A $15.2-million contract between a subsidiary of India-based Tata Consultancy Services and an American state agency has been cancelled, falling victim to politics in view of elections in the US next year.

Indiana state's Governor Joe Kernan, a Democratic candidate for elections due in November next year, has ordered the State Department of Workforce to cancel its contract with Tata America International Corp, a subsidiary of TCS, to upgrade state computers processing unemployment claims.

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Kernan said on Friday that the agency's request for competitive proposals had been put together and advertised in a way that "virtually knocked Indiana companies out of the running," Indianapolis Star reported.

A spokeswoman for TCS was quoted as saying that this was a decision for the state of Indiana to make, and TCS will comply.

No Indiana firms had submitted bids for the contract, the Star said. "That is not the way I choose to do business," it quoted Kernan as saying.

Top aides to the then-Governor Frank O'Bannon had signed on the politically sensitive, four-year contract before his death on September 13. State officials got a number of letters and phone calls complaining about the contract after the Star wrote about it on September 29.

State officials say the computer overhaul, once completed, should speed the processing of unemployment claims, as well as save postage and reduce hassles for businesses that pay unemployment taxes.

Tata America International Corp won the Department of Workforce Development contract over two US-based companies -- Accenture LLP and Deloitte Consulting LP.

Tata's proposal was $8.1 million lower than the next-most-competitive bid. At that time the state officials had said that it (TMI) was best suited to their needs, the Star reported.

During the project, as many as 65 contract employees were to work in the Indiana Government Center alongside 18 state workers.

Tata had said it would hire local subcontractors and do some local recruiting, but most workers were to come from India, the paper reported.

Unemployment officials, the Star said, had acknowledged that hiring a firm that competes with US companies might appear to run counter to their legal responsibility to put Indiana workers first.

But they argued that the contract would save taxpayers millions of dollars -- and insisted the savings wouldn't come at the expense of jobs in Indiana.

Lieutenant Governor Kathy Davis, who leads the state's economic development efforts, told the paper that state government needs to do a better job of giving Indiana companies lead on major projects.

Davis and Kernan said a new initiative, 'Opportunity Indiana', will be launched to ensure the state buys even more goods and services within Indiana.

"As leaders, we have an obligation to build the capacity of our businesses here at home. This is in no way saying there's anything wrong with the company. We're taking another look at the state's procurement practices as a whole," Kernan said.

Kernan's decision, made with strong encouragement from several House Democrats, reverses an earlier decision by Alan Degner, the state's Workforce Development Commissioner.

Degner had called the contract "a binding agreement" with Tata America.

Degner said a "convenience clause" in the contract allowed the state to cancel it without financial penalty.

In the United States, Tata operates as TCS America. The state is awaiting a bill from TCS for training its state workers since October 28.

Degner said company officials were disappointed to get his call on Friday but understood that state officials had a right to end the deal. He said TCS will not be excluded from the work when new proposals are sought in the months ahead.

Expressing dismay at the cancellation of the contract, National Association of Software and Service Companies said: "Such moves, which inhibit free trade in the sector, are not in keeping with the increasing trend towards globalisation."

Citing that research as having already established that free trade in IT services was of mutual benefit to all parties and that offshoring had led to substantial gains to the US economy, Nasscom said it would continue to engage in dialogues with US policy makers and opinion makers.