India to Ease Foreign Direct Investment (FDI) Rules to Raise Automatic Route Cap to 74 Percent in Defence Sector

Key facts

• The cap on Foreign Direct Investment (FDI) in defence firms with existing licences under the automatic route is set to be raised to 74% from 49%.
• The government is dropping a condition that stipulates foreign investment beyond 74% is only allowed if it 'results in access to modern technology'.
• A requirement for fully export-oriented defence manufacturers to set up domestic maintenance and support facilities is set to be dropped to attract foreign investment.
• The Ministry of Defence (MoD) 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.
• India aims 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 the nation seeks to reduce arms imports.
• Foreign equity inflows into the defence sector accounted for $26.5 million of total foreign inflows of $765 billion in the 25 years through September 2025.
• Foreign firms currently operating in India include France's Airbus, Lockheed Martin of the U.S. and Israel's Rafael Advanced Defense Systems.
• 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 sought to bolster funding following a conflict with Pakistan in May in which drones and fighter jets took centre stage.