 Welcome to NewsClick. Today we will be talking to D. R. Gunandan, our defence expert regarding the revelations brought out by N. Ram in the Hindu previous week. There are several issues that he has brought out. In particular, he refers to the nearly 15% higher cost that Government of India paid for purchase of Rafaljet and he pointed out that the development cost which the Government of India did manage to negotiate and bring it down from 1.4 billion to 1.3 billion euros. Nevertheless, it worked out to be more costly because it was spread over 36 jets as against 126 in the 2012 deal. Raghur, let me begin with N. Ram's. So, when he talked about the development cost and he talked about how it spread made it more expensive. Also, do you think that criticism is valid because obviously the development cost would be the same and if you buy fewer they would obviously raise the price? Yes, but it raises two questions I think. Firstly, many of these details regarding the pricing of the India specific enhancements as they are called they have been in the public domain for a while although they haven't attracted the attention maybe that they deserved or maybe people were not certain about the veracity of the evidence behind these statements. But it's a good thing that Ram has come out with these things now because I think it is once again focused attention on an aspect which has not got the attention it deserved. I think that the two important points here are of course, if you've got R&D costs or development costs and they are spread over only 36 not 126 the unit cost will go up but that immediately raises the original question again which in the context of the Rafale deal is I think like the original SIN. Why did you reduce the 126 to 36 aircraft particularly because the argument has been that since you are buying a fly away condition aircraft they are actually coming to you cheaper than with technology transfer and making them in India. If that is the case then why did you go for only 36 why didn't you buy all the 126 in fly away condition it would have cost you less than the 126. In fact, this brings me to the next question because the development cost is a non-recurring expense precisely which means that if any there were to be any additional purchases the price of per unit cost of the jets would have been much lower. Now the question that arises is that why did the government of India which Enram also brings out not have a follow-up clause in the deal. In fact that option was there in the original deal 2012 and in fact even this deal when it started had an option for 18 additional aircraft India chose not to exercise the option. This has been a puzzle from the beginning and explanations we have got from the Ministry of Defence and from Rakshamanthi herself of course we have not heard from the architect of the new deal the Prime Minister who would know why he went in for this. But Rakshamanthi started off by saying that we could buy only 36 because if we had bought more we would have had to have more infrastructure at the basis etc forgetting that you are not going to get 126 tomorrow you are going to get 126 spread over a period of time by which time you would have built up the infrastructure. So I do not really understand this reasoning of why the 126 was reduced to 36 because the larger the aircraft size you would have of the order size it would have brought down the unit costs it would have met your security requirements which is clear is still there because government has again issued a request for a further 110 aircraft are they going to be any cheaper than this one. I will come back to the to the new request that they have floated but before that there is another argument that has been advanced which is that this is proved to be a bonanza for the salt aviation because we are buying 36 jets they will be delivered in 3 years time which means that the salt aviation would have recovered its entire development cost in 3 years under the original deal the salt would have recovered the cost spread over 10 years and it proves to be a bonanza would you have to say about that see it is a double effect and I think this is where insufficient attention has been paid to this these development costs if India is paying for the entire development cost of these India specific enhancements then in that sense the rights to these new technologies should lie with India that does not seem to be the case we are paying for the development costs based on a pro rata return to India built into the cost of the aircraft but with reduced numbers of aircraft that means we are gifting to that's all the development costs which that's all is then applying to its own subsequent versions and we are not getting anything out of it if these are India specific enhancements as they are being called royalties and rights and intellectual property should vest with us but obviously we have been far more generous we have been far more generous we have never exercised that option we have never spoken about it in public in fact if you look carefully at the technical specifications of what's called the F3R standard whereas the original RFP was to the F3 standard most of the India specific enhancements bring the F3 up through F3R which means that we are bank rolling the organization to the F3R standard without getting anything in return and having paid a unit cost much higher because of our limited size of our order of 36. That would be one thing we have already according to news reports India has paid up 50% of the total cost for acquiring 36 jet which comes to roughly rupees 32,000 crores okay which is an enormous amount without delivery of a single jet and without a bank guarantee or sovereign guarantee exactly and we've been through this before in our interviews government of India in any acquisition domestically would never have accepted an order of this size without a bank guarantee it's never been done before no order is placed without a bank guarantee without waiting for delivery but that apart I think when the prime minister made an announcement at a press conference with the French president standing next to him the argument today that the government is putting forward which unfortunately even the supreme court has accepted is that all the other procedures of the defense procurement procedures have actually been taken post facto they are a ratification of what the prime minister had already announced the point I think is that the prime minister having announced the deal makes the price negotiating committee a toothless tiger because that's all knows and the French government knows you've already committed to buy and therefore whatever price that's all quotes it finds no reason to budge from that since they can always say go and ask your prime minister whether he wants to buy it or not this is our price and we are not budging so I think that announcement itself has put India into an extremely weak bargaining position as far as the price negotiations were concerned and the Indian negotiating team which was split yeah four against three yeah which would have otherwise invited caution or a relook or a review of the entire thing it was bypassed by overruling all the 10 contentious points completely and this is another glaring example of I believe the errors made in the supreme court judgment which is any post facto ratification done with the democley sword of the prime minister's farman in front of you who is going to dare to overrule it unless there are huge ramifications and people are prepared for that even the defense minister at that time Manohar Panikar this issue was to come before the defense acquisition council he passed and the defense acquisition council just passed the buck to the cabinet committee on security in effect the then raksha mantri was saying this is your decision you pass it well he said so and so many words but this raises another question also if we have paid a 50 percent of the price of 36 jets to the salt aviation for the asking without any bank guarantee sovereign guarantee at the same time that we are denying Hindustan aeronautics limited its dues for previous payments which are pending in addition other payments that were due to them for services rendered or products delivered to them what does it imply well it clearly implies that India in its entire defense procurement procedures despite all the provisions therein has rendered itself vulnerable to pressures from foreign original equipment manufacturers and we have now placed our entire defense procurement at the mercies of foreign OEMs because we have gone out of our way to undermine our own defense production setup which is in the public sector. Raghu there are two issues that are connected with it I like to draw your attention to there was a story the other day which talked about upgradation of Jaguar by putting in new engines Honeywell engines the price which they quoted were exorbitant apart from that the integration cost that they demanded from government of India of 1.6 billion dollars were considered way too high because HL has quoted a price of 300 million dollars which is less than actually 300 million dollars for the exactly the same thing for integrating the engine to the airframe of Jaguar and other technical things that that are required to be done which brings into issue the significance of a domestic unit especially a defense public sector unit and its significance because it it actually shows that in the long run it would be cheaper to manufacture things at home see it is not just cheaper Gautam I would not even mind like in the MMRCA deal making 126 buying a total of 126 with 18 in a flyaway condition and 108 being made in India the 108 being made in India would be more expensive than the 18 you buy from outside but that is a price we are prepared to pay in order for gaining control over the production process and therefore the life cycle reliability of the ownership of that technology this is what technological capability means and we should be prepared to pay an initial price in order to gain 20 years down the line or 25 years down the line mastery over our own technology and denying ourselves that capability we are falling in prey to a serial dependence on foreign original equipment manufacturers and that is what the example you have cited indicates. Ragu one final question thus all has gained stands to benefit in fact it has been given a bonanza HAL is suffering because of government of India denying it funds first stopping off an budget allocations for defense public sector units then forcing them to buy promoters part of promoters share which means that HAL for instance had to dip into its cash reserves to pay government of India and then third go to the capital market to raise money where then investor interest also enters the scene the main gainer in all this is the salt aviation and reliance Anil Ambani group the one which has suffered maximum and is being depleted of all its resources and being run down seems to be HAL now what does it tell you about the policy orientation of a government which claims to be supranationalist. I will go one step further the loser is not only Hindustan aeronautics limited the loser is the nation and our national security by a increasing dependence on foreign OEMs and b sacrificing the capability that you have built up which happens to be in the public sector by inviting foreign OEMs to partner with novice private sector entities in India you are perpetuating the dependence on external agencies the loser is going to be the country and I think we are committing this mistake over several decades now and this government has taken it to a pinnacle by making such a fetish out of bringing the private sector into the defense we have no internal defense planning we have no long term planning of what is the equipment that we want and therefore what is the technological capability you should build and how it should be built you are now virtually saying let us just buy stuff from outside and gain a few pennies by asking them to partner with some novice company here which will do some screwdriver assembly on CKD or SKD basis and we are happy with that so I think the loser it is not just HAL the loser is the country and it also means that it is delayed by several years delivery or acquisition of jets which were needed urgently delay in this one case but if you continue to proceed on an order to order hardware to hardware basis then you are delaying acquisition of indigenous capability not by years but by decades thank you Raghu this is all for now but Rafal scam is not going away anytime soon there are many many many revelations that that are going to hit the public domain as we go along thank you for watching news click if you have feedback do get back to us