India has canceled a €560 million ($407 million) contract to buy high-end helicopters from AgustaWestland, a subsidiary of Finmeccanica, in move that underlines the unpredictability of one of the world's biggest defense markets.
Sitanshu Kar, a ministry spokesman, said the agreement had been "terminated with immediate effect" because of "integrity-related issues" in a contract that had been dogged by allegations of corruption.
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The cancellation highlights the uncertainties of the growing Indian defense market, traditionally dominated by Russian supplies but increasingly attractive to European and U.S. companies. It also marks another blight on a corruption-ridden term of office for Manmohan Singh, India's prime minister, badly sullied by telecoms and natural resources scandals.
India has become one of the world's largest buyers of arms as it modernizes its defense forces. It is also considered one of the hardest markets in which to gain a foothold. Contracts take a notoriously long time to come to fruition and political sensitivities surrounding arms purchases have run high since corruption allegations related to the supply of Bofors field guns undermined the government of the late Rajiv Gandhi in the 1980s.
A sudden reversal over a high-profile contract like this will give heart to bids by the Euro-fighter consortium and Saab's Gripen fighter aircraft, which were beaten by Dassault's Rafale two years ago to supply the Indian Air Force with a new fleet of 126 multi-role combat fighters in a contract worth about $20 billion.
David Cameron, the U.K.'s prime minister, has lobbied the Indian government in an attempt to keep Eurofighter's Typhoon in contention. While Saab remains confident that the less expensive Gripen could regain appeal after India's economic performance has weakened.
Finmeccanica, an Italian state-controlled defense and industrial conglomerate, said it had not received any official formal communication regarding the cancellation of the contract, reported Ansa, an Italian newswire. A spokesperson for the company was not available for comment.
Indian ministers have long threatened to terminate the agreement in the wake of accusations that representatives from AgustaWestland bribed officials, contravening a so-called "precontract integrity pact" in the 2010 deal.
India's main anti-corruption agency, the Central Bureau of Investigation, began a probe into the deal last year, while A.K. Anthony, the defence minister, in February threatened to bring criminal charges and "blacklist" the companies from future contracts.
Allegations over the deal, which would have supplied 12 luxury helicopters for the use of senior Indian dignitaries, also led to the arrest of Giuseppe Orsi, chairman and chief executive of Finmeccanica, Italy's biggest defence company by sales, by Italian police in February.
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Mr Orsi and Bruno Spagnolini, former head of the AgustaWestland subsidiary, deny any wrongdoing. Their trial opened in July last year in a court in northern Italy.
India's decision comes at a sensitive time for Mr Singh's administration, which is preparing for national elections in which it is likely to be attacked by political opponents for presiding over increased corruption.
Analysts said the decision to cancel the contract at the beginning of the new year was part of a broader plan to appear decisive in the face of such accusations.
"It seems that in advance of the election they have woken up to the need to act on this, and are now trying to burnish their anti-corruption credentials at the last minute," said Brahma Chellaney, a strategic affairs analyst at the Center for Policy Research think-tank in New Delhi.
The supply contract was regarded as an important step for Finmeccanica, which is overhauling its subsidiaries in order to reduce debt and losses, in acquiring a foothold in the fast-growing Indian defense market. The company was also bidding to supply AW119 helicopters to the country's armed forces.