Driven partly by its developing rivalry with China, India is welcoming global gun manufacturers to set up shop to produce small arms including handguns, rifles, carbines, sub-machine guns, light machine guns and grenade launchers.

New investment rules allow private players to establish manufacturing units, sell to Indian defense forces and even cater to export orders. Forty-nine per cent foreign ownership will be permitted automatically but up to 100 percent FDI can be allowed if “modern technology”' is used to manufacture indigenously. Top global manufacturers including Colt’s Manufacturing Co., Heckler & Koch and Israeli Weapon Industry and others have already huddled with Indian companies to establish synergies and gain a foothold in the sector.

Punj Lloyd Ltd has already established a 51-49 joint venture with IWI, a longtime supplier to the Indian security forces. This October, the company will set up a small arms factory in Malanpur in the central Indian state of Madhya Pradesh for assault rifles and submachine guns in collaboration with IWI, a first for the country.

Although internal security threats are a worry along with the fact that local manufacturers are handicapped by red tape, China's increasing bellicosity is major reason for India to become the world’s largest weapons importers according to latest report of the Stockholm International Peace Research Institute. The report adds that China – the world's third largest arms exporter – sold most of its weapons to India’s neighbors, further fuelling the latter's insecurity.

The China-Pakistan nexus is another headache for India. It has led to Beijing's heightened involvement in the disputed Kashmir region, making New Delhi view the situation as a conjoined threat to its security.

The current policy changes in the sensitive defence sector are being projected as a win-win for the country's underserviced defence sector as well private players. However, the latter remain cautiously optimistic of the government's move. Underpinning their scepticism is Modi's Make in India drive, which seeks to transform India into a global manufacturing hub, but which they say has yet to show any tangible or meaningful technology buildup in the country. However, they have their fingers crossed that a similar disenchantment isn't awaiting them.

Under the new directives, for the first time foreign and private sector companies will be able to manufacture small arms and ammunition in India. Facilitating their task further will be a recent revision in the Arms Rules 2016, modified by the government last month, which gives clear instructions to private companies on how they can set up businesses, sell small arms and bring in foreign investment.

According to a defence ministry source, Indian companies will be granted a seven-year license after vetting to set up units in special economic zones. "The arms manufactured will also be allowed for export subject to the approval of the Ministry of Home Affairs in consultation with the Ministry of External Affairs, Ministry of Defense and Ministry of Commerce, on a case-by-case basis," he added.

This liberalization, defense analysts say, marks a refreshing change from an earlier era when small arms manufacturing was a state monopoly and private players were barred from entering the fray. This resulted in resource-crunched and undercapitalized private companies struggling to keep pace with exponential demand from the country's three armed forces, paramilitary forces and the state police.

"The earlier restrictive policies and the structure of the industry constrained domestic defense production with only 30 percent of the demand being met internally. The participation of private sector is even lower at about 10 percent," said Jayant Rathi, a defense consultant with the Reliance Group.

These deficiencies, Rathi said, result in small arms being imported routinely at a staggering cost to the state exchequer. As part of the Indian Army’s “Future Infantry Soldier as a System” 2020 program India will pay an estimated US$10 billion to acquire small and medium arms from countries like Israel, Germany, Switzerland and the US over the next four years.

However, rising discontent among the armed forces about the limited availability of weapons and their inferior quality, and pressure from private companies to allow them entry into the sector over the years, resulted in the government allowing private participation in 2001. Companies like Punj Lloyd, L&T and Bharat Forge were granted licenses by the Department of Industrial Policy and Production to set up bases. However, delays and bureaucratic non-clearances scuppered progress.

According to a senior bureaucrat in the defense ministry, the biggest bottleneck confronting the private players is the multiplicity of government agencies involved in the procurement process. "Each government department has its own set of convoluted rules and procurement processes which seem designed to exasperate entrepreneurs. The harassment multiplies manifold if foreign companies are involved in deals due to the lure of kickbacks. This is really frustrating for companies who just want to get on with the task of earning legitimate profits."

Experts say that though historically India has always preferred the public sector over private in defense production, changing geopolitical and military dynamics have forced a rethink. The Modi government is now looking for synergies and collaboration with defense production giants, especially from the west. For the latter, buffeted by a volatile economic climate, India remains an alluring prospect.

Given the current nationalist government's thrust on indigenization and job generation, private companies are hoping that the new initiatives will help them cater to not just domestic demand but also enter the regional export market in a significant manner.

"The government is very clear and focused in its vision for the defense sector. Indigenization of the industry and acquiring advanced technologies will help in minimizing the country's dependence on imports," a senior defense ministry official told Asia Sentinel. "It will create the desired ripple effect that we're hoping to initiate in the sector."

Neeta Lal is a New Delhi-based editor & journalist