India is poised to liberalise its foreign direct investment (FDI) rules in the defence sector, a strategic shift aimed at attracting greater global participation in its domestic manufacturing ecosystem. According to two government sources familiar with the deliberations, the cap on FDI under the automatic route for defence firms holding existing licences will rise from 49% to 74%.

This adjustment would enable foreign entities to secure majority stakes without prior governmental approval, marking a significant departure from current restrictions.

Presently, foreign investors may hold up to 74% equity in Indian defence businesses only when those firms apply for new licences. Beyond this threshold, investments require explicit government nod, justified by the imperative of accessing modern technology—a clause often decried for its vagueness. 

The proposed reforms seek to eliminate this condition entirely, streamlining approvals and reducing bureaucratic hurdles that have long deterred inflows.

In parallel, discussions are underway to remove another stipulation: the mandate for fully export-oriented defence manufacturers to establish domestic maintenance and support facilities.

As noted by Amit Cowshish, a former defence ministry official, this requirement previously forced companies to invest upfront in infrastructure, which could now be outsourced. Such flexibility is expected to make Indian ventures more appealing to international partners.

The timing of these changes aligns with India's renewed push for self-reliance, or Atmanirbhar Bharat, in defence production, galvanised by last May's brief but intense conflict with Pakistan. That skirmish highlighted the centrality of drones and fighter jets, underscoring vulnerabilities in supply chains and the need for robust indigenous capabilities. By easing FDI norms, New Delhi aims to foster joint ventures that accelerate technology transfer and manufacturing scale-up.

Foreign defence giants already active in India through partnerships include France's Airbus, America's Lockheed Martin, and Israel's Rafael Advanced Defence Systems, alongside longstanding ties with Russia. Yet, actual FDI inflows remain disappointingly low: a mere $26.5 million against total foreign investments of $765 billion over the 25 years to September 2025. This paltry figure reflects regulatory rigidity and the sector's strategic sensitivities.

The muted investment scenario persists despite policy tweaks since 2016, when the automatic route was first introduced up to 49%. Critics argue that ambiguous riders, such as the technology access proviso, have stifled momentum. The impending reforms, potentially enacted within months, signal a bolder stance, inviting majority ownership to catalyse private sector dynamism.

India's defence ministry has sought a 20% budget hike for fiscal 2026/27, building on the current $75.36 billion allocation. This fiscal impetus dovetails with ambitious targets: doubling domestic defence production to $33.25 billion and elevating exports to $5.5 billion by 2029. Exports already hit a record $2.6 billion in 2024/25, up 12% year-on-year, as the nation pivots from its status as the world's top arms importer.

By permitting 74% FDI automatically, India positions itself as a magnet for global majors eyeing Asian manufacturing hubs. This could spur assembly lines for advanced systems like missiles, UAVs, and avionics, aligning with priorities in hypersonics and AI integration.

For foreign firms, majority stakes offer control over operations, mitigating risks in a market long plagued by offsets and localisation mandates.

Challenges linger, however. Ensuring national security amid higher foreign equity will demand robust oversight, perhaps through enhanced vetting for sensitive technologies. Critics may question whether diluted conditions truly guarantee tech inflows, but proponents see this as pragmatic evolution, mirroring successful models in sectors like automobiles.

These reforms could transform India's defence industrial base, blending foreign capital with homegrown innovation. As exports surge and production localises, New Delhi edges closer to strategic autonomy, reducing import dependence amid volatile geopolitics. The move underscores a maturing defence economy, ready to compete on the global stage.

Based On Reuters Report