Of all prime minister Narendra Modi’s plans, such as the ones to cut subsidies for instance, the ‘Make-in-India’ one always looked the most credible, and it offered the greatest potential to kick-start economic growth, including the stalled investment cycle. The reason was simple, the central government held most of the aces in this case while it was up to the state governments, for instance, in the case of cutting food subsidies, to use Aadhaar-based cash transfers instead of distributing physical rations through PDS shops. While getting industry to invest was never going to be easy, in the case of defence equipment—an integral part of the Make-in-India initiative—it was the central government that was going to clear the orders and it was the central government that was going to do the buying. With defence procurement estimated to rise from $16 billion right now to $80 billion annually by 2025, any plan that would result in the lion’s share of this being made in India would give a big fillip to industrial growth—in just the next 5 years, CII-BCG estimated this sector generating a million new jobs. Which is why, in the few months that Arun Jaitley also held charge of the defence industry, he fast-tracked clearances—R1 lakh crore in just a few months—for defence equipment; in each case, while the initial equipment was to be imported, the major part was to be manufactured in India over a period of time.
It was this promise that got leading Indian firms to ramp up their defence plans and some leading global arms giants to start looking at manufacturing in India.
This is where the Rafale deal Modi signed during his visit to France comes as a real surprise. While the original deal for 126 medium multi-role combat aircraft (MMRCA) was supposed to comprise 18 imports in ‘flyaway’ condition while the rest were to be manufactured in India, Modi has killed this deal in a single stroke. Now, 36 Rafale planes are to be imported with no Make-in-India happening. This is problematic at various levels, apart from the fact that Eurofighter Typhoon, which Rafale pipped in 2012, was not given a chance to match the new government-to-government offer that Modi got for the Rafale aircraft from the French government. Buying 126 aircraft, presumably, had a certain logic to it in terms of the number of squadrons the air force would have got—it is not clear if giving the air force a smaller number makes sense in terms of the need to carry spare parts for yet another model of aircraft. Also, when the Rafale needs to be upgraded, as it will, the upgrades will cost a lot more since, with the technology will not have been transferred to India, the upgrades will have to be done at Rafale’s French headquarters.
Indeed, this is the reason why the current deal is cheaper than the one being negotiated earlier—Rafale will no longer have to spend time and money in developing Indian vendors for whose quality it will have to vouch for. Since the new deal effectively rules out a big boost for India’s aerospace industry, the question is whether other vendors will also take their cue from Rafale and drag out negotiations so that, instead of making in India, they can get away with simply making for India. Given the potential the defence industry has, that is unfortunate.