Investing in India’s defence sector is drawing attention as the country builds one of the world’s largest military markets, backed by a surge in domestic production and a steady flow of foreign capital.
Budget boost and export growth fuel the market
The national budget for 2026‑27 rose 15% to INR7.85 trillion (about USD 88 billion). In the previous fiscal year, defence output hit a record INR1.78 trillion, and exports reached more than 80 countries, climbing 63%.
Private firms now contribute roughly a quarter of that output, a share never seen before. The shift reflects a broader policy drive that includes the Make in India programme, the “Self‑Reliant India” export push, the iDEX innovation scheme, and the Positive Indigenisation Lists that aim to curb foreign imports.
FDI liberalisation opens doors for overseas investors
Historically closed to private capital, the defence field first allowed foreign investment in 2001 with a 26% ceiling. That limit rose to 100% in 2016, and today up to 74% can flow in through the automatic route for new licences.
Investments above 74% require explicit government approval, especially when they involve advanced technology or touch national‑security concerns. Existing licence holders may raise fresh stakes to 49% without further clearance, provided they file a share‑holding change within 30 days.
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The Home Ministry oversees approvals, applying criteria that focus on design capability rather than mere assembly. Investors from land‑bordering nations face extra scrutiny, and any deal that could affect security may be reviewed.
Officials are reportedly weighing an extension of the 74% automatic threshold for companies that bring modern technology, which would remove the final hurdle for overseas manufacturers seeking control of an Indian business.
Joint‑venture structures dominate new deals
Joint ventures remain the preferred format. Earlier deals often used a 49:51 split favouring the Indian partner; since 2020, a 74:26 arrangement has become common when the foreign side seeks technology control, while a 50:50 split suits partners with comparable contributions.
Licensing agreements govern technology transfer, imposing limits on field of use, territory, term, sub‑licensing, personnel clearances and end‑use. Some contracts include source‑code escrow, which unlocks code only if the licensor defaults or discontinues the product line.
Share purchases are generally favoured over asset acquisitions because they preserve existing licences under the Arms Act, though a change of control can strip the target of its status as an Indian vendor—a nuance often overlooked.
Start‑ups and strategic partnerships add new trends
Start‑ups emerging from the iDEX and Defence India Startup Challenges attract attention for their intellectual property and procurement pipelines rather than current revenue. Valuations focus on future contracts and technology potential.
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Under the strategic partnership model, the defence ministry picks an Indian private firm to lead platforms such as submarines, fighter jets or armoured vehicles, pairing it with a foreign manufacturer for domestic production. These arrangements blend equity joint ventures, licensing, production and procurement contracts, and include obligations for progressive indigenisation and technology absorption.
The draft Defence Acquisition Procedure 2026, released in February, seeks to tighten design ownership. The Indian partner must now retain design documentation, source code and system architecture, rather than simply receiving a licence.
Offsets that once relied on procurement from local suppliers, investment, technology transfer or banked credits are being phased out. Instead, contracts now embed indigenous content requirements, making the framework more attractive to partners willing to share design authority.
India’s evolution from a net importer to a net producer in under a decade mirrors past industrial shifts seen in other emerging economies, where initial assembly gave way to full‑scale design. The current push toward owning the blueprints marks a deeper commitment, but it also raises the bar for foreign firms accustomed to a licence‑only model.
Early entrants who align their structures with the new approval pathways are likely to secure a foothold before the market tightens further. The combination of liberalised FDI, clear joint‑venture norms and a policy‑driven push for indigenous design creates a distinctive investment setting that balances opportunity with heightened regulatory oversight.
