NEW DELHI India's plan to buy 126 fighter-jets from Dassault Aviation (AVMD.PA) could be delayed as the two sides struggle to reach an agreement over the role of state-run Hindustan Aeronautics Ltd (HAL), two sources familiar with the matter said.
India picked the Dassault-made Rafale jet for exclusive negotiations in January 2012 after a hotly contested bidding war with rival manufacturers, but it is still to finalize the $15 billion deal, one of the world's largest defense import orders.
Under the initial terms of the proposed deal, Dassault was expected to provide 18 fighters in "fly-away" condition, and then let HAL manufacture the rest in India.
However, Dassault now wants two separate contracts to be signed - one for the ready-made ones, and another for the rest to be built by HAL, but India opposes that proposal, an Indian Defense Ministry official told Reuters.
"Dassault says HAL does not have the capacity and capability to assemble the aircraft," said the official, who declined to be identified because he is not authorized to speak to the media.
"HAL is our main public sector partner. And if needed, capacity and capabilities can be improved. But the proposal for two contracts is not agreeable to the government of India," he said.
The source said the dispute would likely delay finalizing the deal but not derail it. Indian Defense Ministry officials had earlier expressed the hope that the deal could be finalized by July.
"This kind of deal is complex. This issue is slowing down negotiations. The disagreement is on who guarantees the quality of the planes produced in India, HAL or Dassault," another source close to the matter said.
Dassault has declined to comment on the substance of the negotiations but has said it expects the deal to be signed before the end of 2013.
Dassault has agreed to supply manufacturing kits and equipment to HAL on time, but will not play a further role in manufacturing after that, the Indian Express newspaper said on Friday.
Negotiations between the company and the Indian government have completely stopped over the disagreement, the paper reported, without identifying its sources.
A Defense Ministry spokesman did not have any immediate comment.
According to a preliminary agreement between Dassault and the government, HAL will make 108 Rafale jets in India, while parts will be delivered by Dassault and its partners, Thales (TCFP.PA), Europe's largest defense electronics group, and aerospace group Safran (SAF.PA).
India, the world's biggest arms importer, plans to spend about $100 billion over the next 10 years upgrading its mostly Soviet-era military hardware.
However, a recent push by the Defense Ministry to increase local manufacturing of military equipment has renewed concerns about whether Indian companies have the advanced technology and trained staff to build sophisticated Defense equipment.
Dassault has previously expressed doubts about the technological capability of HAL to manufacture the Rafale. A HAL program to manufacture advanced jet trainers is running years behind schedule.
Rafale defeated the Eurofighter Typhoon to win the Indian government deal. The Typhoon is developed by a consortium of BAE Systems (BAES.L), Finmeccanica (SIFI.MI) and EADS EAD.PA.
(Additional reporting by Cyril Altmeyerhenzien in PARIS; Writing by Anurag Kotoky; Editing by Ross Colvin and Robert Birsel)