India is insisting that France's Dassault Aviation take full responsibility for the production of the aircraft at Hindustan Aeronautics Ltd or HAL, the state-run facility in Bangalore, said Defence Ministry officials.
France has said it will help HAL stick to delivery schedules, but that it cannot give guarantees for production of the aircraft made at a facility over which it has no administrative or expert control.
Military experts say the deal could cost India $20 billion (around Rs 1.2 lakh crore), double the original estimate, because of the benchmarking of aircraft prices, a sharp drop in the value of the rupee and a roughly five percent annual cost increase.
For the French, the deal would be a major boost for domestic defence manufacturing, with the first 18 Rafale planes built in France and the remaining 108 produced in India.
For the Indian Air Force, the planes are critical to arrest a decline in its operational preparedness, down to about 30 active fighter squadrons compared with a government-approved strength of 42.
Half of the operational fleet are Mig-21 and MiG-27 planes due to retire beginning this year until 2024, a parliamentary defence committee said in a report last month, stressing the need for an early induction of new combat planes.
"It would be a big blow to the armed forces. The armed forces have been banking on the Rafale for a long time. They have said there is no plan B," said Rahul Bedi, a defence analyst at IHS Jane's.
The Rafale fighter beat the Swedish Gripen, the Russian MiG-35, the US-built F-18 and F-16 and, finally, the Eurofighter, in a decade-long selection process for a new Indian multi-role combat aircraft, as Dassault was the lowest bidder on up-front and lifecycle costs over 40 years.
But three years on, the sides are far from signing the contract and an Indian defence source said price negotiations were on hold until the issue of licensed production was resolved.
Both sides are keen to reach a conclusion before Prime Minister Narendra Modi visits France in April.
Dassault and the French defence ministry declined to comment.