First of all, I've got a Defense Industry Daily article up that explains what's going on re: the U.S. offer to sell India F-16s and F-18s. The offer, and the situation, are a lot muddier than most people think.
If you want a truly excellent article that fills you in on the aftermath of Condi Rice's visit and some of the considerations at work, Indian magazine The Week has an outstanding piece that explains the ironies, tensions & opportunities. The Week comes across as very strongly Hindi-nationalist relative to other pieces I've read, so take that into consideration when reading. This defense analysis piece represents the opposite pole.
These decisions are never cut and dried, and the best learning comes from considering the different arguments... welcome to what Jinnderella calls "defenseology".
In related news, the US will participate in the "Cope india 2005" fighter exercises this November. You may have heard about the Indian Air Force having a lot of success against USAF F-15s in Cope India 2004, which was true; the linked article article explains why. Without taking away from the IAF's professionalism, I'm hoping for a more even exercise this year. That would tell us something about future fighter needs, at a time when more clarity is very helpful.
Personally, my bet is that India will turn the USA down - and buy 125 Mirage 2000-5 Mk2s to replace their accident-prone MiG-21s. Why? Several reasons.
Let's start with commonality and past experience. India just picked up 12 Mirage 2000-5s from Qatar the other day, and liked the performance of their earlier model Mirage 2000Cs in the 1999 Kargil crisis. They aren't eager to add new aircraft types, either, which makes some sense given the associated training and maintenance costs. Think of Southwest Airlines, which is famous for its fleet of nothing but Boeing 737s. The same cost logics apply in the military sphere.
The standardization factor could easily prove decisive all by itself, barring a level of offsets that would offer India a bigger prize in return - say, a major step forward for their domestic defense industry. Which may explain why India is asking the Americans about advanced technology transfers. BAE/Saab can't offer that with their excellent JAS-39 Gripen, so if standardization is a factor the existing shortlist shrinks to two: Mirage 2000 and MiG-29 Fulcrum.
Past experience isn't always positive, however. India also operates earlier versions of MiG's Fulcrum, but their experience with the MiG-29A wasn't all that good and it's being pressured re: India's carrier aircraft contract by the Sukhoi SU-27K (aka SU-33). This does not bode well for the MiG-29M's chances in the lightweight fighter deal - or for Mikoyan as a whole, which has fallen from the world's #1 builder of fighter jets to a company with few orders and little work in the pipeline. They really need this contract - and if they fail, it could be the beginning of the end for the company.
Which leaves the American fighters: F-16 Block 70 version, and F-18E/F Super Hornet. They have more room to "grow" than the Mirage 2000 in terms of upgrades, so that's a plus. On the other hand, you can't transfer everything - and India is understandably nervous about American weapons given past U.S. arms boycotts. Throw in the standardization argument, and the American fighters become longshot candidates even if some level of technology transfer is approved.
Which leaves Dassault's Mirage 2000-5 Mk2 as the probable last plane standing, to play the role of India's future light fighter counterpart to its beloved Sukhoi SU-30MKI heavy/strike fighter.
Like I said earlier, we still have a long way to go before this contract is awarded. What I'm telling you is which way I'm betting - and why. Have a look at the links in this article, and see if you come to the same conclusions.
UPDATE: Analyst Ravi Visvesvaraya Prasad neatly illustrates some of the key uncertainties on India's side in this June 9, 2005 India Times article: standardization, and worries about embargo.