The government is proposing to raise foreign direct investment (FDI) in the defence sector to 100 per cent through the approval route.
Sources said the commerce and industry ministry had circulated a Cabinet note for inter-ministerial consultation.
The proposal to raise the FDI cap in the sector from 26 per cent to 100 per cent is aimed at giving a boost to manufacturing activities.
By the 15-page Cabinet note circulated on Thursday, portfolio investors, including foreign institutional investors, would be permitted to invest only up to 49 per cent.
The note said a foreign company could take over a domestic entity, given it brought state-of-the-art technology.
This is the first major initiative of the ministry after Nirmala Sitharaman took its charge this week.
Sources said allowing FDI in the sector "would hugely help reduce the import bill for defence equipment, help boost manufacturing and create jobs."
The United Progressive Alliance government had pegged FDI in the sector at 26 per cent but allowed the Cabinet Committee on Security to approve proposals entailing higher investments.
In May 2010, the Department of Industrial Policy & Promotion had issued a discussion paper suggesting an increase in the FDI cap for the sector.
India opened the defence equipment sector to the private sector in May 2001, but restricted foreign participation to 26 per cent in this capital-intensive and sensitive sector. India is one of the largest defence importers.
Exports are few. It ranks among the top 10 in the world in military expenditure. India imports $8-billion defence equipment and its defence Budget is growing at an average of 13.4 per cent annually since 2006-07.
DIPP had said, "The bulk of the domestic output is met through ordnance factories or defence public sector undertakings. Even when products are made domestically, there is a large component of imported sub-systems."