Government weighs raising defence FDI cap to 74 pc in Budget push

The government is mulling a far more liberalised foreign direct investment (FDI) regime for its defence sector in the forthcoming budget.

Top officials said that among a bunch of Budget proposals is a move to raise the FDI limit to 74 per cent under the automatic route for existing licensed defence manufacturers.

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“The move aims at accelerating technology inflows, joint ventures and domestic production in a strategically sensitive industry. We need to woo both capital and new technology into high-tech defence areas and this is one step which is being actively considered,” officials said.

The move would lift the current ceiling of 49 per cent for such firms and allow foreign investors to acquire majority stakes without requiring prior approval from either the Reserve Bank of India or the government.

Currently, only new firms coming into high-tech defence manufacturing can apply for a 74 per cent FDI under the automatic route.

Officials familiar with the discussions said the change is “also intended to create parity between new and existing licence-holders, while simplifying conditions that have long been seen as ambiguous or cumbersome.”

The government is also considering dropping requirements such as the need to demonstrate access to “modern technology” for foreign investments beyond 74 per cent, which have often led to “subjective interpretations” affecting investments in key components needed for the defence industry.

Besides giants like Lockheed Martin, GE, Thales, Dassault, Rostec conglomerate, the move is expected to help smaller firms making components and accessories for defence industry buy into Indian component manufacturing.

European defence firms, which may feel reassured by the Security and Defence Partnership Agreement signed earlier this week and the ‘security of information’ agreement currently under negotiation, could be among the first to use the new facility, officials said.

India currently imports around 70 per cent of its military hardware, despite rising defence budgets and an ambitious push to build an export-oriented domestic industrial base.

Analysts said allowing up to 74 per cent FDI under the automatic route would enable global defence majors to secure controlling stakes more quickly, potentially unlocking larger capital commitments, faster decision-making and deeper technology transfers.

Analysts see the move positively impacting larger groups such as Tata Advanced Systems, Mahindras, Larsen & Toubro as also smaller and mid-sized licensed manufacturers that are seeking capital to scale up production and exports.

Proponents argue this could lead to the creation of globally competitive manufacturing hubs in India, reduce dependence on imports and strengthen local supply chains. “The move can be expected to bring the exporters into India, with local partners and create an expanded defense innovation and production eco-system,” officials said.

However, security vetting mechanisms would continue to apply, and full foreign buyouts of Indian defence companies are considered unlikely.