The reforms also loosen restrictions on inbound investments in pharmaceuticals and retail.
Government on Monday relaxed foreign direct investment norms in a host of sectors including civil aviation, single-brand retail, defence and pharma by permitting more investments under automatic route.
Other sectors in which FDI norms have been relaxed include e-commerce in food products, broadcasting carriage services, private security agencies and animal husbandry.
"Now most of the sectors would be under automatic approval route, except a small negative list.
"With these changes, India is now the most open economy in the world for FDI," said an official statement.
The decision to further liberalise FDI regime with the objective of "providing major impetus to employment and job creation in India" was taken at a meeting chaired by Prime Minister Narendra Modi on Monday.
This is the second major reform in the FDI space.
The Centre in November had significantly relaxed the foreign investment regime.
Among the major decisions, government allowed 100 per cent foreign investment in "scheduled air transport service/ domestic scheduled passenger airline and regional air transport service".
Under the new regime, 49 per cent would be via automatic route and beyond that limit, government nod would be required.
At present, up to 49 per cent FDI is permitted in scheduled airlines.
"For NRIs, 100 per cent FDI will continue to be allowed under automatic route," a statement said.
"However, foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and non-scheduled air-transport services up to the limit of 49 per cent of their paid up capital and subject to the laid down conditions in the existing policy," it added.
To aid in modernisation of existing airports to establish a high standard and help ease the pressure on the existing airports, it has been decided to permit 100 per cent FDI under automatic route in brownfield airport projects.
Earlier, FDI in brownfield airport projects beyond 74 per cent was under approval route.
In defence sector, foreign investment beyond 49 per cent has been permitted through approval route in cases resulting in access to modern technology in the country or for other reasons.
The government has done away with the clauses pertaining to the 'state-of-art' technology.
Earlier policy allowed FDI in defence sector beyond 49 per cent under the approval route on a case-to-case basis subject to the condition that it would result in access to modern and 'state-of-art' technology in the country.
FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.
As regards single-brand retail trading, it has been decided to relax local sourcing norms for up to three years and a relaxed sourcing regime for another five for entities undertaking SBTR of products having 'state-of-art' and 'cutting edge' technology.
With the objective of promoting the development of pharma sector, it has been decided to permit up to 74 per cent FDI under automatic route in brownfield projects and continue the present system of approval route beyond 74 per cent.
Under the existing policy, 100 per cent FDI is allowed under automatic route in greenfield pharma and 100 per cent under government approval in brownfield pharma.
In case of private security agencies FDI up to 49 per cent is now permitted under automatic route and up to 74 per cent under the government approval route.
The current policy permits 49 per cent FDI under government approval route in private security agencies.
The government has also permitted 100 per cent FDI under automatic route in several wings of the broadcasting carriage services which include teleports, direct-to-home, cable networks, mobile TV and headend-in-the sky broadcasting service.
However, the statement said: "Infusion of fresh foreign investment beyond 49 per cent in a company not seeking licence/permission from sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Foriegn Investment Promotion Board's approval."
To promote manufacturing of food items, the government decided to permit 100 per cent FDI under approval route for trading, including through e-commerce in respect of such products manufactured or produced in India.
The government has decided to do away with the requirement of separate security clearance or RBI approval for setting up of branch or liaison offices by foreign companies dealing in defence, telecom, private security or information and broadcasting if the requisite approval of FIPB or the ministry or regulator concerned is in place.
The government has also decided to do away with the 'controlled conditions' for FDI in these activities relating to animal husbandry.
As per the existing policy, FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture is allowed 100 per cent under automatic route under controlled conditions.
The government has brought in major FDI policy reforms in sectors like defence, construction development, insurance, pension, broadcasting, tea, coffee, rubber, cardamom, palm oil tree and olive oil tree plantations, single-brand retail trading, manufacturing sector, Limited Liability Partnerships, civil aviation, credit information companies, satellites and asset reconstruction companies.
Measures undertaken by the government have resulted in increased FDI inflows from $36.04 billion in 2013-14 to $55.46 billion in 2015-16, the highest ever FDI inflow for a particular financial year, the statement said.
"However, it is felt that the country has potential to attract far more foreign investment which can be achieved by further liberalising and simplifying the FDI regime.
India today has been rated as number one FDI destination by several international agencies," it added.
The changes in the FDI policy, the statement said, are aimed at liberalising and simplifying the norms with a view to promoting ease of doing business, encouraging greater capital flows and making India an attractive destination for foreign investors.
Modi hailed this sweeping liberalisation of rules on FDI saying they would make Asia's third-largest economy the most open in the world.
"Key reform decisions were taken at a high level meeting chaired by the PM, which makes India the most open economy in the world for FDI," the Prime Minister said in a tweet.
In a second tweet, he said the changes would provide a 'major impetus to employment and job creation in India.'