UPDATE 4-French Rafale favoured for multi-billion dollar India jet deal

Tue Jan 31, 2012 11:25am EST

* India's cabinet must sign off on deal

* Sale would be lifeline for struggling Rafale

* Defence ministry source: Rafale jet is cheaper, preferred

By Manoj Kumar and Nigam Prusty

NEW DELHI, Jan 31 (Reuters) - France's Rafale emerged on Tuesday as preferred bidder in a $15 billion contest to supply India with 126 fighters, undercutting the rival Eurofighter Typhoon and boosting French hopes of a long-awaited first export contract for its premier combat jet.

French President Nicolas Sarkozy , who lags in opinion polls ahead of April elections, welcomed India's decision to enter exclusive talks with supplier Dassault Aviation and vowed to provide significant technology transfer as India expands its arms industry.

"The realisation of the Rafale project shows the depth and breadth of the strategic partnership between France and India," Sarkozy said in a statement, while French officials avoided declaring outright victory after a series of false export hopes.

India has become the world's largest weapons importer as it seeks to upgrade its largely Soviet-era navy and air force to counter the rising might of China and threats from Pakistan.

"The Rafale gives a huge combat edge to our air force given the situation in our region," said former Indian air force chief Fali Homi Major.

"We cannot say what kind of conflict situation there would be in the region 20 years hence."

If it came off, the deal would be a major shot in the arm for Dassault, which has struggled to find a foreign buyer for the multi-role Rafale, billed as one of the most effective fighters in the world but also one of the most expensive.

Shares in thinly traded stock of Dassault Aviation shot up 22 percent to a more than four-year high of 749 euros after the announcement, which appeared to raise the chances of the first export contract for the French multi-role combat jet.

However, India's Defence Minister A.K. Antony said earlier no deal would be signed before the end of March.

"It is a long process. The file has not come to my table," Antony said, adding that the finance ministry and then a cabinet panel headed by the prime minister had to look at any agreement.

A French source close to the matter said the decision to enter fresh negotiations with lowest-bidder Dassault was a step forward but that no deal had been signed.

Defence analysts said the deal still needed to get through a potentially complex final stage of negotiations in which France's willingness to transfer know-how would be tested to the full.

LONG WAY TO GO

"This is not the end of the road by any stretch of the imagination. This is only the beginning of a second stage of this campaign," said veteran defence analyst Howard Wheeldon, senior strategist at BGC Partners brokerage in London.

James Hardy, Asia Pacific specialist at IHS Jane's Defence Weekly said that wrangling over the deal could go on for years.

"Financial pressures on India's government could seriously complicate the chances of this being signed any time soon, in particular the depreciation of the rupee," he said. "That and the standard contractual wrangling that occurs during Indian procurement deals could cause delays stretching to years."

Indian defence ministry sources said the life-time cost of the tender including training and maintenance could reach $15 billion, above previous estimates of around $11 billion.

The sources said the Rafale was preferred because it cost about $5 million less per plane and the Indian airforce is familiar with French warplanes such as the Mirage.

"Unit-wise, the French plane is much cheaper than the Eurofighter. Moreover, the Indian airforce, which is well equipped with French fighters, is favouring the French," said the source, who asked not be named.

In 2011, Dassault won a $1.4 billion contract to upgrade India's Mirage fleet.

In December, French Defence Minister Gerard Longuet warned that Dassault would stop production of the Rafale in 2021 if it did not win any export orders.

A deal in the works since 2008 to sell 60 fighters to the United Arab Emirates hit a new snag last year when Abu Dhabi Crown Prince Sheikh Mohamed bin Zayed called Dassault's terms "uncompetitive and unworkable".

The UAE has sought details of the Typhoon, built by the German and Spanish branches of EADS, Britain's BAE Systems and Italy's Finmeccanica.

Hardy said Dassault's poll position in India was a big blow for Eurofighter.

"The Typhoon was widely tipped to be the favourite and had major political support from the big beasts of the Eurofighter nations," he said. "Both Germany and the U.K. invested a lot of time in pushing the Typhoon so this will hurt."

India rejected American, Russian and Swedish bids in April.