India's Finance Minister referred to the financial aid given by Britain to his country as nothing more than 'peanuts', it is claimed.
It is also claimed that Pranab Mukherjee and other Indian ministers tried to reject the money - around £280million a year - from the UK in 2011, but the British Government 'begged' them to take the money.
The Sunday Telegraph claims that the Indian government were disposed to reject the money in April last year, because of the 'negative publicity of Indian poverty' highlighted by the aid.
According to official transcripts, Mr Mukherjee said: 'We do not require the aid. It is a peanut in our total development exercises.'
Figures show India's economy is booming - and may eclipse Britain's economy within the next decade.
The row over aid to a booming country was exacerbated by the news last week that French firm Dassault Rafale was selected as the preferred bidder to supply 126 military jets to the Indian air force.
It was hoped the £13billion deal would be given to the UK - with Government officials claiming the £1billion of aid paid out to India over the last five years would help win the investment.
The British bid, by BAE Systems, which builds the Eurofighter Typhoon jet, was consigned to second place.
International Development Secretary Andrew Mitchell said in December that Britain’s controversial foreign aid programme was partly designed to win the bid.
The aid package is 15 times larger than the £18million France sent to India in 2009.
Asked to justify Indian aid last year, Mr Mitchell said: 'It's a very important relationship. The focus is also about seeking to sell Typhoon.'
The decision was also a setback for David Cameron, who visited India in 2010 with six Cabinet ministers and around 60 businessmen to try to establish Britain as the ‘partner of choice’ for India.
During Prime Minister's Questions in the House of Commons, Mr Cameron said he was 'disappointed' by the decision.
He said: 'We don't expect any job losses stemming from this decision and it does not rule out the Typhoon for India.'
He insisted BAE Systems was still in the hunt for the contract, despite losing the first round of bidding.
Indian officials said Dassault emerged in front because the Rafale jet was ‘much cheaper unit-wise’ than the Eurofighter.
It was reported that Dassault slashed its price demands to ensure the deal was done.
One Indian defence ministry source said: ‘The Indian air force, which is well-equipped with French fighters, is favouring the French.’ The Rafale jets will replace India’s ageing fleet of Russian MiGs.
According to financial advisers Merrill Lynch, India has 153,000 dollar-millionaires — a 20 per cent rise in a year, compared with Britain’s own paltry increase of less than 1 per cent.
Such is the economic power of India that it now gives out more foreign aid than it receives, and has handed over £3.5billion to cement relations with impoverished Africa.
Meanwhile, it invests huge sums in ambitious projects: £2billion will put the first Indian astronauts into space by 2016, and the annual defence budget tops £22billion, with a third aircraft carrier now under construction in an Indian shipyard.
