India Set to Liberalise Defence FDI Norms to Attract Global Investment

India is preparing to significantly ease foreign direct investment (FDI) norms in its defence sector, signalling a decisive shift in policy aimed at attracting global capital, advanced technology, and long-term strategic partnerships. According to reports, the government is considering allowing foreign investors to hold up to 74 per cent stake under the automatic route in defence companies that already possess manufacturing licences. This change would remove the requirement for prior government approval, making investment procedures faster and more predictable for international defence firms.

The proposed reforms mark another step in India’s broader effort to strengthen domestic defence manufacturing while reducing dependence on imports. By enabling higher foreign ownership, policymakers aim to integrate Indian defence firms more deeply into global supply chains and encourage multinational companies to treat India as a production base rather than merely a sales market.

A staff cleans Akash, a medium-range mobile surface-to-air missile defense system developed by the Defence Research and Development Organisation (DRDO). India currently uses the Akash Air defence system, SPYDER air defence system, Barak-8 MK-SAM, Igla-S, 9K33 Osa AK, 2K12 Kub and QRSAM. AFP | Firstpost

Addressing Long-Standing Investor Concerns

One of the most significant elements of the proposed reform is the removal of the condition that allowed foreign investment beyond 74 per cent only if it resulted in access to “modern technology.” This clause has long been criticised for its ambiguity, with investors often uncertain about how the government defines or evaluates such technology transfers. Eliminating this requirement is expected to provide greater clarity and confidence to foreign companies considering large-scale investments.

In addition, the government is reportedly reviewing operational requirements for export-oriented defence manufacturers. Firms that produce primarily for overseas markets may no longer be mandated to establish domestic maintenance and support facilities, allowing them to outsource such functions. This relaxation could lower operational costs and make India a more attractive destination for defence manufacturing aimed at global markets.

Why Defence FDI Matters for India

Despite strong strategic relationships with major defence exporters such as the United States, France, Israel, and Russia, foreign investment in India’s defence sector has historically remained minimal. Over the past two and a half decades, cumulative defence FDI has been strikingly low, reflecting investor hesitation caused by policy restrictions, ownership caps, and regulatory uncertainty.

The current push to liberalise FDI norms is driven by both economic and strategic imperatives. Recent regional security challenges and the need for rapid modernisation have underscored the importance of a robust domestic defence industrial base. Allowing foreign partners greater control and ownership is seen as a way to accelerate technology absorption, improve manufacturing standards, and enhance India’s defence preparedness.

Alignment with ‘Make in India’ and Export Goals

The proposed reforms align closely with flagship initiatives such as Make in India and Atmanirbhar Bharat, under which defence manufacturing has emerged as a priority sector. India’s defence production has grown steadily in recent years, with domestic output reaching record levels and defence exports expanding to new markets in Asia, Africa, and Latin America.

The government has set ambitious targets to further increase defence production and substantially boost exports over the coming years. Liberalising FDI norms is expected to play a critical role in achieving these goals by bringing in capital, expertise, and access to global distribution networks.

Industry Response and Global Context

Industry experts and analysts have largely welcomed the proposed changes, viewing them as a necessary correction to make India competitive with other defence manufacturing hubs. Higher foreign ownership limits provide international firms with greater operational control and long-term investment security, which is particularly important in a sector characterised by high capital costs and long development cycles.

Globally, defence manufacturing is increasingly driven by cross-border collaboration and shared production ecosystems. India’s move to ease FDI restrictions reflects an understanding that strategic autonomy can coexist with global partnerships, provided domestic capabilities are strengthened alongside foreign participation.

The MGMM Outlook

India’s move to liberalise defence FDI norms reflects a clear recognition that building a strong and future-ready defence manufacturing ecosystem requires deeper global integration. Allowing higher foreign ownership under the automatic route, while removing ambiguous conditions linked to “modern technology,” addresses long-standing investor concerns that have held back meaningful capital inflows. These proposed changes signal policy maturity, indicating that India is prepared to move beyond a buyer–seller dynamic and position itself as a serious manufacturing and innovation hub within global defence supply chains.

At the same time, the reforms align with broader national objectives of strengthening domestic capabilities, reducing import dependence, and expanding defence exports. Easing operational requirements for export-oriented manufacturers and offering greater regulatory clarity can enhance India’s competitiveness against established defence production hubs. As geopolitical uncertainties grow and the need for rapid modernisation intensifies, this policy shift underscores an understanding that strategic autonomy is best achieved through a balance of indigenous capacity and credible global partnerships, reinforcing both national security and long-term economic resilience.

(Sources: Firstpost, Economic Times, Moneycontrol)