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Sunday, February 24, 2019

The US-China trade war dynamic: What’s in it for India?



    26 December marked the 125th anniversary of Mao Zedong’s birthday. Speaking in the mid-December celebration of the 40th year of reform and opening up, President Xi Jinping hailed Mao for laying the foundation for the successful transformation of China. 1 January 2019 will mark the 40th anniversary of the establishment of the diplomatic relations between the United States and the People’s Republic of China, though it is unlikely that this event will be celebrated at this fraught juncture in Sino-US relations.
    The two countries are locked in what began as a conflict over trade and tariffs, but has now become all-consuming and is affecting their relationship across the board. Relations between them are probably the worst they have been since 1979.
    Reports say that a US team will travel to Beijing on 7 January to hold trade talks with Chinese officials. It will be led by the Deputy US Trade Representative (USTR) Jeffrey Gerrish and will also include Treasury Undersecretary for International Affairs David Malpass. These will be the first face-to-face discussions since Presidents Trump agreed in his meeting with President Xi in Argentina, to postpone the imposition of additional sanctions on $200 billion worth of Chinese goods (imposed until 1 March).
    Beijing is now battling an economic slowdown, as well the headwinds in its relations with the US. The economy continues to be weighed down by debt and the impact of US tariffs are only now beginning to tell.
    The latest signals coming from Beijing, through the outcome of the Central Economic Work Conference (CEWC) that concluded last week signals that the Chinese will make efforts to stimulate their economy and at the same time work towards a trade deal with the US. [i] This is a key meeting of top officials chaired by Xi Jinping that was aimed at setting the tone of the Chinese economy for 2019.
    The third quarter saw the slowest quarter of growth since 2009. It stood at 6.5 per cent. Some are forecasting Chinese growth to slip below 6.5 per cent in the coming year. The World Bank, however, says China’s economy “remains resilient” and has projected China’s growth rate in 2018 to 6.5 per cent and 6.2 per cent in 2019. [ii]
    The CEWC signalled that that China planned to continue to promote the development of high-end manufacturing and make China a “high end manufacturing powerhouse.” [iii] More important, the CEWC statement struck an upbeat note declaring that “China is still and will be in an important period of strategic opportunity for development for a long time to come.” [iv]
    Meanwhile China is signalling that it is willing to adjust its policies to meet what has now become near-universal criticism. As a result of the G20 meeting, China announced a third round of tariff cuts on 700 goods from 1 January to open up the economy. China also removed retaliatory duty on US automobiles and began buying US crude oil, LNG and soybeans again. [v]
    Meanwhile the US continues to pile on pressure on China. In November the US Commerce Department asked for public comment on putting tough export controls on a list of 14 new technologies which could have dual national security implications such as genomics, computer vision and audio manipulation technology, AI chips, quantum computing, mind-machine interfaces and flight control algorithms.
    The Huawei drama continues to unfold in slow-motion. Its CFO Meng Wanzhou was released on bail earlier in December and even though China has taken three Canadian nationals hostage, it is unlikely that Ottawa will unbend on the issue. As of now the US has not formally sought her extradition.
    Last week, the US Justice Department announced charges against two absconding Chinese nationals for participating in a global hacking campaign to steal tech company secrets and IPR, including the data of more than 1000,000 US Navy personnel. According to the legal documents, the two, operating in conjunction with the PRC’s Ministry of State Security stole information from at least 45 US companies in a campaign that began in 2006. [vi]
    Later that day, in coordinated announcements by UK, Australia, Canada and New Zealand, attacked China for its 12-year campaign of cyber-espionage targeting their technology companies. According to reports, initial plans were for a simultaneous announcement of financial sanctions on those implicated in the hacking. [vii]
    The CEWC did make favourable noises about quickening reform, enhancing foreign investor access, protecting IPR of foreign companies, and removing ownership caps in more areas and “implement the consensus from the China-US summit (in Argentina).” But so far the Chinese have not provided any detailed concessions that could meet the heightened expectations of the Trump-Xi meeting. Indeed, what they are worried about it US piling on demands in the face of Beijing’s concessions.

    Who is winning and who is losing the trade war 

    Conventional wisdom has it that the standoff between the world’s largest economies will end up with losers all around. But the situation could be more nuanced.
    According to a study by European Network for Economic and Fiscal Policy Research (Europe Econpol), 20.5 per cent of the cost of the 25 per cent tariffs that the US has imposed on $250 billion worth of Chinese goods will fall on Chinese producers, while the US consumers will only pay 4.5 per cent. [viii]
    A September 2018 survey by the American Chamber of Commerce (AmCham) China and the American Chamber of Commerce (AmCham) Shanghai says US companies doing business in China have been hurting. They based their findings on a survey of 430 companies doing business in China. Nearly two-thirds of respondents said that cross-tariffs of $50 billion each imposed by China and the US were already affecting their business operations. Additional tariffs would affect a higher proportion of businesses, the survey noted. However, all but a handful of them said they would remain in China for the near future. [ix]
    A study by Nomura Global Research suggests that there could be companies, industries and even some small economies that could benefit. [x] According to the study some would benefit from import substitution, others from production relocation. A country like Malaysia, for example, could gain in the area of electronic integrated circuits, while Pakistan could benefit in cotton yarn. India, along with Malaysia and Singapore could benefit from a diversion of FDI and production from China.
    The AmCham study suggests that the bulk of the 430 companies surveyed would not shift, but of those that would, the bulk would go to Southeast Asia and some to the Indian subcontinent, and only a few would relocate back to the US. 
    More detailed analysis in the study shows that India does not benefit from the import substitution by countries on account of the US tariffs on Chinese imports. Whereas it does gain marginally from the import substitution on account of Chinese tariffs on US imports.
    India’s gains could come from the diversion of production and FDI from China which could occur were the trade war become prolonged. 43 per cent of China’s total merchandise exports depend on foreign investment, pointing to their potential for relocation. This may not hurt China’s giant economy, but would certainly benefit the economies to which the diversion occurs.
    India’s market size and potential make it a likely destination of countries wanting to relocate. But the Nomura Production Relocation Index puts India at the fourth position after Vietnam, Malaysia, and Singapore. 

    Looking forward

    At this stage the outcome of the US-China negotiations remain in the realm of speculation. The Chinese could decide that it was prudent to keep on the right side of the US and make the changes in their economy that the Americans wanted, which would actually amount to carrying out the reforms they have themselves sought but have been unable to make.
    On the other hand, they could double down and refuse to make the changes and hope to buy off the US by increased purchases of energy and agricultural products like soybeans and put on a show that they are working hard to meet US goals. As speeches go, Xi’s have a mixed record. In his major speech on the anniversary of reforms, Xi took a hard line and insisted that only the Communist Party of China (CPC) dominance would allow China to continue its remarkable economic transformation. [xi] On the other hand, the statement at the CEWC, chaired by XI signalled that China was willing to make a deal.
    To show that they are serious in addressing US concerns, a standing committee of China’s legislature, the National People’s Congress, recently began discussion a draft proposal that would prohibit the forced transfer of technology to domestic companies using administrative measures. Just how this would work is not clear since the draft agreement speaks of promoting “voluntary technological cooperation based on business rules.” [xii] Critics, however say that the draft law is a formal document, whereas technology transfers take place in actual practice. It’s not clear when the NPC will actually pass the new proposal as a law. It could actually take another year and more for the process to be completed. [xiii]
    Even so, the Chinese are being careful in handling the US. After targeting Trump’s constituency — soybean growers, the Chinese are once again purchasing it. They have not behaved as they did with Japan in 2010 when they placed a temporary ban on rare earth exports and targeted sales of Japanese companies like Toyota and Honda.
    A great deal of the US-China trade outcome depends on just at what point does the US wants to compromise. The American position, of course, is known only to President Trump. He could have his officials negotiate hard with the Chinese and then cut a deal which would meet his trade demands, but cut the Chinese some slack on the issue of its industrial policy. For Beijing, that could well be a best case scenario which would drastically reduce the current antagonism and prevent what is clearly looking like a train-wreck in Sino-US relations. He has so far, for example, not only let of ZTE off the hook, but also signaled that he may be willing to have a look at the extradition of Meng Wanzhou, if the Chinese so requested. [xiv] One disturbing development for Beijing, however, is that despite the US going it alone, its allies are now lining up behind it to raise the issue of China’s industrial policy and cyber espionage in a united front.
    There are hazards not just for India, but the global economy in the event of the trade war deepening. Among the more dire ones is the decoupling of the two economies into two mutually exclusive Chinese and American camps. China took the lead in the process by walling off its internet from the global product.  Now, counter-moves are afoot to exclude Chinese companies from the United States.
    Countries like India, which are not major players, be forced to choose, but they will also be compelled to be part of this or that global value chains. A wrong choice will obviously have you on the losing side.
    orfonline.org  December 29, 2018
    [i] Yu Hairong, Zhang Xin and Denise Jia “Update: China Vows Deeper Tax Cuts, More Spending”, Caixin December 1, 2018.
    [iii] Ibid
    [iv] “China holds key economic meeting to plan for 2019”, Xinhua December 21, 2018.
    [v] “China Heads into Trade Talks Bracing for More US Demands”, Bloomberg News December 27, 2018.
    [vi] Kate Fazzini and Kevin Breuninger, “Justice Department charges Chinese nationals in ‘extensive’ global hacking campaign” CNBC December 20, 2018.
    [vii] Ellen Nakashmia and David J Lynch, “US charges Chinese hackers in alleged theft of vast trove of confidential data in 12 countries”, Washington Post December 21, 2018.
    [viii] “Chinese exporters bear costs of Trump’s trade war, say EconPol researchers” European Network for Economic and Fiscal Policy Research November 19, 2018.
    [x] “A US-Sino trade war is not all lose-lose: We assess the potential beneficiaries in Asia, “ Nomura Asia,  Special Report, Global Markets Research 20 November 2018
    [xi] “Xi underscores Party leadership over all work”, Xinhuanet December 18, 2018.
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    The US-China Tariff War Has Widened to Concerns Over Military Technology

    January 1, 2019 will mark the 40th anniversary of the establishment of diplomatic relations between the US and the People’s Republic of China. It is unlikely that the anniversary will be remembered amidst the current tenor rife with suspicion and antagonism. 
    The US has virtually told China that it must stop trying to be No. 1, but Beijing continues to push back. Relations seem to be at their worst since 1979The two countries remain locked in what began as a conflict over trade and tariffs, but has now become all consuming and is affecting their relationship across the board. In the meantime, the clock is ticking for the March 1 deadline before which the two countries are supposed to work out their trade issues. Donald Trump had extended the deadline by three months after meeting Xi Jinping at the G-20 in Argentina earlier this month for the two to work out issues before the US clamps down additional tariffs on $200 billion worth of Chinese goods.
    The signals coming out of the Central Economic Work Conference (CEWC) that concluded in Beijing last week suggest the Chinese will make efforts to stimulate their economy to combat a slowdown and at the same time work towards a trade deal with the US. The resolution following the CEWC indicated that as of now, there are no changes in China’s plans to become a “high end manufacturing powerhouse”. The Chinese Communist Party still views the current period as one of “strategic opportunity.”
    To show that they are serious in addressing US concerns, China’s legislature recently began discussion a draft proposal that would prohibit the forced transfer of technology to domestic companies using administrative measures. Just how this would work is not clear, since the draft agreement speaks of promoting “voluntary technological cooperation based on business rules”.
    Meanwhile there is serious business ahead, early in the New Year. The CEWC did make favourable noises about quickening reform, enhancing foreign investor access, protecting IPR of foreign companies and removing ownership caps in more areas and “implement the consensus from the China-US summit (in Argentina).” But so far, the Chinese have not provided any detailed list of concessions that could meet the heightened expectations of the Trump-Xi meeting.
    Two spheres of technology
    Some within the Trump administration, like Peter Navarro, want to shift supply chains out of China and even foresee two distinct technology areas – one Chinese and the other Western. They point out that it is the Chinese themselves who have created that division by excluding global giants like Facebook, Amazon, Google and Instagram from China.
    Now the west is gearing up to exclude Chinese companies like Huawei from its sphere. It’s not that the Chinese sphere is backward – features in WeChat are better than those of WhatsApp – Alibaba and JD.com are difficult to beat in China.
    But from the hardware point of view, in the short-to-medium term, there are the linkages, say in ICT, between Japan, Singapore, South Korea and Taiwan and China, and any disruption could be disastrous for all of them. Likewise, while Vietnam and Bangladesh are important garment producing centres, in the longer term, they cannot match China in terms of scale and integrated supply chains.
    Yet, US business leaders are keen for a quick compromise before their bottom lines are hit. Notwithstanding the problems that some of them face in China, others are making huge profits. In November, Navarro criticised Wall Street leaders for trying to pressure the US President into compromising with China.
    As of now, we are not clear as to what the US wants from the Chinese. While the conventional line is that they are seeking to balance their trade, it is well known that issues have gone well beyond that. At one level, the US has cracked down on visas for Chinese science, technology, engineering and mathematics (STEM) students, at another, they are in the process of instituting export controls in 14 new areas ranging from genomics to AI chips, quantum computing and flight control algorithms.
    US President Donald Trump holds a signed memorandum on intellectual property tariffs on high-tech goods from China, at the White House in Washington on March 22, 2018. Credit: Reuters/Jonathan Ernst/Files
    The real undercurrent of US concern
    The real undercurrent of concern in the US relates to how many of these technologies can enhance Beijing’s rising military capabilities. According to Christopher Ashley Ford, US assistant secretary for the Bureau of International Security and Non Proliferation, the Chinese want to ensure that they will be part of the next revolution in military affairs (RMA). The chine believe this would be based on intelligent military technology involving the incorporation of artificial intelligence into military systems and doctrines.
    Americans express greater concerns to the Chinese policy of “Civil Military Fusion” (CMF), which seeks to ensure that new technologies developed by the private sector are shared by the military. In January 2017, Xi also became the Chairman of the a new Central Commission for Integrated Military and Civilian Development (CCIMCD), which is the apex body to promote this integrationAccording to US specialist Lorand Laskai, rather that waiting for technologies to develop, “China’s leadership is determined to bake Civil Military Fusion (CMF) into the overall design of emerging sectors through top-level planning. In some ways, this process is partly modelled on that of the US. Perhaps for that reason, the US is worried.
    What really worries the US is that in certain areas of technology, China is feeding off US research. It is well known, for example, that the leaders of Chinese AI research like Baidu have had a research lab in the US since 2014. Huawei promised $1 million for AI research to University of California, Berkley. The Chinese company CETC has partnered with the University Technology of Sydney in AI projects.
    An Australian study found that the People’s Liberation Army had sent 3,000 scientists to universities in the west over the past decade to focus on AI disciplines. Chinese entities have funded 10-16% of all venture capital deals between 2015 and 2017 in Silicon Valley, according to a study by an outfit linked to the Pentagon.
    The Wire December 27, 2018
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    Keeping close tabs on all

    The December 20th government notification has authorised the 10 security and intelligence agencies to intercept and decrypt messages being ‘generated, transmitted, received or stored’ in any computer. The government claims it is merely notifying an existing legal provision that had been in place since 2009 when the UPA was the ruling party. But the notification flies in the face of the Supreme Court judgment of last year which had declared privacy to be a fundamental right, and this year’s decision restricting the use of Aadhaar.
    Intercepting information being exchanged by the bad guys is important. But there is just one Internet. Why does the government have to give the authority to 10 agencies, thus making the task of preserving the secrecy of that information more complex? Can’t a single dedicated agency do that task and feed the other departments? Right now it appears that the entire government machinery has been given a carte blanche to snoop not just your emails, but your entire life.
    The Information Technology Act, 2000, had given the Electronics and IT Ministry the right to surveil the newly emerging Internet, more with a view of regulating it and preventing its misuse. But Section 69, added in the wake of the Mumbai attack, gave  the Union government authority ‘to intercept, monitor, or decrypt… any information generated, transmitted, received or stored in any computer resource’.
    Till this amendment, interception of communications was governed by the Indian Telegraph Act, 1885, which permitted the authorities to block or intercept telegraphic messages  in the interests of public order, sovereignty and so on. In 1996, the Supreme Court held that the broad powers of interception assumed by the government  must be guided by established legal procedures and the SC laid down guidelines on requests for authorisation of interception, their period, the destruction of older intercepts  and so on. Subsequently, these were notified as rules by the government.
    On paper, the Union Home Secretary or his counterpart in the state governments provides the authorisation for interception in writing. But, typically, powers are delegated so widely so as to make the restriction near meaningless. Officials can on most occasions get retroactive authorisation.
    On paper, there is a review mechanism headed by the Cabinet Secretary and his counterpart, the state Chief Secretary, which must receive a copy of every interception order. All this looks very good on paper, but we do not know how effective both mechanisms have been. Some years ago, journalist Saikat Dutta filed an RTI application asking how many phones were tapped at the Union level every year. The answer was 1 lakh. The question then is, was the Union Home Secretary able to apply his mind and sign 300 orders per day?
    In the US, the authorisation process goes through a duly constituted court and the requests for surveillance can only deal with foreign powers or their agents, the US agencies cannot target US nationals. Even so, the total requests to the court in 2016 were 1,485, and have averaged 1,200 since 2001.
    Then there is the problem of highly secretive agencies like the IB and R&AW that are unlikely to share their activities with the Union Home Secretary, or even the Cabinet Secretary. They do not come under the ambit of any law and operate more or less directly under the PMO, and in the present case, the National Security Adviser.
    The Radia tapes made a mockery of all these procedures when private telephone conversations of Nira Radia and a number of journalists, corporate leaders and others were disseminated. The recordings were reportedly done by the income tax authorities, but they became part of political football and no one has been held to account for their leakage.
    As it is, whether it was the UPA amendments of 2008, or the current government’s new rules authorising almost all its agencies to snoop, has little to say about the rights of the citizen. The government has not explained why it has entirely excluded state intelligence agencies and their police forces. 
    We are talking about tens of billions of email messages, chat strings and other communications going over the Internet every day. Does the government have the capacity to handle that traffic? Decrypt, translate and digest it? What exactly is being  authorised? Will it be the messages of an individual or a group? Or is the government giving a blanket go-ahead to the agencies to indulge in a big fishing expedition to scoop up whatever information they can? Where are the safeguards? Leave alone the Radia tapes, has any government official or functionary ever been punished for illegal interception of information or phone-tapping?
    All this is not by way of rhetoric, but to say that experience has taught us that the government is not too good in preserving the privacy of the citizen. That can only be achieved by an informed citizenry. But all we have here are bland notifications and usual obfuscations and arguments. Just what persuaded the Union government to undertake this course at this juncture is not known, but coming as it does on the eve of the elections, it is likely to damage the ruling party’s standing in the computer-using middle class constituency.
    National security is very important for all countries, but for democracies like India, personal freedoms are the very foundation of our polity. There is no point in having security minus liberty.
    Tribune December 24, 2018
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    Five reasons why BJP lost Rajasthan, Madhya Pradesh, Chhattisgarh

    To what extent are state Assembly elections a predictor of general elections?
    This is the big question everyone has in mind following the Congress’ superb performance in the recent Assembly elections in Chhattisgarh, Madhya Pradesh and Rajasthan.
    There is the past.
    In 2003, the BJP won the state Assembly elections to these three states and yet lost the Lok Sabha poll in 2004. Likewise, the Congress lost Madhya Pradesh and Chhattisgarh in the 2008 Assembly polls (they did win Rajasthan) and yet they won the Lok Sabha poll.
    bjp-lost_121618123838.jpgAnti-incumbency is the common factor. (Photo: India Today)
    Reasons for decline
    Getting an answer to the question really rests on an assessment of why the BJP fared badly in the state Assembly polls.
    The common answer would be anti-incumbency.
    After all, across the democratic world, electors tire of leaders in, at the most, ten years.
    But Raman Singh had been CM for 15 years and Shivraj Chouhan for 13. But it would be churlish not to give credit to Congress leaders like Ashok Gehlot and Sachin Pilot in Rajasthan, Kamal Nath and Jyotiraditya Scindia in Madhya Pradesh, and in Chhattisgarh.
    More important was the coming of age of the party’s top leader, “young” Rahul Gandhi. His low-key, can-do approach made a significant difference.
    A third factor being spoken about is “rural distress”— farmers were unhappy, as indicated by the party’s greater loss in the countryside.
    A fourth factor highlighted by India Spend is that in Chhattisgarh, MP and Rajasthan, where 43, 36 and 30 per cent of the seats respectively are reserved for SCs and STs, the BJP did not do too well. Across the three states, they lost 120 or 66 per cent of the 180 reserved seats as against the 77 they had won in 2013.
    Equally telling is the fifth issue brought out by The Print in revealing that the party won only 46 per cent of the 80 urban seats, down from the 80 per cent they had won in 2013.
    While losses in the countryside could be put down to “rural distress”, the erosion in the urban areas which voted strongly for the party earlier is a danger signal.
    Demonetisation, the poor roll-out of the GST, as well as anti-incumbency seems to have dented the appeal of the party.
    In the recent Assembly poll in Gujarat, the BJP faced strong headwinds, but was able to triumph once again because of the solid support it got from its urban constituency.
    farm_121618124213.jpgAgrarian crisis is another factor. But the BJP didn't do well in urban seats as well. (Photo: Twitter/@AIKS)
    Numbers don’t lie
    Nationally, Modi had generated enormous support among the young and aspirational for his agenda of development and promotion of a range of transformational initiatives, like StartUP India, Skill India, StandUp India, Pradhan Mantri Kaushal Vikas Yojna, Smart Cities mission, AMRUT and so on.
    However, outcomes in most of these have been indifferent and many schemes are yet to get off the ground.
    In the meantime, the economy has simply not been able to provide 10 million jobs per annum that Modi had talked of in his election campaign in 2014.
    In fact, CMIE figures show that the number of formally employed Indians actually fell in the period 2017-2018. The government claimed that 3.11 million jobs were added between September 2017 and February 2018, while CMIE figures put the figure at 1.8 million for 2017.
    Indeed, the CMIE data shows that new investment projects went down by 38.4 per cent in the financial year 2018 and the completion of new ones fell by 26.8 per cent over the previous year. FDI declined by 15 per cent. An indicator of just how fraught the situation was is brought out by the fact that when the Indian Railways advertised for 90,000 jobs, they got 23 million applications. Things have not been too good in FY 2019 either.
    rahul1_121618124227.jpgComing to power in three states will help Congress in filling up its depleted coffers. (Photo: Reuters)
    A new hope
    All these issues will be in play in the 2019 Lok Sabha elections. The period now and then is too short for the Congress Party to be expected to deliver on promises. This is perhaps to its advantage because fulfilling some of those would not be easy. Perhaps, the most important outcome of the election was that it gave a lifeline to the Congress, which was floundering in the face of repeated defeats.
    Coming to power in three states will also help in filling up its depleted coffers, something that will be very important when it faces the cash-rich BJP in the 2019 contest. But far more important is the sense of confidence and “can do” spirit the state Assembly results would have given to Rahul Gandhi’s neophyte leadership and the Congress party.
    Mail Today December 16, 2018
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    SC’s Rafale Verdict is Narrow, Govt Still Has A Lot to Answer For



    The Supreme Court bench that has dismissed all the petitions relating to the Rafale deal, has taken a narrow and orthodox view of the issue.
    The judgment read out by Chief Justice Ranjan Gogoi has said that the need for the aircraft and its quality are not in doubt. That is, indeed, true. The aircraft is first-rate, and, yes, the Indian Air Force needs them badly. Further, it has said that issues relating to business decisions such as pricing and choice of offset partner, are not within its purview. But that is precisely where the rub lies.

    SC Hasn’t Looked Into How Govt Acquired Rafale

    The allegation against the ruling party is that it bought the aircraft at a vastly inflated price, which was related to the issue of offsets being given to an inexperienced company.
    It is the manner in which the government acquired the aircraft that is being questioned, and the apex court has not quite looked at that.
    Essentially, the court seems to have argued that national security concerns override many of the concerns expressed by the petitioners, and in any case, the apex court cannot become an appellate court for defence deals.
    They said they had no reason to doubt the decision-making process and nor was there any material to show that there was commercial favouritism in the deal, despite allegations that the Modi government had taken the offset contract from the Hindustan Aeronautics Ltd and given it to Anil Ambani’s Reliance Defence.

    Questions Looming Over Rafale

    Petitions had demanded a court-monitored investigation into the deal after former President Hollande told a French journal in September that the Indian government had proposed Ambani’s company as a partner for the deal. The Congress accused Prime Minister Modi and his government of corruption and crony capitalism, and demanded that the pricing details of the aircraft be made public. The government had rejected this citing ‘secrecy clauses’ in the deal.
    Notwithstanding the Supreme Court’s action, the questions surrounding the deal are not going to go away. We haven’t really got answers for some important aspects of the deal.
    First, how come a deal for 126 aircraft was suddenly reduced to 36? That the Indian Air Force needs more fighters is evident from the fact that earlier this year, the IAF put out a formal Request for Information (RFI) for 114 fighter aircraft, and, surprise, surprise, Dassault is among the six companies who have responded, offering its Rafale.

    Why the Need for Offsets?

    So we are in a bizzare situation where the government first accepted the need for 126 aircraft, chose the Rafale, then for reasons it has not disclosed, reduced the number to 36, and has now expressed a desire to acquire 114 more.
    Considering that the Rafale won the last competition, we would assume that they would win it again and that we would end up paying more for what we could have acquired several years ago, or even a year ago. The Indian Air Force and the government would then have tied themselves into knots.
    Second, of course, how and why Dassault  chose as its partner a company (Reliance Defence) which has no experience in the aviation business.
    One can understand why HAL was rejected—its record for quality control is pretty shoddy. But there are other Indian companies that have considerable experience in manufacturing defence products. Actually, the basic question that can be asked is: why offsets? 
    Because it is a well-known practice that defence companies simply add the cost of offsets to their base price for a product. Indeed, if you do not ask for them, you can get that as a discount on the price. The theory behind offsets is that they will help create a defence manufacturing eco-system by compelling manufacturers to invest in making parts of the product in India.
    The reality has actually been otherwise. Those who have invested have done so in a straightforward way, not because they were compelled to do so, but because of offsets.

    Little Regard for Procedure & Processes

    There is, of course, a possibility which we can only examine as a speculation since it is so sensitive that no information will be forthcoming.  That is, that the government was in no position to acquire the entire lot of 126 Rafales and decided on 36 because it urgently needed to upgrade the aircraft that are designated for use by the Strategic Forces Command, who are tasked to deliver nuclear strikes.
    These aircraft would have special bells and whistles  which could include hardening their electronics for EMP, as well as equipment to penetrate enemy air space. So, National Security Adviser A K Doval, who is in-charge of the nuclear arsenal, persuaded the prime minister to acquire a limited number of the highly capable aircraft.
    That was the time Modi was riding high and he took a peremptory decision to dump the old deal and initiate a new one, with little regard to procedures and process.

    Why Reliance Defence? Speculation Continues

    As for explaining the choice of Reliance Defence and Anil Ambani, that, too, will have to remain in the realm of speculation, because we have Hollande’s word against that of Dassault. And one of them is an interested party.
    It would be too much to expect the Opposition not to keep hold of the issue as the country goes into a general election. The Rafale deal and the SC judgment leaves too many questions unanswered.
    At this point the judicial system has said what it had to, but the political system, too will have to have its say because the politics of the time demands it.
    The Quint December 14, 2018
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