By Manoj Kumar and Ross Colvin
NEW DELHI (Reuters) - Indian Defense Minister A.K. Antony is leaning toward barring Anglo-Italian helicopter firm AgustaWestland from doing business in the country because of a corruption scandal, but he could be outvoted by cabinet colleagues, several government sources said.
Some cabinet ministers and even officials within the defense ministry fear such a move could set back India's efforts to modernize its military, the sources told Reuters. India plans to spend $100 billion in the next decade on military hardware.
Publicly, Antony has said he is awaiting the results of a federal police investigation into the allegations of corruption, which AgustaWestland denies. But several defense officials said that based on evidence uncovered so far, the minister favored barring the firm from bidding for Indian defense contracts.
AgustaWestland, a division of Italian defense group Finmeccanica, faces allegations in Italy and India that it paid bribes to win a $750 million deal to supply 12 VIP AW101 helicopters to transport Indian political leaders.
Any decision on barring AgustaWestland will initially be taken by Antony, but it will need approval of a cabinet committee that includes Prime Minister Manmohan Singh, Finance Minister P. Chidambaram and foreign minister Salman Khurshid.
Behind the scenes, some cabinet ministers and defense officials have expressed concern that any move to ban yet another major defense firm could deal a blow to India's stuttering efforts to modernize its military.
Antony is nicknamed St. Antony for his anti-corruption zeal and reputation for probity. Blacklisting the helicopter firm could contain damage to the ruling Congress party, which fears the corruption allegations could become an issue in upcoming state and national elections.
The extent of the opposition in the cabinet to such a move is unclear, but if those opposing blacklisting muster a majority then Antony may have to look at less punitive measures, such as imposing a heavy fine. Everything hinged on what the probe by the Central Bureau of Investigation (CBI) into the deal uncovers, defense ministry officials said.
A cabinet minister confirmed to Reuters there were "divergent views within the government" over the issue.
"We don't want to over-react because we don't want to let this issue affect our defense preparedness," Khurshid, the foreign minister, told the Times of India newspaper in an interview in February.
The mere fact there is debate within the cabinet and the defense ministry over blacklisting is notable. It shows growing disquiet over an anti-corruption measure that analysts say has cost India dearly, reducing the pool of arms firms it can buy from and hampering efforts to replace obsolete equipment.
SIX ON BLACKLIST
India placed six defense companies on a blacklist last year after allegations that bribes were paid to win contracts.
These included Rheinmetall Air Defence, part of Germany's Rheinmetall AG, Israel Military Industries and Singapore Technologies Kinetics, which have been barred from doing business in India for 10 years.
Defence analysts said the ban on these and other companies had had a major impact on the Indian military. For example, the army has been unable to upgrade its artillery for decades.
"Can we afford to blacklist all the major defence companies?" said an Indian Air Force official.
"The blacklisting of (AgustaWestland) could limit competition in other deals, giving an opportunity to other bidders to raise the price," said another defence official.
Defence and security intelligence group IHS Jane's says Finmeccanica is pursuing aerospace programs worth $12 billion in India. AgustaWestland is a potential contender for the Indian Navy's planned $250 million Light Utility Helicopter program.
"In most areas of defence, there are a low number of potential suppliers," said Guy Anderson, editor of Jane's World Defence Industry. "Cutting a company out of the competitive process means you are not in the best position to get the equipment you actually want at the best price."
If a decision was taken to blacklist, AgustaWestland would likely be targeted rather than its parent company, Finmeccanica, whose subsidiaries are deeply embedded in India's defence sector, defence officials said.
The defence officials said they were waiting for AgustaWestland to respond to a detailed questionnaire on the allegations. The company has until Monday to reply.
Under an "integrity pact" signed with AgustaWestland, India can cancel the contract and bar the firm from bidding for any government contracts for at least five years.
In its quest to guard against corruption, India's defence procurement system was now extremely complex, bureaucrats had become risk averse and the military was not getting the equipment it needed, said Harsh Pant, an Indian defence expert at King's College in London.
Naresh Chandra, a former top bureaucrat who last year completed a review of national security, said blacklisting was not the way to go. His report is still confidential.
"The purchase procedure is not the end. The main end is to equip the armed forces in good time with the best you can get."
(Additional reporting by Nigam Prusty; Editing by John Chalmers and Raju Gopalakrishnan)