India announced Thursday it would lift the cap on foreign direct investment in the defence sector to 49 percent and announced a 12-percent rise in military spending as part of efforts to modernise its armed forces.

In his first budget, Finance Minister Arun Jaitley raised defence spending for the current financial year to 2.29 trillion rupees ($38.3 billion), up from 2.03 trillion rupees budgeted in the 2013-2014 year.

Jaitley, who is also defence minister, said he planned to open up the military industry to foreign investment, lifting the limit from 26 percent to 49 percent, with Indian companies retaining management and overall control.

"There can be no compromise with the defence of our country," Jaitley told parliament.

"Modernisation of the armed forces is critical to enable them to play their role effectively in the defence of India's strategic interests."

- Investor scepticism? -

Thursday's budget also included 10 billion rupees ($167 million) for railway lines in border areas that is expected to be targeted at areas neighbouring rivals Pakistan and China.

India has eyed Chinese investment in railways near its border anxiously, with Beijing ploughing billions of dollars into infrastructure in Tibet.

India is one of the world's biggest arms importers, traditionally relying on Russia and in more recent years the United States for equipment and technology due to weaknesses with its own industry.

But slow procurement over decades and the collapse of a string of defence deals during the previous centre-left Congress party government's rule has left the military short of key equipment.

Jaitley said last month he aimed to speed up buying in the interests of "national security", while experts expect a more muscular foreign policy under the new adminstration.

Prime Minister Narendra Modi, a hardline nationalist, won landslide elections in May, pledging to reform and revive the economy which has slumped to a decade-low level.

India's military has grown increasingly frustrated at the state of its equipment as it looks to defend itself against an increasingly assertive China and from Pakistan.

Defence analyst Rahul Bedi said the new cap would fail to lure foreign companies because it was less than 50 percent and they feared losing rights to their sensitive technology.

"It doesn't matter if it's 26 percent or 49, it's not 51 percent which puts them in control, so foreign investors are going to look at this with scepticism," Bedi from IHS Jane's Defence Weekly told AFP.

India hiked its military spending by a huge 34 percent in 2009-2010 over the previous year after the 2008 attacks in Mumbai by Pakistan-based gunmen killed 166 people and revealed gaping holes in the country's security setup.

India overtook China to become the world's biggest importer of arms in 2010, according to the Stockholm International Peace Research Institute, which monitors the global arms trade.

The US has displaced Russia as India's biggest arms supplier, importing $1.9 billion of military kit from the US in 2013, according to research from IHS Jane's.