India to ease foreign investment rules in defence sector to boost manufacturing: Report

India plans to make it easier for foreign companies to invest in domestic defence firms, two government sources with knowledge of the matter told Reuters, as New Delhi looks to strengthen local manufacturing following last year’s conflict with Pakistan.

Under the proposed changes, the cap on foreign direct investment in defence companies holding existing licences under the automatic route — where government approval is not required — will be raised to 74 per cent from 49 per cent, the sources said.

Currently, foreign investors are permitted to own up to 74 per cent of an Indian defence firm under the automatic route only when companies are applying for new licences.

The government is also discussing removing a condition that allows foreign investment beyond 74 per cent only if it “results in access to modern technology”, a clause that has drawn criticism from experts for being vague and ambiguous.

Move would allow majority foreign ownership

The planned easing of rules, which has not been previously reported, is aimed at encouraging defence companies from partner countries to take majority stakes in Indian ventures, the sources told Reuters. They were not authorised to speak to the media and declined to be identified.

The reforms could be implemented in the next couple of months, they added.

Another condition set to be removed requires fully export-oriented defence manufacturers to establish domestic maintenance and support facilities, the sources said.

“This condition compelled companies to first set up a base for maintenance activities, which can now be outsourced by the export-oriented units, making it easier for them to attract foreign investment,” Amit Cowshish, a former defence ministry official, told Reuters.

Muted foreign investment so far

Several global defence firms already operate in India through joint ventures or strategic partnerships, including France’s Airbus, US-based Lockheed Martin and Israel’s Rafael Advanced Defense Systems. India also maintains extensive defence ties with Russia.

Despite this, foreign equity inflows into India’s defence sector have remained limited, accounting for $26.5 million of total foreign inflows of $765 billion over the 25 years through September 2025, according to government data.

India has sought to increase defence funding following a short but deadly conflict with arch-rival Pakistan last May, in which drones and fighter jets played a key role.

The defence ministry has sought a 20 per cent increase in spending in the budget for fiscal 2026/27 over the $75.36 billion allocated for the current year. Last year, the government said it aimed to nearly double domestic defence production to $33.25 billion and raise defence exports to $5.5 billion by 2029.

Defence exports rose 12 per cent year-on-year in 2024/25 to $2.6 billion, a record high, as India seeks to reduce its long-standing reliance on arms imports.

(With inputs from Reuters)