FDI in Defence Manufacturing: Automatic Route Cap and Government Route Beyond It
Defence manufacturing FDI policy was substantially liberalised in 2020, raising the automatic-route ceiling well above where it had sat for years — but the route beyond that ceiling still hinges on a specific, deliberately subjective test that is not just about the percentage of foreign ownership.
The current ceiling structure
- Up to 74% FDI in defence manufacturing is permitted under the automatic route.
- Beyond 74% and up to 100% is permitted, but only through the government approval route, and specifically where the investment is likely to result in access to modern technology, or for other reasons to be recorded, as determined by the government.
This 74% automatic-route ceiling reflects a substantial liberalisation from the earlier policy, which for years capped automatic-route defence FDI at a much lower level (49%) before being raised.
The "modern technology" test — deliberately not a bright line
Licensing runs alongside FDI approval
Defence manufacturing in India separately requires an industrial licence under applicable industrial licensing law, administered by the Department for Promotion of Industry and Internal Trade in coordination with the Ministry of Defence — this licensing requirement is distinct from, and runs alongside, the FDI approval/automatic-route question. A foreign investor needs both the FDI structure to be compliant and the underlying manufacturing entity to hold the appropriate industrial licence.
Why the sector is treated this cautiously despite liberalisation
Defence manufacturing sits at the intersection of two policy goals that pull in different directions: attracting foreign capital and technology to build domestic manufacturing capability (reducing import dependence), while maintaining strategic control over an industry with direct national-security implications. The 74%/100% split, combined with the discretionary "modern technology" gate for majority/full foreign control, is the mechanism used to balance both goals rather than fully opening or fully restricting the sector.
Practical structuring implications
A foreign defence-technology company considering an Indian manufacturing joint venture should generally plan around the 74% automatic-route ceiling as the practical, more predictable structuring point, unless there is a clear, well-evidenced technology-transfer case to support seeking approval beyond that level — and should build the government-approval timeline and its inherent unpredictability into any plan that depends on crossing 74%.