Since 2001, India has allowed foreign direct investment (FDI) up to 26 per cent in its defence industry. The policy has, however, not been successful in bringing about any meaningful financial or technological inflows, primarily because of the lack of incentives in the policy for foreign investors. Although suggestions have been made in various quarters to increase the existing cap, there has been no consensus with regard to its precise limit. Keeping in view India’s underdeveloped R&D and production base, and various defence industry-related policies and provisions whose success is contingent upon a liberal inflow of FDI, an increase in the foreign investment cap up to 100 per cent would be logical, instead of a fixed cap-based method, which may be a constraint to desirable inflows. However, given the sensitivity attached to defence-related FDI, each investment should be subject to wider review and impact analysis following which the FDI percentage could be determined varying between zero and 100 per cent.