India and France are speeding up negotiations on a $10 billion deal for 126 Rafale aircraft following months of delays because of disagreements over the cost of building them in India, two Indian Defence Ministry officials told Reuters.
India started exclusive talks with French Dassault Aviation's (AVMD.PA) Rafale for a 126-plane order in January 2012, over the competing Eurofighter Typhoon (EAD.PA). The two sides still have to sign a final contract.
The deal is likely to be discussed during a two-day visit by French President Francois Hollande to India beginning on Thursday, but both sides have played down the chances of it being finalised.
The talks have progressed slowly because of differences about how to price technology transfer, sourcing of spares and the selection of an Indian partner, the officials said.
"There are three issues of contention - pricing of transfer of technology, sourcing from India and the joint venture with Hindustan Aeronautics Ltd (HAL)," said a senior official at the ministry, who said negotiations had been delayed by a few months, largely because of those issues.
Another official said the contentious points had been mostly resolved and the deal could be finalised as soon as July.
Dassault declined to comment.
The second official said Dassault had earlier asked India to pay up to $2 billion more for the future upgrading of technology that would be transferred over the 30-year life-cycle of the deal.
French Foreign Minister Laurent Fabius said on Sunday that talks with India to complete the long-awaited first export order for Rafale were looking up. At an air show in Bangalore last week, India pledged not to let defence cuts stand in the way of efforts to finalise the deal.
Following India's strong objections to the cost escalation, French has broadly agreed to review its decision but negotiations were still going on for calculating the price for the maintenance and life-cycle cost of the planes, the second official said.
India has been insisting that at least 30-50 percent of the value of the contract be sourced from Indian companies, while Dassault wanted to lower that percentage, saying Indian firms do not have the capacity to supply that quantity of parts, the official said.
India revised an offset policy for procurements of arms last year, and specifies that defence contract over 3 billion rupees must plough back at least 30 percent of the contract value into India as offsets.
Since 2007, Indian companies have secured sourcing contracts worth more than $4 billion under this policy.
"The contention is also over the pricing - you can put different value to hardware, services including transfer of technology," said the first official, who declined to be identified because of the sensitivity of the issue.
Hollande, accompanied by ministers and corporate delegates, is likely to discuss the sale of nuclear plants to India and investment in other sectors, India's Foreign Ministry said.
Under the Rafale deal, Dassault is expected to send 18 ready-made jets, then manufacture the rest in India.
India expects the deal will provide business of $4 billion to $5 billion to Indian companies, said the second ministry official, who has knowledge of the talks.
Both officials said another contentious issue in the negotiations was the selection of India's state-run Hindustan Aeronautics Ltd (HAL) as partner of Dassault to manufacture planes in India.
Rafale has expressed doubts about the technological capability of HAL to manufacture such a sophisticated fighter jet, the official said. A HAL programme to manufacture advanced jet trainers is running years behind schedule.
However, India has told French negotiators that provisions of entering into a joint venture with the HAL to produce fighter jets was non-negotiable and there was no question of involving any private company in the deal, the officials said.
The visit by the French president could further help speed up the negotiations, could help speed up the negotiations, the second official said.
He said both countries were committed to the deal, and Defence Minister A.K. Antony and Air Force chief N.A.K Browne were making it a top priority during the upcoming fiscal year that begins in April.