Tuesday 27 March 2012

MMRCA – India’s Largest Fighter Aircraft Deal Till Date – 3rd and Final Part-The Rafale and the Eurofighter Typhoon

The Rafale and Eurofighter were selected by the IAF out of the 6 initial contenders. Both have their pro and cons. The Rafale is more battled hardened, tested in Afghanistan and more recently in Libya (Gaddafi had wanted to purchase a few Rafale’s for the Libyan Air force a few years ago!!).Rafale had already flown numerous air to ground operations in Afghanistan before being pulled into the Libyan conflict. The Eurofighter on the other hand flew limited missions over the Libyan air space in support of anti Gaddafi forces .

The Eurofighter is touted to be the better of the two in air to air missions. It’s EJ 200 engine is more powerful than the Rafale’s which means it can fly faster and has a better rate of climb. What it allows the Eurofighter to do is to be able to shoot at its adversary with a greater kinematic force from a higher altitude. It has a bigger nose which translates into a bigger area to house a bigger radar than the Rafale’s. It has the capability to mount a towed decoy mounted on its wings which the Rafale is not advertised to house. The objective of a towed decoy is to try to mimic the signature of the typhoon when it is being hunted by a missile and fool the missile into locking onto it and thus save the aircraft. The absence of the towed decoy is a serious handicap when faced with a barrage of missiles from the air as well as the ground.

The Electronic warfare system of the Rafale on the other hand is touted to be better than the Typhoon. Rafale’s Spectra is touted to be smarter than Typhoon’s Pirate/DASS combination, although the Rafale and Typhoon has never engaged the other in a real war scenario (military exercise do not allow testing of full capabilities of a specific weapon system for fear of leaking sensitive technology).The Rafale may have a smaller nose but its AESA radar is in a much more advanced state of development than the Typhoon’s. Also the Typhoon has had serious funding issues with partner states cutting back on the number of orders for the fighter. It is this issue which probably had swung the deal in favour of the Rafale. Dealing with one nation in a defence deal is a difficult proposition now think about dealing with four of them (as in the case of the Eurofighter consortium) and you have a nightmarish situation for planners in the Vayu Bhavan. Although complete transfer of technology is part of the agreement the final version of the Typhoon “Tranche 3” with the typhoons full features is still a pipe dream. What the IAF would have fretted about was that it would in all likely hood been asked to fund the development of Tranche 3 Typhoon and not the German or Italian taxpayers (they are busy bailing out the Greeks!).The development of the Rafale is much clearer. It has to. Unlike UK and Spain who would also be purchasing the JSF the Rafale is the only 4th   Generation fighter that the French Air Force is committed to. The French are not buying the JSF, yet !. Add to the fact that the Rafale would also be the number uno fighter for the French Navy you have an aircraft which would need to be upgraded periodically to maintain its edge.No such commitment is available from the Eurofighter consortium. No future development of the Typhoon beyond Tranche 3 is either in the works or announced publicly.

What air force planners would also have noted is that when the UK under pressure from the US had banned the supply of spares for the Sea King helicopter as a post Pokran rap, France was busy discussing with the IAF  on a deal to upgrade the Mirage 2000’s.This plus the fact that the French allowed the Indians to tinker with the source code during the Kargil conflict (using Israeli laser guided kits to bomb Pakistani positions in Muntho Dalo and Tiger Hill) showed France to be a better ally than the Brits when push came to shove. In a future hypothetical scenario in case of a conflict with Pakistan or China it would be easier to deal with one country than four particularly if that one country has been favorably disposed towards you in the past in a similar situation.However, it does not mean that the Rafale is inferior to the Typhoon and that only geo political consideration made the GOI choose the Rafale over the Typhoon.

The Typhoon also lacks two clear capabilities that the Rafale has. It cannot be used as a nuclear platform and it cannot be used as a naval aircraft. With China’s rapidly modernizing navy and its growing belligerence in the Red China Sea it is imperative that the Indian navy has at least 3 large aircraft carriers.

The Navy would do well to order a couple of squadrons of the navalized Rafale’s to station on its aircraft carriers. At present it has the Mig29k’s which would fall short of the Chinese Su-33 of the PLAAN. The Rafale on the other hand would be a completely different beast for the Sukhoi 33 to compete against. The navalized Rafale is already being flow by the French navy and no further development is required to make it fit for carrier operations. India would however, require to invest  in carriers of around 50,000 tonnes with arrester wires and catapult launches to house the Rafale. If the IAF and the Indian Navy both order the Rafale this would bring about efficiency in training, maintenance, development and reduce expenses considerably. As a nuclear platform the Rafale’s edge is a lot less pronounced because one nuclear weapons are rarely used and second it is more economical and efficient to have missiles rather than aircrafts as delivery platforms of nuclear weapons.

Coming back to the capabilities of the two aircrafts which are at par in the air to air mission: The Typhoon has more powerful engines, but the Rafale due to aerodynamics and wing layout has a higher maximum take off weight and hence can carry more missiles and bombs than the Typhoon can.The Rafale also has greater range than the Typhoon. Although modern air forces invest heavily in air to air refuelers in actual war like scenarios shit can happen, refuelers may be diverted or even break down. An aircraft with a longer range is always an added advantage. It would mean fighters can  take off from deep inside India’s heavily defended air bases fly mission over hostile air space and come back to their secure location without having to make a pit stop. The Rafale is also touted to be easy on maintenance. Which means it has a lower logistical footprint. This leads to better turn around rate (more fighters available) and less expensive on the maintenance bill. The Rafale’s smaller nose means that it cannot house as big radar as the Typhoon can. The RBE2 is not AESA radar in its present form but it is no pushover either, in conjunction with Spectra it is an awesome combination if properly used. The Typhoon with its equally superb combination of DASS+PIRATE+ CAPTOR is no slouch either. In a no holds bar air to air contest it would be interesting to see which fighter would vanquish the other.

Both the Typhoon and the Rafale do not have functioning AESA radar, (strange because it was one of the requirements of the MRCA) but both have it as a developmental feature. I guess Dassault would have provided enough technical data and demonstration to convince the IAF that the RBE2 would be developed into a fully fledged functional AESA.
In the air to ground scenario the difference between the two is a little more pronounced.
The typhoon has yet to demonstrate its full range of air to ground capabilities. Missions over Libya have not dispelled these doubts. Even with a more powerful engine due to its inherent design it can carry less by way of fuel and armaments than the Rafale. Its laser guided bombs have yet to be tested. Doubts remain over its primary stand off long range air to ground missile. Whether the long range missiles would be provided to the IAF also is in doubt. The Rafale was designed ground up to be a less observable aircraft, coupled with its aerodynamics its passive electronic system makes it a great bomb truck.

Now that the GOI has finally selected the Rafale as the L1 contract, it has to do a few things very quickly.It needs to sign the contract with Dassault as soon as possible. Any rumors of corruption should be dealt with swiftly, if found baseless the person raising the rumors has to be punished severely. The country cannot afford another Bofors scam. Once the contract is signed, get as many used Rafale’s as possible to start training both the pilots as well as the maintenance crew. This approach is nothing new, India had signed a mammoth contract with Russia for the supply and production of the Sukhoi 30MKI fighters. At the time of signing the contract the Sukhoi 30 in its present form was not ready. The IAF instead of waiting for the final version of the fighter to arrive started to train both its pilots and ground crew on the basic Sukhoi 27 version. This meant that by the time the Sukhoi 30’s started to roll out both fighter pilots and ground crew were familiar with the Sukhoi30.
The GOI must also ensure that it gets transfer of technology in critical areas such as single crystal engine technology, sensor fusion and licensed production of all missiles (All French missiles that are to slated to be carried by the Rafale).The Rafale deal must not be just another plain vanilla military deal.

India has to leverage this deal to be able to build up her own military industrial complex.
The next jet (manned or unmanned) has to be designed and manufactured in India. The Rafale deal is expected to be costing the Indian exchequer more than $20 Billion. Expensive indeed! But as the saying goes, if you want peace be prepared for war.

Concluded

Monday 19 March 2012

Going for Gold - A case for investing in Gold


Wow …… the Finance Minister raises the customs duty on gold from 2 to 4% and reporters hail the move calling it ”reformist”. Gold to them is an unproductive asset!!  What a bunch of jokers! The additional levy of 2% tax they feel would ensure Indians would invest in more productive assets such as land, stocks and bonds and bring down the current account deficit (loosely imports less exports)

Let’s begin with some sound financial numbers and not fiscal jugglery as practiced by the finance ministry (FY13 budgeted fuel subsidies to be lower than FY12 fuel subsidies….yeah right).Cost of 10 gms of gold in 2007 was valued at around Rs10,000 approx.The value of 10 gms of gold in 2010 end was around  Rs17,000 .Switch over to 2013 10 gms of gold is valued at Rs28,000.

These are numbers which I have tracked and I have purposely refrained from “googling “pre 2007 gold rates.This means that the value of gold has almost tripled from 2005 to 2012/13.Those on  the technical side will note that the value has grown at a rate of 18% from 2007  to 2012/13 compounded annually and by 17% from 2010 to 2012/13 compounded annually. Compare this with RBI bonds (those backed by the Government of India ) which gives a coupon rate of interest of around 8% to 8.5% depending on the tenure. Compare it with the PPF rate of return of 8.5% or even better with the EPF (employee provident fund) rate of return of 8.25% (Government of India reduced the rate of interest from 9.5% for 2010-11 to 8.25% for 2011-12).Even if the returns on PPF and EPF are tax free (this might change according to the DTC under the EET – Exempt Exempt Tax model) it is quite clear which asset class gives a better return. Also  what stops the Government of India from reducing the EPF rate again?

 Imagine the fate of a salaried individual who is  forced to contribute 24% of his basic salary (12% employer's contribution and 12% “our “ contribution ……..entire 24% comes under our CTC!!...do not know why they call 12% as “employer's contribution” then !!) See’s his pension fund interest being dictated by a finance official mandarin, being reduced again?

So my EPF interest rate is at 8.25% while the inflation rate is at 10%! This means that the real value of my pension fund kept in the EPF, inflation adjusted has decreased. The 10% inflation that I talk about is certainly on the lower side.I have yet to consider the price hike in fuel which will take place (at the time of writing the Government  has shied away from raising the price of crude due to the state election) and the insane increment of service tax and excise duty from 10 to 12%.So given a choice where should one invest…….EPF,PPF,government bonds stocks or GOLD!

As stated earlier, I had almost chocked when some so called educated news reporters called gold an “unproductive asset”.Lets compare gold with land .Yes unlike land we cannot grow crops on gold, but what other advantages does land have over gold? Gold can be traded ,more easily than land; legal documentation of ownership of gold is of higher quality ( imagine investing your life savings in a piece of land or an apartment and then discovering that the land had legal ownership issues).True you cannot live inside gold but you can surely sell your invested gold getting higher returns and then purchase a property.

The comparison with property is an important one .No other asset class in India other than property can match the appreciation in gold over a relatively longish period of time .Property prices remained static (not declining like stocks)even during 2008 -09 during the post Lehman Brothers crisis while gold kept appreciating. Yet it is imperative for social security and peace of mind that we all own “our own “apartment or a dwelling to retire to for the day as well as for life.(read not “owned by the bank “!!).

Lets come to stocks (ha ha the great ponzi scheme) .Equity markets are at a high now.Flush with liquidity from QE and the LTRO stock markets are once again in the headlines.Pray switch back to 2008 and 2009 post  Lehman brothers  collapse when the stock markets tanked or a few years earlier when the dotcom bubble had burst or just immediately after the Harshad Mehta scam. Getting a better picture? Investing in a stock market is like playing Russian roulette with a nuclear bomb.Let us look at a hypothetical scenario where a retiree who had invested all his money in a Mutual fund with 100% exposure/investments in equities and by some chance had retired in 2009, his 10 lac investment would be worth around 50% of the invested amount or even lower.

So the next time you read an article in the news paper or hear a smart wizkid on television asking you to invest 50% of your savings into equity ( not gold or property) you know it is time to get a better newspaper or change the channel. Now let us make the situation a bit worse for our poor retiree , let us assume that he had saved his retirement funds for his child’s marriage ( likely scenario in the Indian Context) the value of his savings has gone down from 10 lacs to 5 lacs, the price of gold unfortunately has increased and so has the entire cost of getting his child married. What does he do? He has no option but to sell his stocks or redeem his MF units at a loss and sell off any other property that he has.Worse he might have to go in for a loan (unlikely that any banks will lend him any money since he has retired). A nightmarish  scenario indeed!

You will often hear analyst say that stock markets over 20 years or a longer period of time will give you better returns that bonds or other saving instrument e.g. PPF,EPF etc (they never compare  performance of the stock  market with gold prices inflation adjusted).Yes true but what if in the middle of those 20 years you needed money to finance your children’s education or marriage and the stock market went bust exactly during that time period? Postpone your child’s education or marriage?

The only asset class which has kept itself at par with inflation is gold. A while ago the gold standard was in practice. Under the gold standard countries would keep their currencies pegged to the dollar, any movement in the dollar would lead to a proportionate change in the value of their currency ,keeping the peg fixed at all times.The U.S. in turn fixed the price of gold to the dollar.I am not getting into a debate on the benefits or the drawbacks of the gold standard. The gold standard was abandoned under Nixon in 1971 and the world has moved on since then.

The current global economic crisis precipitated by the situation in Greece, Ireland,Portugal and soon to be Spain and Italy (and many more to follow) have lead  central banks all over to start printing as if there is no tomorrow .Printing more notes unfortunately will just lead to more inflation in the long run. The value of money as a result will go down. Add the coming crisis in Iran and you will see inflation in its worst form. Your EPF returns will keep giving you 9.5% oops 8.25% but the price of a litre of  bottled  water would have increased by 10%!

Where should any rational investor then invest? Surely he has to invest in an asset class which gives him a rate of return higher than the inflation rate.No not stock markets (God do we not learn from the stock market crashes) not in EPF,PPF ,Government  bonds ( try the Greek Government bonds !!) ,land ( yes if you had that much money),apartments (yes good option if you have the money) or do you invest in an asset class which has trebled in last ten years? Keep in mind that you need to buy your house with your own funds, if you borrow from the bank and the bank interest rates keep rising as they have since 2011 to keep inflation in check  your EMI’s will go up sending your already tight budget into a tailspin.(unlike the government we do not have our own mint! ).*EMI’s have fixed interest rate usually in the initial years of the loan before switching over to a floating rate of interest.

In the Indian context it is very important to realize early on in your working life that gold would be a necessity  for your children’s marriage. Gold is hence required not only as an investment asset but also to meet social obligations. Unfortunately I do not see a crash in gold prices. (This would provide me with a buying opportunity).Also remember that gold is a commodity and its supply will one day eventually run out.
When that happens we all know where gold prices will be heading to.
Please also ensure that when you in invest in gold you invest in gold in its physical form and not in its paper form.

DTC- Direct Tax Code
PPF- Public Provident Fund( Voluntary saving scheme) Account either in State Bank of India or Bharat Post
EPF-Employee Provident Fund( Compulsory contributory scheme for most  salaried employee’s)
QE- Quantitative easing.
10 lacs- 1 Million