India to ease rules to boost foreign investment in domestic defence firms, sources say

NEW DELHI: India plans to make it much easier for foreign firms to invest in defence companies, two government sources with knowledge of the matter said - a move that would align with efforts to boost domestic manufacturing after last year’s conflict with Pakistan.

The cap on foreign direct investment in defence firms with existing licences under the so-called automatic route, where government approval is not required, is set to be raised to 74% from 49%, the sources said.

Presently, foreign investors can only own 74% of an Indian defence business under the automatic route when the companies are seeking new licenses.

The government is also in discussions about dropping a condition that stipulates foreign investment beyond 74% is only allowed if it “results in access to modern technology” - wording that has been criticised by experts as vague and ambiguous.

Move would allow foreign firms to take majority stakes

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

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

India’s trade and defence ministries did not respond to Reuters’ requests for comment.

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Another condition set to be dropped is a requirement for fully export-oriented defence manufacturers to set up 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,” said Amit Cowshish, a former defence ministry official.

Muted investment thus far

Foreign defence firms that currently have operations in India through joint ventures or strategic partnerships include France’s Airbus, Lockheed Martin of the US and Israel’s Rafael Advanced Defence Systems. India also has extensive defence ties with Russia.

That said, foreign equity inflows into India’s defence sector have been muted, accounting for $26.5 million of total foreign inflows of $765 billion in the 25 years through September 2025, according to government data.

India has sought to bolster funding for the defence sector following a short but deadly conflict with arch-rival Pakistan last May, in which drones and fighter jets took centre stage.

The defence ministry is asking for a 20% increase in spending in the budget for fiscal 2026/27 over the $75.36 billion allotted for the current year. Last year, the government also said it aimed to nearly double domestic production of defence equipment to $33.25 billion and boost defence exports to $5.5 billion by 2029.

Defence exports grew 12% year-on-year in 2024/25 to $2.6 billion - a record high as India seeks to shed its long-standing status as one of the world’s largest arms importers.