* India looking to develop domestic defence industry
* Minister says public sector firms ought to be involved
* Defence Ministry to look into complaint
By Anurag Kotoky
NEW DELHI, Oct 9 (Reuters) - A plan to attract private Indian firms to help build military aircraft could be delayed after a cabinet minister said the proposal was unfair to state-run companies.
India has emerged as the world's biggest arms importer as it tries to update archaic weapons systems to keep up with neighbours China and Pakistan in a $100 billion modernisation drive.
The government wants to encourage private Indian companies to partner with foreign suppliers to reduce its reliance in imports and help develop a domestic defence industry that has so far been beholden to underperforming public sector companies.
In May, the Defence Ministry launched a tender to buy and build 56 military transport planes to replace an ageing fleet of Avro jets at an estimated cost of 119 billion Indian rupees ($1.9 billion.) The ministry said the deal must be struck between a foreign supplier and an Indian private firm.
However, Heavy Industries Minister Praful Patel said on Wednesday that the public sector utilities (PSUs) already making products for the armed forces should have been given a chance to take part in the bidding process.
"All I am saying is, our companies, the PSUs, are extraordinary companies which have great capabilities and they have time-tested proven abilities and they have been doing this job for years and years," Patel told a television station after writing a letter to the defence minister.
"There is no reason why an Indian PSU should have an exclusion in the contract," Patel said.
The Defence Ministry said it would now look into Patel's complaint, potentially delaying the tender process. Many of India's foreign arms purchases run into long delays because of accusations of corruption and complicated bureaucracy.
Despite Patel's confidence in India's state-run defence manufacturers, their track record is patchy. Hindustan Aeronautics Ltd (HAL), the country's main defence aeronautics supplier, has been developing a light combat aircraft since the early 1980s with no success so far.
India's $15 billion deal with France's Dassault Aviation to buy 126 Rafale fighter jets is yet to be finalised, partly because the French company doubted HAL, its mandatory partner, had the technological capability to manufacture such a sophisticated fighter jet.
The Indian air force told the Defence Ministry in July it did not want to buy a trainer plane under development by HAL, preferring a cheaper and more efficient imported plane.
Air Force chief N.A.K. Browne said on Friday HAL's attempt to build a trainer jet was "extravagant". He said the company's prototype was not powerful enough, according to a report by news agency the Press Trust of India published on the Economic Times website.
HAL also made the engines in India's collection of MiG fighter jets, commonly known as flying coffins because of their appalling crash record. More than half the MiG fleet of 872 aircraft has been lost to crashes that killed 171 pilots, Defence Minister A.K. Antony told parliament last year.
HAL has said it significantly contributes to the armed forces with locally made products, and is revamping its capabilities and capacities as part of a modernisation drive.
Many blue chip Indian companies, including billionaire Mukesh Ambani's Reliance Industries, Larsen & Toubro Ltd (L&T) and Mahindra and Mahindra have been gearing up to take part in India's push to build a local arms industry.
The tender to replace the Avro fleet was sent to five foreign companies, including Boeing, Lockheed Martin and EADS CASA.
The government expected deliveries to start within a year of finalising the contract, Antony told parliament this year.