It was February 12, 1998. A P J Abdul Kalam, then secretary of the Department of Defence Research and Development (DRDO) at the Ministry of Defence (MoD), had travelled to Moscow to put his signature on an inter-governmental agreement between India and the Russian Federation.

That agreement bore fruit on June 12, 2001. Not in Moscow, but off the Chandipur coast in Odisha. There the Indo-Russian BrahMos supersonic cruise missile made its first successful launch.

The pact Kalam had signed had made possible BrahMos Aerospace, a joint venture (JV) between India’s DRDO and Russia’s NPO Mashinostroyenia (NPOM). It was established with an authorised capital of $300 million — held in the ratio of 50.5 per cent by the Indian side and 49.5 per cent by the Russian side.

But it was an exception — the enabling agreement actually predated the May 2001-opening up of the defence sector to private enterprise and foreign investment, and the liberalisation of foreign direct investment (FDI) norms that would follow in the years after.

Since then, the JV has delivered in spades. The BrahMos today arms the army, the air force and the navy. Having made its combat debut during Operation Sindoor in May 2025, it has also become the symbol of India’s recent success in exporting major military equipment. Buyers include the Philippines, Vietnam and Indonesia.

“BrahMos Aerospace is an example of FDI and transfer of technology (ToT) from a foreign state-owned original equipment manufacturer (OEM),” said a former defence official with knowledge of the project, who did not wish to be named. However, the country’s record in attracting FDI into the broader defence sector has been less impressive.

MoD data, based on what companies operating in the defence and aerospace sectors report, pegged cumulative FDI inflow at ₹6,670.59 crore, as of March 2026. Department for Promotion of Industry and Internal Trade (DPIIT) data — though not comparable — paint a starker picture: from April 2000 to March 2026, FDI equity inflow in defence industries stood at  ₹247.97 crore, just 0.004 per cent of the total of  ₹52.86 trillion. By either measure, the inflows are meagre.

Necessary but not sufficient

“It would be a fallacy to claim that liberalised defence FDI norms alone will suffice,” said Shreevardhan Sinha, senior partner (regulatory and compliance) at corporate and commercial law firm Desai & Diwanji. He explained that foreign OEMs weigh three factors when deciding whether to invest: How liberal the FDI policy is, how predictable the licensing process is, and how much visibility there is into demand for the equipment they would manufacture in India.

On the first, there have been improvements since 2001, the year defence production was also opened to foreign participants, subject to industrial licensing. FDI of up to 26 per cent was allowed.

Beginning in 2014, the FDI policy underwent a series of successive amendments. That year, composite foreign investment of up to 49 per cent was permitted through the government route. Investment above 49 per cent would require approval from the Cabinet Committee on Security.

In 2015, foreign investment of up to 49 per cent was allowed through the automatic route. Investment above that level could be permitted through the government route on a case-by-case basis, where it was likely to result  in access to modern and state-of-the- art technology.

Another revision followed in 2016. The 49 per cent cap under the automatic route remained unchanged, but the conditions governing FDI above that level through the government route were amended to allow it where it was likely to result in access to modern technology or “for other reasons to be recorded”.

The last revision came on September 17, 2020. The FDI limit was enhanced to 74 per cent through the automatic route, but only for companies seeking a new defence industrial licence, thus favouring greenfield investments. FDI beyond that level and up to 100 per cent would be permitted through the government route, again subject to the condition that the investment was likely to result in access to modern technology or for other reasons to be recorded.

A comparison of DPIIT data from before and after the latest FDI norms revision does show an uptick. Of the  ₹247.97 crore in cumulative FDI equity inflow recorded between April 2000 and March 2026,  ₹191.09 crore — or about 77 per cent of the total — came in after June 2020. This growth, however, has come from a vanishingly small base, and the absolute numbers remain modest despite it.

“The current thresholds have simply not moved the needle enough,” said Cchavi Vasisht, associate fellow at the New Delhi-based think tank Chintan Research Foundation (CRF). Meanwhile, challenges around the other two factors—licensing and demand visibility—remain, and are understood to be holding back greater FDI inflows.

Echoing Sinha, Commander Gautam Nanda (retired), partner (Business Consulting) at EY India, said, “While the current policy allowing up to 74 per cent FDI through the automatic route has created meaningful opportunities for investment in India’s defence sector, obtaining a defence industrial licence remains a necessary requirement for some items covered under the regime. Continued efforts to streamline these procedures could further enhance India’s attractiveness as a destination for global defence investment and innovation.”

At present, only four industries are still subject to compulsory industrial licensing: Electronic aerospace and defence equipment; industrial explosives; cigars and cigarettes; and specified hazardous chemicals. In the defence sector, industrial licences are issued by the DPIIT and the Ministry of Home Affairs (MHA) under the Industries (Development and Regulation) Act, 1951, and the Arms Act, 1959.

 “This means all the ills of the licensing Raj in terms of delays — getting a licence, which should take six months, takes one to two years, given the need for clearances from the Department of Defence Production, security clearance from the MHA, and from the state’s Home Department,” he said.

“These are critical bottlenecks,” said Sinha, explaining that they stem from defence being a highly regulated sector. Permissibility of foreign investment is only the first step. Investors often perceive the licensing process as lacking sufficient predictability, particularly where multiple agencies and security-related consultations are involved. Requests for additional information and inter-agency consultations can sometimes lengthen the approval process, contributing to regulatory uncertainty. More than the specific rules themselves, Sinha argued, it is the cumulative effect of multiple regulatory frameworks — including the involvement of multiple agencies and security clearances — that deters foreign firms. “It adds to the time and cost, and is a negative for investor confidence.”

That uncertainty is compounded by the pace and manner in which defence procurement is conducted. “Setting aside the challenges with securing a licence, perhaps even more important is that before committing to any substantial investment, the foreign OEM needs a firm answer to the question: Who will buy the equipment we manufacture in India? Taken together, this makes the task of estimating a return on their investment quite difficult for foreign OEMs,” he added.

Demand visibility had long been a constraint for private defence players, and it is only in recent years that they have begun to overcome it in a meaningful way. A succession of measures—from earmarking a share of the defence budget’s capital-acquisition outlay for the private sector to moving away from the practice of placing orders with public sector firms through nomination, without competition—has begun to produce results. The importance of demand visibility is reflected, too, in the lone successful instance of 100 per cent FDI in the defence sector.

In November 2023, Swedish aerospace and defence company Saab secured approval for 100 per cent FDI to manufacture the shoulder-launched Carl-Gustaf M4 weapon system at a new facility it is establishing in Haryana. The facility, whose groundbreaking ceremony was held in March 2024, will be the country’s first fully foreign-owned defence production facility. The company’s confidence is understandable, given that the Carl-Gustaf system has been in service with the army since 1976 and has established itself as its principal shoulder-launched weapon.

“Foreign defence companies are often hesitant to share highly sensitive, cutting-edge technology without having absolute control over the manufacturing operations, which is essential for protecting their intellectual property (IP),” said Vasisht of CRF.

However, she added, several other compounding reasons explain the slow pickup in defence FDI. “Apart from the IP-control concern, compliance requirements such as mandatory local sourcing and maintenance centre obligations add transaction costs.” In her assessment, the government is seized of the matter, with potential solutions having been under consideration.

Taking it forward

The headline figures for domestic defence production—which rose by about 140 per cent between FY17 and FY26, from  ₹74,054 crore to roughly  ₹1.78 trillion—do not provide adequate clarity on whether critical capability gaps have been plugged.

“That trajectory shows India can scale volume domestically, largely in mature, lower-complexity categories. The harder ceiling is in frontier subsystems, such as jet engines, advanced seekers, stealth materials and the latest generation of radars, where decades of research and development (R&D) cannot be compressed by capital alone. FDI, coupled with genuine technology transfer—not just assembly—is the fastest lever to close that specific gap,” said Vasisht.

She pointed to South Korea as a textbook case of successfully leveraging foreign technology transfers and investment to build a domestic arms industry.

“By partnering directly with global aerospace giants to co-develop equipment, it ensured steady investment flows while systematically absorbing the know-how to eventually export its own advanced weaponry.”

One relatively quick step to turn on the tap would be to ease the FDI norms further.

“Raising the cap to 100 per cent through the automatic route may serve as a powerful catalyst for attracting global OEMs that have been closely watching India’s defence growth story. While licensing requirements will continue to play an important role, greater investment flexibility would send a strong signal of confidence, encourage deeper collaboration, and help address key concerns around IP protection,” said Commander Nanda (retired) of EY India.

“In January, it was reported that the cap on FDI through the automatic route for defence firms holding existing licences could be raised from 49 per cent to 74 per cent. The removal of the mandatory maintenance-centre requirement for export-focused units was also said to be under consideration. These steps are pending,” said Vasisht.

A more comprehensive solution, however, could lie in carrying forward the work that began in 1991 for the broader economy and, in 2001, for the defence sector in particular. “Liberalising FDI norms was a good first step, but now next-generation reforms that will ensure a more predictable broader regulatory environment are needed,” said Sinha of Desai & Diwanji.

Some measures have already been taken to ease the industrial-licensing process, including the removal of restrictions on annual capacity under defence industrial licences and the pruning of the list of defence products requiring compulsory licensing.

Other steps have been taken to enhance the ease of doing business: increasing the initial validity of defence industrial licences in phases from two years to 15 years, with the validity further extendable to 18 years, and making Arms Act licences for the manufacture or testing of arms and ammunition valid for the lifetime of the licensee company, subject to certain conditions.

Taking these measures further, Sinha prescribed the following reforms: “A single-window clearance mechanism for licensing along with a 60-90-day approval timeline. A risk-based review of the list of items that continue to require licensing. And last but perhaps most crucially, providing greater demand visibility through continued reforms aimed at shortening procurement timelines and simplifying procurement processes.” Sinha argued that even without waiting for the other reforms to take effect, this last step could significantly strengthen foreign OEMs’ confidence in investing in India.

Under its ‘Year of Reforms’ initiative, the MoD had, by May last year, already compressed the timelines for various stages of the procurement cycle, a move expected to save more than a year and a quarter overall.

The acquisition of defence equipment typically takes five to seven years to complete. The draft Defence Acquisition Procedure 2026 proposes further acceleration of the acquisition process.

Just as the BrahMos JV gave India an operational supersonic cruise missile by 2005, about 14 years after the need for such a weapon became apparent following the 1990–91 Gulf War, similar partnerships could enable the country to achieve self-sufficiency in specific technology areas it has yet to master, potentially with similar speed. An expansion in FDI could help accelerate that process further.