India delays Rafale deal after exhausting capital budget

By Sanjeev Miglani

NEW DELHI, Feb 6 (Reuters) - India's military has postponed until the next financial year a plan to buy 126 fighter planes from France's Dassault Aviation (Paris: FR0000121725 - news) , the defence minister said on Thursday.

New Delhi had picked the Rafale fighters for exclusive negotiations in January 2012 and had been expected to finalise 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 defence sector trade fair.

The military, the world's biggest arms importer for three years running, has already spent 92 percent of its defence 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 defence modernisation programme 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 defence upgrade programme has moved slowly like other major projects under the current government and partly because of Antony's insistence on transparency and integrity in the defence 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 (Berlin: AIR.BE - news) , Finmeccanica (Other OTC: FINMF - news) and BAE Systems (LSE: BA.L - news) .

Dassault Aviation's chief executive, Eric Trappier, said in December that he was optimistic about finalising 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 programme to manufacture home-grown combat planes to replace ageing Russian MiG-21 fighters is running 15 years behind schedule.