Rafale deal: Pricing issues, India's insistence on 50% local spending lead to missing of July target

NEW DELHI: The Rafale deal, rescued by Prime Minister Narendra Modi when he visited France in April, has hit a government air pocket. India’s insistence that France spend 50% of the value of the Rafale deal in Indian defence sector (called an offset requirement) and pricing issues have meant that India and France have missed the July target of finalising the agreement on purchasing 36 fighter jets.

Officials familiar with Rafale negotiations said higher political intervention may be required to hasten the process.

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These officials did not want to be identified. While the old Rafale deal — buying 126 aircraft — has been cancelled, progress on buying 36 French jets is stalled because the French say spending 50% of the value of the deal in Indian defence sector will push up the total deal cost for India. The 36 Rafale jets were offered at just over $200 million each when the PM visited France in April, a price 25% lower than that offered to the UPA government.

The French understanding was, officials say, that the standard 30% offset obligation will apply and it will met while creating the infrastructure for Rafale.



Defence minister Manohar Parrikar, however, has been insisting on 50% offset (he told ET this in an interview published on May 11) and Indian negotiators have been asking for this as well. The French have argued 50% offset obligation will not allow them to sell the jets at the price agreed upon in Paris in April. The deal size — less than $8 billion, as agreed during Modi’s France visit — will also go up, officials say, if the Indian Air Force plan to create two bases for Rafale jets is accepted. Two bases will require separate, high-cost infrastructure as well as two sets of maintenance, training and armaments storage facilities.

There’s also the issue of integrating third country weapon systems in French-made Indian Rafale jets. This integration will also drive up costs.