India to Ease FDI Rules for Defence Sector

India's government is preparing to increase the cap on foreign direct investments from 49% to 74% for military industries which have licenses currently under the automatic route. They are also preparing to eliminate some of the other dissuasive measures for potential investors, exclusively reported by Reuters. 
This initiative is part of a wider effort to accelerate growth in local manufacturing due to last year's hostilities between Pakistan and India. Currently, foreign investors can hold up to 74% stakes in only those companies applying for new licenses. 

By encouraging defence partner nations to take control of Indian companies, India is signalling to the world that it wishes to strengthen ties with defence partner nations within its own borders through the creation of defence sector partnerships.

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Key Rule Changes Planned

The Government plans to remove the current requirement that investment beyond 74% requires the introduction of modern technologies, which many have found to be ambiguous or vague. Companies producing military products for export will also be allowed to outsource any maintenance service requirements required by Indian law.

Proposed reforms to foreign investment rules should be ready for implementation within a few months. Thus, it provides the opportunity for foreign investment in military products to be made without having to obtain prior government approval for the establishment of government operations.

Past Investment Trends

India has attracted only $26.5 million in foreign equity for the defence sector as compared to a cumulative inflow of $765 billion in 25 years (as of September 2025). Joint Venture Collaborations include Airbus (France), Lockheed Martin (USA), and Rafael Advanced Defence Systems (Israel). India has strong ties with Russia regarding defence development. 

Inflows remain limited, primarily due to structural challenges, some of which will be addressed through the new reform measures.

Strategic Context Post-Conflict

The most recent short-term conflict with Pakistan occurred in May of last year. The short-lived conflict involved the use of drones and fighter aircraft, and has increased support toward defence funding initiatives. 

The Ministry of Defence is also requesting that the Budget for the Fiscal Year (FY) 2026-27 reflect an increase of 20% over FY 2025 of $75.36 billion. Therefore, the Ministry's plan is to nearly double the total value of all domestically produced defence equipment to $33.25 billion and increase the total value of defence exports to $5.5 billion by 2029. 

By changing to Foreign Direct Investment (FDI) flows, India hopes to decrease its dependency as one of the largest global importers of defence equipment.