India Considering Further Liberalisation of Defence FDI Rules to Attract Global Manufacturers

India is considering another round of liberalisation of its foreign direct investment rules for the defence sector as the government looks to attract greater overseas capital, advanced technology and international manufacturers into the country’s rapidly expanding defence-industrial ecosystem.

The Department for Promotion of Industry and Internal Trade is currently holding consultations with stakeholders on possible changes to the existing FDI framework. Government officials have confirmed that some easing of the rules is under consideration, although no final policy decision or revised FDI notification has yet been announced.

The discussions come at a time when India is attempting to transform itself from one of the world’s largest importers of military equipment into a major centre for defence design, manufacturing and exports.

Current Defence FDI Rules Allow Up to 100% Foreign Investment

India has already progressively liberalised foreign investment in defence manufacturing.

Under the existing framework, foreign investment can reach 100% in the defence sector. Up to 74% FDI is permitted through the automatic route for companies seeking new industrial licences, while investment above 74% can be permitted through the government route where it is considered likely to provide access to modern technology or for other reasons recorded by the government.

Foreign investment remains subject to national-security scrutiny, including security clearance and Ministry of Defence guidelines.

The government also retains the power to examine foreign investments that could affect national security.

The present framework was introduced as part of reforms announced in 2020, when the automatic-route ceiling for qualifying defence investments was increased from 49% to 74%.

Government Now Examining Further Simplification

The latest consultations indicate that New Delhi believes there may still be regulatory barriers discouraging some international defence manufacturers from committing larger investments to India.

According to the latest government-linked reporting, DPIIT is examining possible easing of the existing conditions after consultations with stakeholders.

One issue discussed during earlier policy deliberations has been the difference between new companies seeking defence industrial licences and existing licensed manufacturers. The existing rules contain additional conditions for companies that already hold licences or have previously received government approval for defence FDI.

Bringing greater uniformity to these categories could potentially make it easier for foreign companies to increase their holdings in established Indian defence ventures.

Earlier policy discussions have also examined whether some of the conditions governing foreign investment above 74% could be simplified. However, the government has not yet formally announced the exact provisions that will be changed, and any specific new ownership threshold or automatic-route expansion should therefore be treated as a proposal rather than established policy.

Defence FDI Remains Relatively Small

The latest push is particularly significant because direct foreign investment recorded specifically under India’s defence-industries category remains relatively modest compared with the enormous scale of the country’s military procurement market.

According to figures cited during the latest policy discussions, defence industries attracted approximately US$32.29 million in FDI between April 2000 and March 2026.

The relatively small figure does not mean foreign defence companies have little involvement in India. International manufacturers participate through joint ventures, technology partnerships, component sourcing, aerospace manufacturing, engineering centres and Indian subsidiaries operating across categories that may be recorded under different industrial classifications.

Nevertheless, the defence-specific FDI number illustrates the government’s difficulty in converting India’s enormous procurement requirements into correspondingly large direct investments by foreign original equipment manufacturers.

Further liberalisation is intended to address that gap.

Why Foreign Defence Companies Want Greater Control

Defence manufacturing differs significantly from conventional manufacturing because companies must often transfer highly sensitive technology, proprietary manufacturing processes and intellectual property before production can begin.

Global defence companies may therefore be reluctant to transfer their most advanced technology to joint ventures in which they do not exercise sufficient management or ownership control.

A larger permissible foreign equity stake can make an Indian manufacturing operation more attractive because the overseas company obtains greater control over investment decisions, technology protection, quality assurance and export strategy.

For India, however, foreign ownership must be balanced against national-security considerations and the broader objective of developing independent domestic capabilities.

This explains why defence FDI has traditionally been governed more tightly than investment in most civilian manufacturing sectors.

Technology Transfer Could Be the Bigger Prize

The principal objective of further liberalisation would not simply be to increase the amount of foreign capital entering India.

Modern defence manufacturing requires access to sophisticated technologies in areas such as aero-engines, sensors, electronic warfare, advanced materials, precision weapons, propulsion, unmanned systems, military electronics and next-generation manufacturing.

India wants global companies to establish deeper production ecosystems within the country rather than merely selling complete military platforms manufactured abroad.

Foreign investment could help establish manufacturing facilities, engineering centres and supply chains capable of producing complex systems locally while progressively increasing Indian content.

Such facilities could also create opportunities for Indian private companies, MSMEs and start-ups to become suppliers to major international defence programmes.

India Wants Global Companies to Manufacture for Export

The government’s longer-term strategy is increasingly centred on making India not just a production location for the requirements of its Armed Forces but also a manufacturing base for international markets.

India’s defence exports increased from only ₹686 crore in FY 2013-14 to ₹38,424 crore in FY 2025-26, reflecting the rapid expansion of the country’s military-export ecosystem.

Private-sector companies contributed approximately ₹17,353 crore, or 45.16%, of exports during FY 2025-26, while Defence Public Sector Undertakings accounted for around ₹21,071 crore, or 54.84%.

The government is targeting ₹50,000 crore in annual defence exports by 2029, alongside defence production of around ₹3 lakh crore.

Greater foreign investment could support this objective if multinational defence companies begin integrating Indian factories into their global supply chains.

Instead of manufacturing exclusively for Indian military contracts, an Indian plant could potentially supply components, subsystems or complete products to customers in other countries.

Global Defence Companies Already Building in India

India has already attracted several major international defence companies into manufacturing partnerships with Indian firms.

Domestic companies now manufacture aircraft structures, helicopter components, missile systems, artillery-related equipment, aerospace assemblies and other sophisticated products for international customers.

Indian companies including Tata Advanced Systems, Larsen & Toubro, Bharat Forge, Mahindra Defence and several specialised aerospace manufacturers have built extensive partnerships with global defence companies.

The next policy phase could encourage international manufacturers to place more substantial parts of their production, engineering and technology-development operations in India.

This would complement India’s two Defence Industrial Corridors in Uttar Pradesh and Tamil Nadu, as well as programmes designed to expand domestic defence supply chains.

Liberalisation Will Not Mean Unrestricted Foreign Ownership

Even if FDI rules are relaxed further, defence investment is unlikely to become completely unrestricted.

The existing policy subjects foreign investment to security clearance and gives the government authority to review investments affecting national security.

Defence companies also operate under industrial-licensing requirements covering sensitive weapons, ammunition and military systems.

These safeguards are likely to remain central to any revised framework because defence manufacturing involves technologies and production capabilities directly connected with national-security requirements.

The policy challenge is therefore to make investment easier without weakening India’s ability to protect strategically sensitive technologies and supply chains.

FDI and Aatmanirbhar Bharat Are Not Necessarily Contradictory

Greater foreign investment may initially appear to conflict with India’s Aatmanirbhar Bharat programme, which seeks to reduce reliance on imported military equipment.

The government’s strategy, however, increasingly distinguishes between importing finished defence systems and bringing foreign technology and capital into India for domestic manufacturing.

If an international defence company establishes production in India, employs Indian engineers, sources components from Indian suppliers and manufactures systems locally, the resulting industrial capability can contribute to indigenisation even if the parent company remains foreign.

The effectiveness of such a policy ultimately depends on how much technology, intellectual property, manufacturing knowledge and supply-chain capability is created within India.

Foreign investment that simply establishes assembly operations would produce substantially smaller strategic benefits than investment involving advanced engineering and genuine technology transfer.

A Possible Next Stage in India’s Defence Manufacturing Reforms

India has undertaken a series of defence-industrial reforms over the past decade, including higher FDI limits, Positive Indigenisation Lists, greater preference for Indian-designed equipment, defence industrial corridors, reforms to industrial licensing, the iDEX innovation programme and increasing procurement from domestic industry.

Further liberalisation of FDI rules would represent another step in this broader transformation.

The immediate development, however, remains at the consultation stage. DPIIT is discussing the issue with stakeholders, and the government has not yet published the final structure of any revised regime.

The most important issue to watch will therefore be whether New Delhi simply simplifies procedural conditions under the existing 74%-automatic framework or introduces a more substantial change allowing foreign defence manufacturers greater ownership and operating flexibility.

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References

1. Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Government of India. Press Note No. 4 (2020 Series) – Review of Foreign Direct Investment (FDI) Policy in Defence Sector, issued September 17, 2020. The notification provides for 100% FDI in the defence industry, with up to 74% permitted through the automatic route for companies seeking new industrial licences and investment beyond 74% through the Government route, subject to prescribed conditions.
2. Department for Promotion of Industry and Internal Trade (DPIIT), Government of India. Consolidated FDI Policy Circular of 2020 – Section 5.2.6: Defence. The policy specifies a 100% FDI ceiling in defence manufacturing, with the automatic route available up to 74% and the Government route beyond 74% where investment is likely to provide access to modern technology or for other reasons recorded by the Government.
3. Department for Promotion of Industry and Internal Trade (DPIIT), Government of India. Foreign Direct Investment Reforms – Defence Sector. DPIIT notes that the defence-sector FDI ceiling was raised from 26% to 49% in 2014 and subsequently liberalised to permit up to 74% through the automatic route for companies seeking new industrial licences, with FDI beyond 74% and up to 100% permitted through the Government route.
4. Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry. Foreign Direct Investment Policy. DPIIT is the nodal department responsible for formulation and review of India’s FDI policy and conducts stakeholder consultations for the liberalisation and rationalisation of FDI regulations.

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