"India is the world's largest arms importer, spending some 1.8 per cent of its GDP on defence. It imports about 70 per cent of defence equipment, a proposition which the government wants to change," said Mr Jaitley while addressing the annual meeting of CII in New Delhi.
Mr Jaitley said the focus would be on technological tie-ups to help India become a "manufacturing economy".
"We are in the advanced stages of formulating a policy where we can ensure that instead of just being buyers... on the strength of technological and other tie-ups, India also becomes a manufacturing economy," he said.
He, however, did not elaborate on the policy in works and whether it will include tax incentives and state support. "The response that we have from domestic and international industry has been quite encouraging itself," he added.
With its growing global clout, India -- which has topped the Stockholm International Peace Research Institute's list of largest defence importers for the last seven years -- is looking at self-reliance in aerospace and defence industry.
The government has pledged to spend USD 250 billion by 2025 on weapons and military equipment.
Mr Jaitley had last week in US stated that the policy will help major global defence companies set up manufacturing units in the country in collaboration with Indian firms.
"Under our changed policy, we are in the future going to concentrate not merely in buying from the rest of the world, but encouraging global defence majors in collaboration with Indian companies to set up manufacturing units in India," he had stated.