Government Set to Reform FDI Norms to Boost Defence Production

Government Set to Reform FDI Norms to Boost Defence Production

Why in News? 

According to a Reuters report, the Government of India is preparing to reform foreign direct investment (FDI) norms in the defence sector to spur domestic manufacturing and attract global partners.

India’s Current FDI Policy in the Defence Sector

• Under the current policy, foreign direct investment (FDI) in India’s defence manufacturing sector is allowed up to 74 % under the automatic route. This means no prior government approval is needed for investments up to this level, although companies must demonstrate access to modern technology in eligible cases.
• Investments beyond 74 % require government approval and undergo a rigorous review. These proposals are typically assessed based on their contribution to advanced technology access or their strategic importance to India’s defence ecosystem.
• The automatic route permits foreign investors to enter the sector without government intervention, provided they meet prescribed conditions. In contrast, the government route requires approval from the Ministry of Defence and DPIIT, ensuring that all proposals align with national security priorities before clearance.
• Historically, India allowed only 49 % FDI under the automatic route before 2020. In September 2020, this threshold was increased to 74 % for new industrial licences, aiming to attract larger foreign investments into domestic defence manufacturing.
• Previously, defence enterprises had to maintain 51 % Indian ownership, and a three-year equity lock-in period applied. These restrictions have now been removed, providing greater flexibility in shareholding and investment structures.
• All FDI proposals must still adhere to security guidelines and industry-specific licensing requirements, governed by the Industries (Development and Regulation) Act, 1951, and the Arms Act, 1959, particularly for ammunition and related segments.
• The Department for Promotion of Industry and Internal Trade (DPIIT) and Ministry of Defence jointly oversee the implementation of defence FDI rules. DPIIT issues updates on sector caps and routes, while the Ministry of Defence evaluates proposals under the government route.
• India’s defence FDI framework operates within larger initiatives like “Make in India” and the Defence Procurement Procedure, aiming to strengthen domestic manufacturing, encourage exports, and increase private sector participation in defence production.

Proposed Changes to India’s FDI Norms in Defence Sector

• Increase in Automatic Route FDI Cap: The government plans to raise the FDI limit from 49 % to 74 % under the automatic route for defence companies with existing licences. This change allows foreign investors to hold majority stakes without prior government approval, simplifying participation and encouraging larger capital inflows.
• Elimination of Technology Access Condition: The proposal seeks to remove the requirement that foreign investment above 74 % must ensure access to modern technology. The clause was seen as ambiguous, and its removal aims to simplify eligibility rules and enhance investor confidence.
• Relaxation of Export-Oriented Conditions: The government is considering abolishing the mandate requiring fully export-oriented defence manufacturers to maintain domestic maintenance and support facilities. This would reduce operational burdens for export-focused companies and improve their global competitiveness.
• Facilitating Majority Foreign Ownership: By allowing up to 74 % automatic FDI and removing restrictive conditions, the reforms enable foreign firms to hold majority stakes in Indian defence ventures, promoting deeper participation of global OEMs in domestic production.
• Improved Policy Certainty and Simplification: The proposed changes aim to streamline regulatory procedures, reduce ambiguity, and cut bureaucratic hurdles. This makes the defence FDI regime more investor-friendly, attracting higher foreign capital and strengthening domestic manufacturing.

Why are such FDI Reforms Needed?

• Bridging the Investment Gap: Despite India’s growing defence requirements and participation in global partnerships, foreign direct investment (FDI) inflows in the defence sector have remained extremely low. Over the past 25 years, only $26.5 million has been invested, compared to $765 billion in overall FDI, revealing a structural gap in attracting capital and limiting access to advanced defence technologies.
• Meeting Ambitious Production Targets: India’s defence production stood at approximately ₹1.5 lakh crore (≈ $18 billion) in FY2024‑25, with the government targeting production worth ₹3 lakh crore by 2029. To achieve this near‑doubling, greater participation by multinational defence companies is crucial to fill capacity, expertise and capital gaps that domestic firms alone cannot bridge.
• Accelerating Technology Access and Innovation: Domestic innovation schemes like iDEX and startup platforms are expanding India’s capability, but cutting‑edge technologies in areas like hypersonics, AI‑driven systems, and advanced sensors still require global collaboration. FDI reforms aim to bring technology transfer and shared R&D, boosting indigenous innovation in sectors historically dominated by foreign OEMs.
• Enhancing Export Competitiveness: India has seen defence exports surge from under ₹1,000 crore to over ₹23,622 crore in FY2024‑25, but this remains modest relative to global peers. India targets $5.5 billion in defence exports by 2029. Attracting larger foreign firms through eased FDI can help scale supply chains, improve quality standards, and boost exports further, supporting the government’s aim of making India a global defence export hub.
• Reducing Import Dependence Strategically: India has historically been one of the world’s largest defence importers, sourcing equipment from Russia, France, Israel, and the U.S. Continuation of heavy imports exposes strategic vulnerabilities. FDI reforms are intended to shift procurement towards domestically co‑produced platforms, gradually reducing dependence on foreign supply lines in geopolitical crises.
• Catalysing Private Sector Participation: Domestic private sector share in defence manufacturing is growing (around 23 % in FY2024‑25), but remains constrained by limited access to global supply chains and capital. Easing FDI norms aims to address this shortfall by encouraging joint ventures and strategic partnerships, enabling them to collaborate with multinational OEMs and participate in high-technology production and development.
• Creating High‑Value Employment: Strengthened defence manufacturing can generate large‑scale skilled employment across sectors like aerospace, naval systems, electronics, and cyber defence. FDI inflows are expected to spur ecosystem development, creating R&D hubs, supply clusters, and advanced manufacturing clusters across defence corridors and industrial nodes.

Government Initiatives and Reforms to Boost Defence Production and Export

• Defence Production & Export Promotion Policy (DPEPP) 2020: DPEPP 2020 aims to transform India into a global defence manufacturing and export hub by 2029. It targets ₹3 lakh crore in production and ₹50,000 crore in exports, encouraging R&D, self‑reliance, and innovation. 
• Defence Industrial Corridors (UP & TN): Defence Industrial Corridors in Uttar Pradesh and Tamil Nadu are specialised hubs for defence manufacturing clusters. Corridors have secured 253 MoUs worth over ₹53,000 crore and attract global OEMs, strengthening supply chains. 
• Positive Indigenisation Lists (PILs): Positive Indigenisation Lists restrict imports of select items to promote domestic manufacturing and substitutes. Over 5,500 items covered, with 3,000 indigenised, ensuring local firms receive priority procurement.
• Innovations for Defence Excellence (iDEX): iDEX supports startups and MSMEs to develop cutting‑edge defence technologies with financial grants It has engaged hundreds of innovators. Many iDEX projects transition to procurement by the Armed Forces, boosting production and export prospects.
• Defence Acquisition Procedure (DAP) 2020 Reforms: DAP 2020 prioritises Buy Indian – IDDM, mandating higher indigenous content in procurement. Approval timelines for industry‑led projects are reduced to accelerate production.
• Ease of Doing Business (EoDB) Measures: EoDB reforms simplify licensing, export authorisations, and clearance timelines for defence firms. End‑to‑end digital platforms have processed over 1,500 export authorisations efficiently. Defence licences now last up to 18 years, improving planning certainty.
• Indigenous Defence Equipment Exporters Association (IDEEA): IDEEA is the government’s nodal agency for facilitating defence exports. It strengthens export capabilities by assisting Indian manufacturers in obtaining export authorisations, expanding market access, and enhancing global outreach. Agency created goal to meet ambitious Rs 35,000 crore export targets set by the 2018 Defence Production Policy.