India to raise 26 percent cap on foreign investment in the defense industry

India’s Defense Ministry plans to raise the 26 percent cap on foreign direct investment in the country’s defense industry, a move aimed at attracting global military and aerospace companies to invest in the country.

The move will facilitate the development of a multi-role transport aircraft by the state-run Hindustan Aeronautics Ltd., the ministry said in a statement late Wednesday.

The government is also keen to encourage the country’s private sector to play an active role in an industry dominated by state-run companies. Indian companies such as Larsen & Toubro and the Tata Group are in talks with global defense companies to establish manufacturing units in the country.

Boeing Co. and Hindustan Aeronautics signed a tentative agreement at the end of last year aimed at bringing aerospace manufacturing work worth US$1 billion to India over the next 10 years. Under the agreement the U.S. aircraft maker will help the Indian company in developing manufacturing processes and capabilities needed for the production of military hardware for Boeing and its subcontractors.

In 2005, Boeing won an order for 68 airplanes worth US$11.4 billion from state-run Air India, and Boeing is currently in the fray for a large fighter jet contract from the Indian Air Force, which plans to buy 126 new airplanes.

Lockheed Martin Corp. is also bidding for the contract against Russian and European rivals.

India’s defense spending has steadily risen in recent years as the country tries to modernize its outdated hardware.

The Indian government raised the defense budget by 12 percent to 960 billion rupees (US$24 billion;