India's order for two Rafale squadrons casts doubt on larger deal

By Sanjeev Miglani and Frank Jack Daniel

NEW DELHI (Reuters) - Any future Indian purchase of Rafale jets will come through direct talks with the French government, the defence minister said on Monday, suggesting that commercial negotiations for a larger deal with Dassault Aviation have been shelved.

Prime Minister Narendra Modi on Friday announced a plan to buy 36 planes from Dassault through the government-to-government route, after three years of price negotiations for local assembly of the aircraft produced no results.

Defence Minister Manohar Parrikar said Modi's decision came after the commercial negotiation went into a "vortex" although he stopped short of saying the government had scrapped the negotiation for a contract with Dassault for 126 planes worth up to $20 billion.

"This had to be done to break the vortex," he said, adding that the preferred method was now to talk directly to the French government, rather than return to commercial negotiations.

"Instead of going through the RFP (Request For Proposal bidding process) where there is lot of confusion, chaos, it is now the situation that 36 will be procured ready to fly. What is to be done with the rest will have to be discussed," Parrikar said.

A decision to abandon commercial talks would mean the end for what had been touted as one of the world's biggest defence deals, and could give hope to rival manufacturers, experts said.

"The government has bought time now," said Muthumanickam Matheswaran, a former Air Marshal in the Indian Air Force, adding that future purchases "could be that aircraft, or it could be another aircraft."

"That is an indication that the RFP that has been hanging for more than 3 years, is finished," said Matheswaran, who advises Hindustan Aeronautics.

Under the original plan, the Air Force was to buy 126 Rafale fighters with 108 of them produced at a state-run Hindustan Aeronautics plant in Bengaluru as part of India's efforts to build a domestic military industrial base.

But the two sides could not agree on the terms.

The value of the deal was estimated to have grown to about $20 billion from an initial $12 billion in the meantime.

(Additional reporting by Nigam Prusty and Frank Jack Daniel; Editing by Robin Pomeroy)