On Rafale Controversy, How Seriously Should We Take The Sinha-Shourie-Bhushan Trio?

Late on Wednesday evening (8 August) in Singapore, a good friend forwarded me this link and asked me to go through it fully. It is a press statement or article written by Messrs Yashwant Sinha, Arun Shourie, and Prashant Bhushan.

At the outset, we have to note that the first two were ministers in the National Democratic Alliance-1 government of Atal Behari Vajpayee. Prime Minister Narendra Modi has sidelined them. They are bitter and angry. Bhushan was part of the Aam Aadmi Party, and has pitted himself against the NDA-2 government in many instances.

Their press statement was released in Scroll.in, which is also not favourably disposed towards the NDA-2 government, to put it mildly.

Most sell-side research (research by stockbrokers and investment banks is called sell-side research) in the financial sector falls under this category. When they issue a buy call on a stock, one does not know if they truly believe in the stock or if their investment banking interests dictate that they issue a buy recommendation. There is a natural conflict of interest. So, it will be of interest and worthy of attention only when the sell side issues a sell recommendation.

So, like the sell side case, these three gentlemen have a natural conflict of interest. They have an axe to grind. When someone is bitter and has a personal animus, there will be a tendency to overstate the case, exaggerate a bit here and there, and hide some inconvenient details. One cannot dismiss these possibilities lightly.

Therefore, they have to make a rather rigorous case to convince the listener/reader that they have risen above their personal considerations. In this particular instance, when they have taken up something as important and critical as national security, the onus on them to be thorough with their homework is several notches higher.

My current reading of their press statement does not convince me that they have passed the test. Maybe I am wrong. One can never be certain if one were honest.

To summarise their statement, they think that the Government of India is vastly overpaying for the Rafale fighter jet, implying kickbacks, etc, it is not sharing the details of the contract, it has awarded ‘manufacturing under license’ to a favoured Indian private sector entity. These are serious allegations. Very serious. So, how seriously should we take them?

1) What is Hindustan Aeronautics Limited’s record in defence production? How long did it take to produce the Light Combat Aircraft (LCA) [single-jet, single-seat], and how comfortable are the Indian Navy and Air Force about the LCA? See here for details. It is a bit strange that Dr Shourie, the man who privatised public sector enterprises, is now batting for HAL with its track record of delivery.

2) The questions raised by the three gentlemen sound so obvious. So, why were they not raised before and by others?

3) How many defence manufacturing firms were there in India in the private sector earlier? I presume the answer is zero. So, naturally, no firm will have a record. You have to begin somewhere.

4) Understand the historical context: When Korea wanted to become a steel power, they had no resource advantage or knowhow. They told Japan to pay war reparations in steel drawings and plans, and depute people. The rest is history. Moral of the story: one has to start somewhere.

5) Didn’t the French government endorse the Government of India’s answer on certain confidentiality provisions after the no-confidence-motion debate? See here:

Hours after Congress president Rahul Gandhi questioned the Rafale Deal, France responded saying a security agreement it concluded with India in 2008 legally binds the two countries to protect the classified information relating to operational capabilities of defence equipment.

That seems to make sense. Few countries would want details of the exact weaponisation and customisation of a fighter plane to be made public. In fact, there is a healthy precedent with the United Progressive Alliance government defence ministers on this. See here.

6) According to a Government of India press release, the process of acquiring a fighter jet was initiated in 2002 when NDA-1 was in office. UPA-1 and UPA-2 were in office for 10 years from 2004 to 2014. They had not finalised and procured the fighter jets in these 10 years.

The contract was signed late in 2016 finally, I think. By August 2016, it was not signed yet. See here.

7) The three gentlemen follow the post hoc ergo propter hoc (Latin for “after this, so because of this”) logic with many of their assertions. In other words, they are innuendoes, as of now.

8) The clincher – the price of Rafale aircraft: The most serious allegation that the three gentlemen have brought up is that the Government of India has increased the price from Rs 670 crore per plane, conveyed to the Indian Parliament in November 2016, to Rs 1,660 crore per plane now!

In February 2015, the French government agreed to sell 24 Rafale Jets to Egypt at 5.2 billion euros. Taking the average exchange rate of euro-US dollar and US dollar-Indian rupee in February 2015, the price per aircraft works out to Rs 1,525.2 crores. That was in February 2015. The Indian rupee is now 10 per cent weaker ($1 = Rs 68.60) than it was in February 2015 ($1 = Rs 62.03735 then), and there is India-specific customisation which could be different from Egypt’s.

So, the current price of Rs 1,660 crore per aircraft for India does not seem odd. Perhaps, there is nothing to see here.

It is quite possible that the minister who gave the price of Rs 670 crore per plane in November 2016 was misquoting or did not take into account the correct exchange rate.

Many seem to forget that the Indian rupee depreciated 50 per cent against the US dollar in 2011-13 period, thanks to double-digit inflation, high current account deficit, and high budget deficit under the UPA-2 government.

Yes, Indian sloppiness can be and is a security risk. Worse, India’s economic performance then was a bigger security risk, and some are working overtime to bring the risk back.

9) Now, what about the bad debt problem in the Indian banking system? I think it is a very big economic and security risk.

Let us crunch some back-of-the-envelope numbers:

India’s nominal gross domestic product (GDP), as of March 2018: Rs 168,000,000,000,000

Stressed loans at 8 per cent of GDP: Rs 13,440,000,000,000

Assume 60 per cent goes bad: Rs 8,064,000,000,000

Assume 50 per cent recovery rate, rest bad: Rs 4,032,000,000,000

That can buy 242 Rafale jets at the price of Rs 1,660 crore per plane.

Did the three gentlemen issue a press statement and urge the opposition political parties to get to the root of the bad debt problem in Indian banks, to find out when these loans were made (under UPA-1, UPA-2, or NDA-2?), to whom, recommended by whom (UPA or BJP politicians?), sanctioned by whom, and approved by whom and under what authority, and so on?

Final word

Given the nature of the allegations and the previous Cabinet status of the two gentlemen making the allegations, it is incumbent upon the government to share as much detail as possible with the public to assure them that the transaction has been undertaken solely with national interest in mind and that it is above board.

This piece was first published on the writer’s blog and has been republished here with permission.