NEW DELHI: The French government has rejected Indian negotiators' demand for a 50 per cent offset clause citing sharp cost escalation but offered to participate in 'Make in India' projects to carry forward the talks for 36 Rafale fighter jets that have hit turbulence.

Defence sources said India's insistence on the offset clause, tweaking of weaponary technology and plans to set up two bases for Rafale fighter jets would lead to cost escalation .

Offset policy was first introduced as part of the Defence Procurement Procedure (DPP), 2005, under which a foreign company has to invest back a portion of the deal into India.

"The 50 per cent offset clause was part of the original tender that was floated for 126 fighter jets. The French President and Indian Prime Minister have now decided to go in for a direct purchase of 36 Rafale jets. So, how can 50 per cent offset clause be asked when the French are offering the fighters at the same rate at which its Air Force is buying," defence sources said.

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They added the French have instead offered to undertake 'Make in India' initiatives. "The French can look at the option for making Falcon business jets in India or even the Rafales for future besides other projects," the sources said, adding the French government has made it clear that their companies would like to be part of 'Make in India' initiative.

The sources said the offset clause will simply drive up the cost of each aircraft.

It is not just the offset clause that the French are worried about. Indian Air Force wants to integrate a Israeli helmet mounted display with the Rafale fighter jets besides tweaking the weaponry technology so that the aircraft can fire a missile other than what the Rafales carry. The missile, sources said is of American make.

"The changes asked for are not like changing tyres in cars. It takes time, effort and money, all of which will again drive up the cost," the sources said.

