New Delhi: India has chosen two European companies as the final contenders for a potential 42,000 crore deal to buy 126 combat aircraft for the Indian Air Force (IAF), billed as the country’s largest defence contract yet, rejecting two firms from the US, its strategic partner.

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French defence company Dassault Aviation SA’s Rafale and the European Aeronautic Defence and Space Co.’s (EADS) Eurofighter Typhoon are on the pruned shortlist for the medium multi-role combat aircraft (MMRCA) order, defence ministry spokesman Sitanshu Kar said on Thursday.

“We have crossed a major milestone in the process of acquisition of the MMRCA for the IAF," Kar said.

Left in the race: A file photo of a Eurofighter Typhoon (top) and a Dassault Rafale. Indian defence ministry officials say the two shortlisted companies have been asked to extend their commercial bids till 31 December. Photo AFP

Defence ministry officials said the two shortlisted companies have been asked to extend their commercial bids till 31 December. The commercial bids were set to expire on Thursday. Officials confirmed that the other four contenders have been asked to not extend their bids.

“The final deal is likely to be signed by the end of the current financial year," said a defence ministry official who did not want to be identified. “At present, an exercise of benchmarking is on."

Benchmarking refers to process in which a “range of reasonable cost of acquisition" is determined, the official explained.

“The four companies that have not made the shortlist have been rejected on technical grounds. Grounds for rejection have been conveyed to them individually," he said without specifying the reasons.

Analysts agreed technical considerations had dictated the shortlist for the MMRCA order, overriding others aspects aimed at boosting India-US relations that have been steadily warming in the past decade and upgraded to the level of a “strategic partnership".

“The fact that the Americans are out of the shortlist clearly indicates that the IAF and the Indian government went purely by technical parameters, and not so much by strategic considerations," said Anit Mukherjee, an analyst with the Institute for Defence Studies and Analyses (IDSA) in New Delhi. “Having said that, the American absence could lessen India’s leverage while negotiating costs."

Retired brigadier and defence analyst Rahul K. Bhosale agreed the American aircraft were technically inferior to the Europeans jets. “India needs a 4.5-plus generation aircraft, which is what the Eurofighter and the Rafale offer, while Boeing and Lockheed Martin are reaching the end of their lifecycles," he said.

Statements from Saab AB, Boeing and Lockheed Martin confirmed their exit from contention in one of the most highly prized defence contracts in recent times.

“We have received this decision and will closely monitor the future process and provide additional information if requested by the Indian ministry of defence," SAAB said in a statement.

“Boeing today was notified that our Super Hornet proposal for India’s MMRCA competition was not shortlisted in the initial down select. We are obviously disappointed with this outcome," the Seattle-based company said. “Our next step is to request and receive a debrief from the Indian Air Force. Once we have reviewed the details, we will make a decision concerning our possible options, always keeping in mind the impact to the Indian Air Force."

US ambassador to India Timothy Roemer said the US was “deeply disappointed by this news" that Boeing and Lockheed Martin were not among the finalists.

“I have been personally assured at the highest levels of the Indian government that the procurement process for this aircraft has been and will be transparent and fair," he said in a statement.

Roemer separately announced his resignation on Thursday citing personal reasons.

Most of the IAF’s inventory is of Russian origin. In recent years, India has been sourcing its military hardware from other countries including Israel, Britain and France.

In March, a report released by Swedish think tank, the Stockholm International Peace Research Institute (Sipri), said India had overtaken China as the world’s largest arms importer, receiving 9% of the volume of global arms transfers in 2006-10.

As per the defence procurement procedure (DPP), under which India makes its acquisitions from foreign vendors, the shortlist would be followed by the opening of commercial bids. On the basis of the commercial bids, the defence ministry would determine the lowest (L1) bidder. Once the L1 bidder is determined, the cost negotiation process would begin with the bidder.

The combat aircraft deal is expected to generate offsets to the tune of at least 18,000 crore.

India imposes counter-trade obligations on original equipment manufacturers that are awarded defence contracts worth more than 300 crore by way of production of components in India.

To meet this obligation, foreign vendors partner with Indian firms. At present, the offset obligation varies between 30-50% of the value of the foreign exchange being spent on the acquisition. In the case of the proposed contract, the value is 50%.