India delays Rafale deal after exhausting capital budget

NEW DELHI Thu Feb 6, 2014 7:05am EST

View of the assembly line of the Rafale jet fighter in the factory of French aircraft manufacturer Dassault Aviation in Merignac near Bordeaux, southwestern France, January 10, 2014. REUTERS/Benoit Tessier

View of the assembly line of the Rafale jet fighter in the factory of French aircraft manufacturer Dassault Aviation in Merignac near Bordeaux, southwestern France, January 10, 2014.

Credit: Reuters/Benoit Tessier

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NEW DELHI (Reuters) - India's military has postponed until the next financial year a plan to buy 126 fighter planes from France's Dassault Aviation, the defense minister said on Thursday.

New Delhi had picked the Rafale fighters for exclusive negotiations in January 2012 and had been expected to finalize the deal, estimated at $15 billion, by the end of March.

But negotiations to buy 18 planes off-the-shelf and build the rest in India have slowed and will stretch into the following fiscal year, Defence Minister A.K. Antony told a news conference at a defense sector trade fair.

The military, the world's biggest arms importer for three years running, has already spent 92 percent of its defense capital budget for this year, he said.

"Major procurement can only be possible in the next financial year. There is no money left," Antony said. The country is due to hold elections by May and a new government is expected to be installed the following month.

India is in the midst of a $100 billion defense modernization program to replace Soviet-era planes and tanks, and narrow the gap with China, with which it fought a war in 1962. A border dispute lingers.

But the defense upgrade program has moved slowly like other major projects under the current government and partly because of Antony's insistence on transparency and integrity in the defense procurement process, long dogged by allegations of kickbacks.

Last month, Antony's office cancelled a $560 million euro ($770 million) deal with AgustaWestland for 12 helicopters after allegations were made that bribes had been paid to middlemen to secure the contract.

CLEAN-UP

Antony said there could be delays in arms procurement decisions as he tried to clean up the process, but it was important to send a message that India would tolerate no wrong- doing in these deals.

"Everybody will get opportunities, if products are good and prices are low. There is no need to do lobbying," he said.

India chose the Rafale after a bidding contest against the Eurofighter Typhoon aircraft, made by a consortium involving Airbus Group, Finmeccanica and BAE Systems.

Dassault Aviation's chief executive, Eric Trappier, said in December that he was optimistic about finalizing the fighter jet deal within a few months, though he was unsure whether it would be sealed before or after the national election.

Antony said the two sides were also trying to tackle the issue of life cycle costs relating to the Rafale.

India's air force, which launched the acquisition process in 2005, has said that delays will severely affect the fleet strength of the force.

The military was forced to turn to the overseas market because a program to manufacture home-grown combat planes to replace ageing Russian MiG-21 fighters is running 15 years behind schedule.

(Editing by Ron Popeski)

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