FDI in Defence
How much of a foreign gun maker India will let you actually own
Imagine a country happy to let a foreign restaurant chain open branches freely, but insisting on a background check and explicit sign-off before allowing one to open a factory that also happens to make kitchen knives. Foreign investment in defence manufacturing has faced almost exactly this kind of graduated caution in India, for the obvious reason that defence output is not an ordinary consumer product.
India currently permits up to 74% foreign direct investment in defence manufacturing through the automatic route, meaning a foreign company or investor can take a stake up to that level without needing specific case-by-case government approval, provided the investment brings access to modern technology. Beyond 74%, up to 100% foreign ownership is still possible, but only through the government route, requiring explicit case-by-case approval, typically reserved for investments seen as bringing genuinely cutting-edge, otherwise unavailable technology to India.
This threshold has been progressively liberalised over the past decade, from a much more restrictive cap in the past, reflecting a policy trade-off: India wants the technology transfer, capital and manufacturing expertise foreign defence companies can bring, but wants to retain effective Indian control and oversight over an industry with direct national security implications.
The practical effect has been a wave of joint ventures rather than wholly foreign-owned defence manufacturing in India, foreign primes typically partnering with an Indian company to stay within or just below the automatic route threshold, which also happens to align well with the government's broader Make in India and offset policy goals of building genuine domestic capability rather than simply importing finished foreign equipment.
Whenever a foreign defence company announces a new manufacturing joint venture in India rather than a wholly owned subsidiary, the FDI cap, and the practical benefits of partnering with an Indian company for both regulatory and offset-related reasons, is very often the structural reason behind that specific ownership arrangement.