The government is considering liberalisation of foreign direct investment (FDI) norms in the defence sector to further attract overseas investors, according to an official statement on Monday. The Department for Promotion of Industry and Internal Trade is holding stakeholder consultations on the subject, with an official confirming that 'some easing in norms is under consideration'. Currently, FDI up to 74 per cent is permitted through the automatic route, while beyond that foreign direct investment is allowed through government approval route wherever it is likely to result in access to modern technology.
Foreign investment in the defence sector is subject to security clearance by the Ministry of Home Affairs and as per the guidelines of the Ministry of Defence. As reported by Business Standard, India has attracted USD 32.29 million FDI in defence industries between April 2000 and March 2026. The government has implemented a series of measures to boost manufacturing in the sector, with India's defence budget increasing from ₹2.53 lakh crore in 2013-14 to ₹7.85 lakh crore in 2026-27. However, experts argue that India's current FDI framework, which permits 74% foreign equity through automatic route, may not adequately protect strategically sensitive technologies developed domestically.
The launch of Innovations for Defence Excellence (iDEX) in 2018 has fundamentally transformed India's defence ecosystem, bringing startups and micro, small and medium enterprises into globally competitive critical technologies. Companies like Raphe mPhibr and Skyroot are among iDEX's notable winners, developing capabilities in autonomy, electronic warfare, unmanned aircraft systems, sensors and space technologies. As these companies scale, they require significant capital that foreign venture and growth capital has largely provided. However, this transition raises critical questions about India's regulatory framework for protecting national security while attracting foreign investment.
Exports from the sector grew from ₹686 crore in 2013-14 to ₹38,424 crore in 2025-26, demonstrating significant growth in the defence manufacturing sector. According to the latest data, the private sector contributed ₹17,353 crore or 45.16 per cent of defence exports in 2025-26, while defence public sector undertakings contributed ₹21,071 crore or 54.84 per cent. The government is targeting ₹3 lakh crore in annual defence production and ₹50,000 crore in exports by 2029.
Experts suggest India should consider creating a national-security screening mechanism for foreign investment in strategic-technology companies, moving beyond traditional ownership-based controls. The proposed framework would focus on rights attached to foreign investments rather than investment size alone, including board representation, access to sensitive technical information, or influence over strategic decisions. Israel's approach of identifying specific areas and transactions requiring heightened scrutiny while maintaining relatively open innovation ecosystems could serve as a useful model for adaptation. This adaptive screening framework would protect India's strategic autonomy without compromising the dynamism of its startup ecosystem.
