision. “Because Reliance has no technical capability,” one of them told me, it was important to “pick up a project, understand the technique and know nuances of it—a lot of investment has to come towards building capability.” Instead, it seemed more interested in attracting offset partners that would give a fillip to its business, rather than deliberate on the nature of the orders themselves from a perspective of technology development. The moment they realised that they were “more of trophies for them,” as one official said, they left.
But even the offset spending Reliance Group has secured from the Rafale deal has not been enough to turn it around. Nor have other deals for the conglomerate’s defence businesses—several of which show a pattern familiar from the Rafale saga, of government actions boosting Ambani’s fortunes. How much more of the government’s defence spending is destined for Ambani’s corporation is an open question, but so is whether Reliance Group can survive long enough to see much of it at all.
Reliance Infrastructure, the parent of Reliance Defence Limited, reported total debts of over Rs 18,000 crore in its latest financial filings, compared to a net worth of around Rs 24,000 crore. As highly leveraged as it is, it is still the only one of Ambani’s four listed core companies with a debt that does not exceed its worth. Reliance Defence counts 13 subsidiaries, including Reliance Aerostructure, which holds the majority stake in Dassault Reliance Aerospace Limited. These companies are not publicly listed, and do not report financial figures. Reliance Infrastructure controls Reliance Naval and Engineering, via a special-purpose vehicle called Reliance Defence Systems. This is Reliance Group’s ship-building operation, which is vying for several major building projects for the India navy, and in the last two years was reportedly shortlisted in competitions for contracts worth over Rs 1 lakh crore. It is also the only one of Reliance Group’s defence companies that is publicly listed, and is compelled to disclose information on its finances and workings. As such, it is the best available window into the state and style of Reliance Group’s defence business.
ON 23 DECEMBER 2014, the defence acquisition council, a body of the defence ministry, approved a proposal to procure six indigenously built submarines at an estimated cost of around Rs 80,000 crore. The exact price was to be determined through competitive bidding, and the council formed a committee to identify suitable Indian shipyards. The defence minister at the time stated that the committee was required to submit the report indicating their preference of both the potential companies and shipyards within three months. Which companies were selected through this process, and whether the bidding happened, is not yet publicly known. In February 2018, I filed an RTI application with the defence ministry to ascertain which shipyards had been selected and what criteria had been applied in doing so, but received no reply.
Three days before the proposal for the submarines was approved, Reliance Defence Systems Private Limited was incorporated. And three months later, it would acquire a major stake in one of the country’s largest ship building companies listed on the National Stock Exchange—Pipavav Shipyard. The only trouble with Pipavav was that it was on the verge of bankruptcy. Various investors had reportedly offered to take a large stake in the company and shore it up, but through February 2015 Pipavav’s promoters appeared to show no immediate interest. Then, in early March, they announced that Reliance Group was aiming to gain management control over the next six months.
Pipavav’s debts exceeded Rs 6,000 crore, and the shipyard had not paid any interest on its loans in at least two years. But Pipavav did have, as a lure for potential investors, tie-ups with the French government-owned DCNS and the Russian government-owned JSC Zvyozdochka, both shipbuilders with prior experience in making or maintaining vessels for the Indian navy. And, in addition to a modest list of existing orders, Pipavav was in the running to construct two amphibious warships—officially called landing platforms or docks, or LPDs—having submitted a tender in 2013.
With Reliance’s proposed takeover underway, Pipavav Shipyard began a process to restructure its debt. This is a process of settling creditors’ claims through some combination of converting debt into equity—essentially, surrendering parts of the company to them—and raising funds from additional investors.
Debt restructuring is a sign of acute financial trouble, and typically cause to treat a company with extreme caution until it successfully refinances itself. But for Pipavav, its entry into the process heralded a wave of fresh business opportunities. Its fresh business opportunities also appeared to coincide with Modi’s foreign trips to Russia.
In July 2015, with Modi in Russia for a diplomatic summit, the Russian government reportedly announced that it had chosen Pipavav to partner with the Russian firm JSC Zvyozdochka, on a project to build frigates for the Indian navy. When the National Stock Exchange asked Pipavav for details of the deal, the company responded that the relevant correspondence was “between Government of India and Government of Russia,” and so, confidential. Soon after this, Pipavav informed the NSE that it had partnered with JSC Zvyozdochka to refit Indian submarines.
In late December, with Modi again on a diplomatic visit to Russia, the Indian media reported that Reliance Defence and Russia’s United Shipbuilding Corporation were soon to announce a partnership to vie for the frigate project. When asked about this deal by the NSE, Pipavav’s response was that the “negotiations are a subset of strategic dialogues on defence cooperation between Government of India and … the Government of Russia.”
Reliance Group announced at the end of December that it had completed its takeover of Pipavav Shipyard. It went on to change the company’s name, first to Reliance Defence and Engineering Limited, and later to Reliance Naval and Engineering Limited—traded as RNaval on National Stock Exchange.
This was about the time that the government released the 2016 update of the defence procurement procedures, with a chapter on the strategic-partnership policy—the one that would allow a private company, chosen by the defence ministry, to collaborate with a foreign company. Even before that policy was finally made public the following year, along with the pledge that submarine orders would be reserved for private companies, Ambani was telling RNaval’s shareholders that he endorsed the strategic-partnership model, and that their company was one of only two private Indian firms that would qualify to build new submarines. Media reports affirming this appeared as well, and identified the second contender as the engineering firm Larsen & Toubro. Mazagon Dock, a state-owned shipbuilder that was already building submarines for the navy, was not on the list. The government never released details of how it came to shortlist just these two private firms, despite being challenged on the question in parliament.
Reliance Group finally put forward a plan for restructuring RNaval’s debt and refinancing the shipyard in February 2017. A couple of months later, the shipyard’s shareholders approved a refinancing scheme that saw some lenders given a one-time payment of Rs 163 crore, and promised to compensate others with equity. IDBI, a state-owned bank that led a consortium of RNaval’s main creditors—notably, all of them government-owned banks—allowed the company to exit debt restructuring. This still marked an improvement in RNaval’s financial standing, though its debts remained enormous. It had continued to post losses since Reliance Group’s takeover, and its combined debt had continued to grow. As of March 2017, the debt was nearly Rs 9,000 crore.
The situation grew even more peculiar. In June, the defence ministry terminated an order for naval vessels that it had earlier signed with another private shipbuilder, ABG Shipyard, citing the company’s terrible financial health. However, RNaval had secured a large contract to supply fast-patrol ships to the coast guard that January, while still in the process of restructuring its debt. One company was able to continue securing defence contracts despite its financial distress, while the other was cut out of a lucrative deal because of it.
The same month that the navy annulled its order with ABG Shipyard, news appeared that RNaval and Larsen & Toubro had been invited to submit fresh bids for building amphibious warships, the LPDs. When the government first invited bids for the LPD project, in 2013, it called for the building of four vessels in two different shipyards. It would select through tendering a private or public shipyard to build two vessels, and nominate what it deemed a suitable state-owned shipyard to make another two, after a transfer of know-how from the original shipyard. (Defence procurement procedures allow such nomination-based manufacturing for naval projects.) The government had earlier nominated Hindustan Shipyard Limited to build the first two ships, and Pipavav Shipyard and others had bid for the rest. In early 2017, however, the government decided that all four ships would be built by a single shipyard to be selected via a new round of tenders. Reliance Defence and Larsen & Toubro, both private firms, were reportedly the only firms shortlisted to bid for this.
For as long as RNaval was still in the restructuring process, it was not eligible to be considered. Interestingly, RNaval’s refinancing plan was published three days after the government’s decision to cancel Hindustan Shipyard’s nomination for the project. The invitation for RNaval to submit a fresh LPD tender came very shortly after the company exited debt restructuring.
The government offered no formal explanation for why it had taken a two-ship order away from Hindustan Shipyard, and excluded it from fresh bidding for LPDs. The shipyard’s annual performance reports of the last three years, published by the ministry of heavy industries, reported that it was now being utilised to only around half of its capacity.
The publication of the strategic-partnership policy also came shortly after RNaval finished restructuring its debt. Soon after that, the defence ministry reportedly listed Reliance Defence and Larsen & Toubro as the only viable Indian partners for Project 75I—an effort to build six advanced non-nuclear submarines for the navy. It also reportedly listed four potential foreign manufacturers for the project.
Of the foreign firms, France’s DCNS was the most entrenched in India—it was already the foreign partner in Mazagon Dock’s ongoing submarine project. Mazagon Dock itself had a solid track record for submarine construction—it had already delivered two submarines under its existing order. But with the strategic-partnership policy having excluded state-owned firms, the DCNS-Mazagon partnership was not a viable option in the competition for the new submarines. DCNS’s other existing partner was the one it had signed with RNaval back when it was still Pipavav Shipyard.
In early 2018, Reliance Naval proposed a modified refinancing scheme to the one that had been approved by shareholders and allowed it to exit debt restructuring the previous year. The earlier plan to convert some debt into equity, which might have meant loss of management control for the Reliance Naval if enough stake was transferred to creditors, was now gone. Many lenders had still not approved the corporation’s plans for resolving its debt with them. As of March, the uncertainty over how the corporation planned to sustain RNaval continued.
RNaval’s financial statement for 2017-18 was dismal. Its net worth had shrunk to Rs 443 crore—compared to a net worth of Rs 1,447 crore in the previous financial year. An independent audit submitted as part of the financial report concluded that “the company has been incurring cash losses, its net worth has been substantially eroded as on 31st March 2018, loans have been called back by secured lenders, current liabilities are substantially higher than current assets … these conditions indicate the existence of a material uncertainty that may cast significant doubt on the company’s ability to continue as going concern.”
To add to RNaval’s problems, the former promoters of Pipavav Shipyard and RNaval sent each other legal notices for breaching the purchase agreement and causing losses of over Rs 8,000 crore and Rs 5,000 crore respectively to each other.
By May 2018, several of RNaval’s creditors asked the Ahmedabad bench of the National Company Law Tribunal—a bankruptcy court—to initiate insolvency proceedings against the shipyard, which would force it to liquidate its assets to pay its debts. This added to an earlier set of insolvency cases filed the previous year. The company had tried to repel those by repeatedly presenting reasons why they should not be immediately heard, which the tribunal had already once declared “nothing but an invention to somehow gain time.” All these cases remain pending before the court.
Much hope had earlier rested on the fact that, as a candidate for the LPD and advanced submarine projects, RNaval was in the running for orders worth over Rs 1 lakh crore, or $14 billion. But the shipyard has apparently now lost its chance at the most valuable of these, for the $8-billion Project 75I. Recent media reports indicate that the government has gone back on its plan to run the project under the strategic partnership policy. RNaval was already running behind schedule on its existing orders, and its finances remained dire, leaving Larsen & Toubro as the only plausible private option. But this left the government in a “single-vendor situation”—a turn of events that the strategic-partnership policy was explicitly meant to avoid. After all of its contortions to keep Mazagon Dock out of the Project 75I competition, the government reportedly reconsidered its options and nominated the state-owned shipbuilder for the entire six-submarine order.
This has implications for the LPD order too, as without RNaval, the government could face a single-vendor situation here as well. To further complicate matters, RNaval alleged in June 2018 that a senior naval officer with a son working at Larsen & Toubro had been favouring the rival firm. The following month, the navy invited executives of both firms for a bid opening—a standard procedure meant to guarantee transparency. This came on the cusp of a new session of parliament, with the government anticipating more accusations that it had favoured Reliance Group in the Rafale deal. The executives were made to wait, and then told, without any explanation, that the unsealing had been postponed.
RNaval’s plans to build navy frigates in partnership with Russia also fell through. The Indian government eventually ordered two vessels directly from a Russian shipyard, and an additional two, to be built with Russian assistance, from the state-owned Goa Shipyard.
In March 2018, over a hundred local contractors and merchants who had worked with the RNaval shipyard staged a sit-in outside the company’s administrative office in Rajula, Gujarat, during which they demanded their dues from several years’ worth of unpaid bills. The protest continued until late June, with no effect. When I spoke to several of the protestors in July, they told me that the shipyard had effectively come to a standstill. Bhavesh Lakhani, a contractor, said that numerous unfinished ships from earlier orders, including the fast-patrol vessels for the coast guard and several vessels for the navy, “are all lying just like that, unattended.” They gave me a list of 191 vendors to whom Reliance Naval owes amounts as low as Rs 80,000 to as high as Rs 3.25 crore and they included suppliers of electrical material to contractors who provided labour.
{FOUR}
THE TRAJECTORY OF PROJECT 75I demonstrates the Modi government’s failure to find workable answers to old questions plaguing Indian defence manufacturing. The initial exclusion of state-owned firms and the stubborn consideration for a severely indebted private company, only for the contract to then go to a state-owned firm anyway, only succeeded in delaying an urgent defence order. On this test, the strategic-partnership policy failed.
The Rafale deal will present another stern examination. Here, the policy retroactively formalised the arrangement that Dassault and the government had already reached, with the state-owned HAL shunted out in favour of a struggling private corporation with no aerospace experience whatsoever. How this will enhance India’s defence industry remains to be seen.
Even after all the bureaucratic somersaults and political recriminations, Modi’s administration has brought the country right back to where it started: being heavily reliant on often uncompetitive state-owned firms and failing to galvanise private defence production. The technological balance is skewed, as much as ever, towards foreign companies and the government appears to have no discernible strategy for correcting it.
Indian companies are coming into the defence business “in a hurry to make money,” a person with decades of experience in defence aerospace told me. He pointed to Reliance Group as an example. “Their approach is to explore a new area of opportunity like defence, and without putting much into capability try to make the maximum out of it. … They are all chartered accountants. That is why they are there to make money. That is okay with the trading business, but in defence long-term strategy is needed. And that is the problem with these kinds of guys.”
But that in itself may not be a reason to dismiss private defence manufacturing. India does have the capability to create a more enhanced defence ecosystem if small and medium enterprises are taken on board. The problem, the head of one such firm making specialised defence systems and components told me, is that they have never been given a chance. “Those who are not powerful, no one gives them anything,” he said.
Even with all the promises of major defence spending and indigenous manufacturing, he continued, “Today I am surviving because of exports.” When trying to get anything out of Indian officials, “you struggle like anything. You ‘look after them’—you know, all those things. Then you still run around, ‘Sir sir sir,
ho gaya, sir? Sign
kar do.’
Woh bolega ke nahi, mera mood
nahi hai, sign
nahi karunga.” (“Is it done, sir? Please sign.” He will say “No, I’m not in the mood, I won’t sign.”) And domestic firms are often expected to provide products and services at massive, unsustainable discounts simply “because they’re Indian. … Someone at a high position told me, ‘Boss, you have to show the cost benefit to the nation.’”
The head of the private firm pointed to other countries that have successful domestic defence industries. “Go to the USA and try selling something to US defence. It’s impossible. You have to be local.” In Israel, “they will actually have a list, who all vendors are there in Israel,” and anything that is available locally is given preference. The Indian government could also say “this component is here in India, it won’t come from outside. … Put that part in the contract.”
The expert in defence aerospace agreed that more needs to be done to incubate small and medium-sized enterprises. “SMEs are very important to the aerospace business,” he said. “You need to respect them and have a good working relationship. They are the ones who build the capability.” Without a supply chain of engines, radars, weapons systems and other specialised components that such firms can provide, no country can hope to execute advanced indigenous projects.
“Without having a supply chain in place, the policy for strategic partners won’t work,” he continued. “It’s a stupid policy. None of the Indian companies qualify to become a strategic partner … None of them have experience in aerospace business.”
On the other hand, the ease with which Reliance managed to lodge itself in a complex industry speaks of the political access it has historically enjoyed. Anil Ambani “was involved in political game,” the official who worked with him said. He made the mention of Prime Minister Modi part of a “routine discussion” in the office. “The impression he generates to everybody that he is very close [to the prime minister].” The impression that the colleagues around Anil Ambani received was that “everything can be bought, can be set up, business can be made.”
The government recently started a competition for the production of 110 fighter jets in India with foreign collaboration. As the strategic-partnership policy covers fighter jets, the Indian partner in the project is guaranteed to be a private firm. The Adani Group—Modi’s oldest corporate backer—is eyeing a deal in partnership with the Swedish manufacturer Saab.
“I think it’s idiotic that tomorrow Adani comes into this business because of money power, with no experience, and becomes an aircraft manufacturer,” the senior official said. “After the selection of a foreign partner, HAL should be chosen as the strategic partner along with other private companies. But HAL should be the lead integrator”—heading the assembly and testing of the finished fighters—“and other companies should help creating a supply chain.”
But, he cautioned, state-owned manufacturers “have to set a lot of things right themselves, and they can’t depend on the government forever. They should run the business in a way that they earn their salaries from export of equipment, and not from the government.”
HAL’s future is now uncertain. Frozen out of the Rafale deal and likely the new 110-fighter competition, it has little hope of any new infusion of orders or expertise. The long-awaited Tejas, which HAL is meant to build, has entered partial service, continues to miss deadlines and is yet to go into full-fledged production. For all its failings, the firm remains the only Indian manufacturer with meaningful experience in defence aeronautics. With no viable replacement in sight, it is not in the national interest to let HAL fade.
Reliance Group’s aerospace venture, by contrast, is well positioned for more business. India’s air force remains desperate for fighters: squadron numbers remain low, the Tejas remains far from ready, and ageing Mig-21s continue, quite literally, to fall out of the sky. The 36 Rafales now ordered are far from enough to fill the original 126-fighter gap in the fleet. Dassault and the government have both dropped hints of follow-up orders. There is also the talk of acquiring Rafales for the navy, which needs new carrier-based fighters after testing a naval variant of the Tejas and finding it far from capable. And if Reliance Group struggles in the meantime to sustain its aerospace interests on its own, it might, as the former senior official at Reliance suggested to me, have a hidden backer—Mukesh Ambani.
The official said that many foreign companies had treated Reliance Group with a lot of caution. The corporation had sent representatives to Russia and Ukraine “to enter into tie-ups with various companies to grow the business. But these companies would also see the viability of their business partnering with a company that has nothing on ground. Eventually, many of them didn’t show any interest.” Why, he wondered aloud, did “Dassault choose a company which has been in debt and had no experience?” That, he said, “is something one should find out.”
http://www.caravanmagazine.in/business/india-gambles-defence-interests-reliance-group
