India's cabinet has approved plans to open its defence and railways industries to foreign investment as new Prime Minister Narendra Modi's right-wing administration moves to reform and revive the ailing economy.

Cabinet agreed late Wednesday to increase the limit on foreign direct investment in defence to 49 percent from 26 percent, and allow unlimited investment in railway infrastructure, according to the Press Trust of India news agency.

The government, which unveiled both plans in the budget last month, is attempting to push ahead with much-needed reforms after sweeping to power at elections in May with the biggest mandate in 30 years.

But its efforts hit a major hurdle this week, when the opposition blocked its attempts to introduce legislation to lift investment in the insurance sector.

Cabinet approval comes on the eve of US Secretary of Defence Chuck Hagel's visit to India to strengthen ties between the two militaries and to drum up defence deals.

Hagel, who arrives late Thursday, is expected to meet with top government ministers during the three-day visit.

"The US recognises the immense potential for its companies in the Indian arms market" with the lifting of the investment cap, analyst Sameer Patil from Mumbai-based thinktank Gateway House said this week.

Modi's government wants to speed up modernisation of its Soviet-era military after years of slow procurement and the collapse of deals over corruption allegations.

India, the world's biggest arms importer, has traditionally relied on Russia but has turned to the United States in more recent years for equipment and other technology.

Investment in India's vast and crumbling state-run railway network, which carries 23 million passengers a day, is desperately needed after years of neglect.

India struggles to fund upgrades of the network, partly developed under British colonial rule, because most of its revenues are spent on operating costs.

Railway company shares were up on Thursday on the approval, with Texmaco Rail & Engineering gaining 9.41 percent on the Bombay Stock Exchange.

Kalindee Rail Nirman Engineers was up 5.00 percent, while Titagarh Wagons and Kernex Microsystems India were also trading almost five percent higher.

"The increase in FDI for railways ... will have a positive impact on the economy and growth," said Vishwas Udgirkar, a director of Deloitte India.

But investment was not expected to flow overnight, with foreign companies first needing to form joint ventures with India firms before taking cautious steps, he said.