BAE Systems, Europe's largest defence company, is in BAE has identified India as its seventh “home market” after Britain, the United States, South Africa, Sweden, Australia and Saudi Arabia. It believes that, as India's economy grows, the State will want to re-equip its Armed Forces with more modern weapons.

BAE was unable to give details of how it might develop the HAL relationship, but it is possible that a joint venture company could be used to promote the sale of Eurofighter Typhoons.

The Indian Air Force is running a £6 billion competition to replace its ageing Russian jets and the Typhoon is one of a number of fighters being put forward.

Mr Turner's comments came as he delivered his last set of results as chief executive. He retires at the end of this month and will become chairman of Babcock.

In the first six months of this year BAE lifted sales by 12.5 per cent to £7.7 billion and operating profits rose by 23 per cent to £789 million.

Mr Turner's replacement - Ian King, the chief operating officer - said that there would an improved performance in the second half as sales had been skewed towards the end of the year.

This is because BAE reaches a number of key milestones in big projects, such as the sale of Typhoons to Saudi Arabia this year.

These milestones will trigger specific payments to the company. BAE has spent £216 million in Saudi this year as it builds its presence ahead of the start of Typhoon production.

There had been concern that the contract, which could be worth up to £20 billion, would be scrapped over Saudi anger at an investigation into BAE's relationship with the Kingdom.

A Serious Fraud Office (SFO) investigation into BAE's £43 billion al-Yamamah arms deal was halted at the end of 2006 after the Saudis threatened to withdraw co-operation on terrorism.

The High Court ruled this year that the Government should not have stopped the investigation on national security grounds, but that decision was overturned by the Lords this week.

Mr Turner said: “The Lords found that the Government had the right to take action. We have called for a full review of the evidence by the SFO and I think they will come to the conclusion we have done nothing wrong.”