New Delhi, Jan 21 (NationPress) India is contemplating a major overhaul of its Foreign Direct Investment (FDI) regulations within the defence sector, proposing to elevate the automatic-route ownership limit from 49% to 74% for current licensed defence companies and eliminating ambiguous stipulations that could transform the defence landscape, as highlighted by a recent report.

According to an article from the India Narrative, this policy adjustment is designed to attract global manufacturers, promoting joint ventures and technology transfers to enhance domestic production.

With escalating geopolitical tensions and a strong emphasis on self-sufficiency under the ‘Make in India’ initiative, these reforms could be revolutionary, driving economic expansion, technological progress, and bolstering national security.

The article elaborates on how this could be a crucial turning point for India, noting that traditionally, the defence industry has been hesitant about foreign participation due to security apprehensions.

In 2016, FDI was permitted up to 49% through the automatic route, with higher stakes requiring government approval. By 2020, the cap was raised to 74% for new licenses, while 100% ownership was allowed with government consent in cases involving advanced technologies.

Despite these advancements, existing licensed firms remained limited to 49%, a restriction the new proposal aims to alleviate.

The central economic rationale is that increasing the automatic-route cap to 74% will position India as a more appealing destination for large defence corporations by offering enhanced operational control, robust intellectual property protection, and well-defined ownership rights.

These elements are often prerequisites for multinational defence firms considering substantial capital investments and technology transfers. The article emphasizes that India's defence market is projected to exceed USD 75 billion by fiscal year 2025–26, with the government advocating for a 20% budget increase for 2026–27, framing the reform as a mechanism to attract foreign investments into manufacturing hubs.

This initiative could generate skilled employment and invigorate ancillary sectors such as electronics and materials. Estimates featured in the article suggest that liberalized regulations could draw in USD 5–10 billion over the coming decade while aiding in the reduction of import reliance, which currently constitutes 60–70% of defence requirements.

The article also posits that technology transfers from partners in nations like the US, France, Israel, and other allied countries could expedite the indigenization of complex systems, including fighter jets, submarines, and missiles, while advancing capabilities in AI, cybersecurity, and hypersonics, fields where India currently trails.

Emphasizing that “In a multipolar world, defence manufacturing is a crucial domain for influence,” the report notes that China's supremacy in supply chains has urged Western companies to diversify. India’s reforms position it as an alternative option, taking advantage of its democratic values and skilled workforce. Agreements like those with the UK and EU could enhance tariff advantages for defence exports.

Comparisons are drawn with nations like Vietnam, Turkey, Brazil, and South Africa, which reportedly experienced increases in defence exports and FDI following liberalization. The article suggests that India could follow suit, leveraging free-trade agreements and its skilled labor force to establish itself as a defence equipment export hub, targeting markets in Southeast Asia and Africa, aiming to capture a share of the USD 2 trillion global defence market.

This initiative is part of a broader goal to transition India from being a net importer to a competitive exporter in defence manufacturing.

While acknowledging valid concerns regarding national security risks from heightened foreign control, bureaucratic and licensing challenges, and apprehensions among domestic firms about intensified competition, the article recommends safeguards. These include targeted approvals for sensitive situations (like restrictions involving neighboring nations) and policy measures to protect MSMEs and tier-2 suppliers.

It pointed out recent administrative actions – like extending licence validity – as incremental enhancements but stressed the need for clearer, consistent regulations and incentives to ensure that the domestic industry benefits rather than faces displacement.

Improvements in approval processes, enhanced ease of doing business in defence, and ensuring that liberalization is paired with initiatives promoting technology absorption and local supplier development are also highlighted.

Collaboration frameworks like joint ventures, co-development, and R&D centers can alleviate competitive fears while providing benefits to civilian sectors such as aviation and automotive, as detailed in the India Narrative.