Recent geopolitical dynamics, regional conflicts and related national security concerns have made the Indian defence sector ripe for additional growth and investment. As technologies evolve and new forms of warfare emerge, this growing sector is likely to witness further transformation in India, driven by immediate and long-term security threats, significant policy reforms, an ambitious modernization agenda, and a strategic imperative for self-reliance—along with necessary global collaborations involving foreign Original Equipment Manufacturers (“OEMs”) and strategic alliances with key international allies.

India’s proposed reform measures in the defence industry—including potential amendments to the legislative and regulatory framework (see here and here)—together with rising domestic demand and increased focus on exports, innovation, indigenization, emerging technologies, research and development (“R&D”), and strategic international partnerships, are likely to provide new opportunities for private and foreign participation in the sector.

Proposed Reforms

Given India’s liberalized Foreign Direct Investment (“FDI”) regime (see discussion below), proposed reforms include building domain expertise in cyberspace security and space-based surveillance, an emphasis on emerging technologies such as Artificial Intelligence (“AI”), hypersonics and robotics, as well as streamlined defence procurement and acquisition procedures. Further, certain specific proposals are reportedly under consideration, such as the following:

amendments to the Defence of India Act, 1962 with respect to cybersecurity infrastructure and supply chain resilience;
enhancement of the Defence Production and Export Policy, 2020 with respect to simplifying export regulations and incentivizing domestic manufacturing;
periodic updates of defence procurement and cybersecurity laws;
revision of the Defence Acquisition Procedure, 2020 (“DAP 2020”) (see discussion below) to impose domestic sourcing requirements for critical components, along with simplification of procurement processes;
introduction of blockchain-based legal frameworks for the purpose of compliance automation, contractual integrity, and supply chain tracking, as well as enforcement of compulsory cybersecurity audits and penalties for non-compliance;
international defence cooperation pursuant to technology transfers, strategic alliances with key geopolitical allies, and joint cybersecurity initiatives to address digital threats; and
structural reforms to create a more favorable investment climate, including through a simpler tax and regulatory regime.

Budgetary Allocation, Local Production and Exports

Recent news reports indicate that in the aftermath of Operation Sindoor, India’s ministry of defence (“MoD”) is likely to receive an allocation of INR 500 billion, in addition to the INR 6.8 trillion already allotted in the union budget of February 2025—where the MoD received the largest sectoral share, with INR 1.8 trillion earmarked for capital outlay, including capital acquisition for the armed forces, along with capital expenditure on R&D and creation of infrastructural assets.

The last few years have witnessed a large rise in indigenous defence production (including through startups and a robust innovation ecosystem comprising initiatives like iDEX (Innovations for Defence Excellence)—which funds R&D by startups and micro, small, and medium enterprises (MSMEs)), private sector participation, and exports—including through support from the ‘Make in India’ initiative.

Moreover, the Government of India has articulated its ambitions to scale up the quality and quantity of local production, along with export targets. There appears to be a growing appetite for higher budgetary allocations, equipment modernization, technology-related investments, and technology-first procurement—including through existing and emerging geostrategic opportunities involving countries such as the U.S., France, Israel, and Russia.

In terms of global supply chain integration and the export of ammunition, arms, systems/sub-systems, and sundry defence equipment (along with parts/components), the Government estimates that India’s defence-related exports aggregated USD 2.8 billion in FY 2024-25, involving over 100 countries, with the US, France, and Armenia being the largest purchasers in 2023-24.

New Opportunities: ‘Def Tech’ and International Collaborations

For leading global defence and aerospace firms, India represents not just a large end-user market, but a strategic ally with a growing ecosystem in emerging technologies, including in:

AI for defence-related applications – including AI-based intercept management and predictive maintenance systems, decision intelligence, and target tracking/identification
Cybersecurity and quantum-resilient communication
Autonomous defence technologies and systems (including Lethal Autonomous Weapons Systems (LAWS)), armed unmanned aerial vehicles (UAVs, including swarm drones and vehicle-mounted counter-drone systems), loitering munitions, as well as uncrewed combat and new-age defence platforms
Electronic warfare (EW); networked ‘command, control, communications, computers, intelligence, surveillance, and reconnaissance’ (C4ISR); and advanced sensor suites
Hypersonics (including hypersonic and next-gen missile and air defence systems) and robotics (including humanoid robots and robotic dogs)

‘Acing Development of Innovative Technologies with iDEX (ADITI)’, or the ‘ADITI Scheme’, a sub-scheme within iDEX, aims to support critical and strategic technologies such as satellite communication, advanced cyber technology, autonomous weapons, semiconductors, AI, quantum technology, nuclear technologies, and underwater surveillance.

While India remained the world’s second-largest arms importer during 2020-24 (after Ukraine), its share of global imports declined relative to the previous five-year period on account of its growing capacity to design and manufacture its own weapons. India has started to move away from international procurements to a self-reliance model based on co-development, co-production, and indigenous innovation, thereby emerging as an important geography for defence manufacturing through bilateral collaborations—where the focus appears to be on building advanced, resilient, and adaptable capabilities in emerging domains through meaningful international partnerships.

Given the urgent need for major defence reforms in advanced countries, including on account of unsustainable cost structures, uncompetitive military-industrial bases, and slow acquisition pipelines, investors in the global defence and aerospace industry, as well as foreign OEMs and governments, could find strategic and/or long-term opportunities in India, where the local ecosystem may be able to provide:

a suitable co-creation platform for future-ready, globally scalable solutions;
a modernized policy environment that facilitates greater FDI, as well as new export and re-export opportunities, along with streamlined domestic procurement procedures comprising leaner timelines and digital processes; and
a capable and robust industrial base (including 16 Defence Public Sector Undertakings (DPSUs), over 430 licensed companies, and approximately 16,000 MSMEs) with strong indigenous production capabilities ready for co-development, licensed production, and joint innovation.

Several proposed international collaborations are indicative of deep industrial synergies for the future. In addition, Defence Industrial Corridors (“DICs”) have been set up in certain Indian states to boost local manufacturing. Such DICs provide ready-to-use infrastructure and industrial support (including to foreign OEMs) and customized incentive packages (including tax exemptions and refunds, duty concessions, and capital and training subsidies) based on investment, employment, and project location.

Ease of Doing Business

In terms of the ease of doing business (“EoDB”) in the Indian aerospace and defence sector, certain regulatory difficulties likely persist with respect to acquiring land, securing infrastructure support, and navigating overlapping federal and inter-departmental/ministerial jurisdictions, processes, and processing timelines. However, the Government has introduced measures to improve EoDB in the defence manufacturing sector, including by (i) extending the validity of export authorizations for parts and components of defence items (which have also been de-licensed to encourage investment), (ii) reducing the number of items on the defence product list that require a manufacturing licence, (iii) extending the validity of defence licences under the Industries (Development and Regulation) Act, 1951 (“IDR Act”), (iv) increasing the pace of issuing industrial licences to companies in the defence sector, and (v) introducing an end-to-end digital export authorization system for the purpose of improving efficiency.

Foreign Investment in Defence

The framework for FDI in India is set out in the Consolidated FDI Policy framed by the Government of India’s Department for Promotion of Industry and Internal Trade (“DPIIT”), which contemplates FDI through two routes: (i) the automatic (i.e., approval-free) route; and (ii) Government approval route.

Prior to 2001, investment into India’s defence industry was reserved for the Government and state-owned entities. Starting May 2001, however, the defence sector was gradually opened to equity participation from the private sector, including through FDI, with the DPIIT raising the FDI limit in defence production to 74% (from 49%) under the automatic route (for companies seeking new industrial licenses – see discussion below) in 2020. Further, FDI of up to 100% was permitted under the Government approval route where it was likely to result in access to modern technology or for other recorded reasons.

FDI in the defence industry is subject to industrial licensing under the IDR Act and other statutes (for e.g., FDI in manufacturing of small arms and ammunition is subject to licensing under the Arms Act, 1959). The Government of India has notified lists of items which require an industrial license. With respect to (i) a company not seeking an industrial license, or (ii) which has already received Government approval for FDI in defence, any fresh infusion of foreign investment up to 49% will require a declaration to be submitted with the MoD within 30 days (a) in the event of a change in the equity/shareholding pattern, or (b) if an existing investor transfers a stake to a new foreign investor. Proposals from such companies for raising FDI beyond 49% will require Government approval. However, the earlier position, where existing FDI approval-holders or defence licensees needed to obtain Government approval with respect to any change in ownership pattern up to 49% has been replaced.

Applications for industrial licenses are considered, and licenses issued, by the Licensing Committee of the DPIIT in consultation with the MoD and Ministry of External Affairs. However, foreign investment in the defence sector is subject to (i) security clearance by the Ministry of Home Affairs, and (ii) the guidelines of the MoD. Licensees are required to adhere to the guidelines under the Security Manual for Licensed Defence Industries issued by the MoD, including with respect to physical information, documentation, cybersecurity aspects, and others. In any case, foreign investments in the defence sector are subject to scrutiny on grounds of national security, and the Government reserves the right to review such investment which affects, or may affect, national security.

The investee company should be structured to be self-sufficient in areas of product design and development. The investee or joint venture company, along with the concerned manufacturing plant, should also have facilities for maintenance and lifecycle support with respect to the product being manufactured in India.

Given the intersectional nature of modern defence technologies, companies may need to evaluate whether and to what extent foreign investments will require prior approval. Such evaluations will depend on, among other things, the nature of application, business, and/or product involved, and in some cases, may attract regulatory restrictions in other sectors, such as space. Under the amended FDI policy, 100% FDI is allowed in the space sector, which was further liberalized in 2024 for prescribed sub-sectors/activities. The satellites sub-sector has been divided into three different activities with defined limits for foreign investment in each such sector.

AI-related FDI may be subject to Government review based on sectoral application. 100% FDI under the automatic route is permitted for electronics manufacturing—including semiconductors, subject to applicable laws/regulations, security, and other conditions. As the building blocks of several electronic devices such as drones, semiconductors are used in a variety of applications and across sectors, including in aerospace and defence.

For a discussion on private sector participation in India’s space sector, see our note here. For a discussion on accessing space and satellite spectrum allocation in India, see our note here. For an overview of key considerations while investing in AI in India, see our note here. For an overview of opportunities in the Indian semiconductor industry, see our note here.

Defence Acquisition Procedure

At present, defence capital acquisition (other than works and land undertaken by the MoD) is carried out in accordance with the provisions of the DAP 2020. The DAP 2020 has a strong focus on local manufacturing, while procurement is undertaken through specific schemes, which are determined pursuant to a variety of factors, including whether the product has been designed indigenously or if it includes indigenous content (“IC”), and whether the vendor is an Indian vendor. Such schemes are as follows:

Buy (Indian – Indigenously Designed, Developed and Manufactured (IDDM)): This category refers to product acquisition from an Indian vendor where such products have been indigenously designed, developed, and manufactured with a minimum of 50% IC.
Buy (Indian): This category refers to product acquisition from an Indian vendor where such products may not have been designed and developed indigenously, but have 60% IC.
Buy and Make (Indian): This category refers to an initial acquisition of equipment in a fully formed state from Indian vendor(s) engaged in tie-ups with foreign OEMs, followed by phased indigenous production involving transfer of technology (“ToT”) with respect to critical technologies. Under this acquisition category, a minimum of 50% IC is required with respect to the ‘Make’ portion of the contract.
The ‘MAKE’ procedure was introduced to promote indigenous design and has been streamlined over the years to ensure faster development of defence equipment by both public and private industries. MAKE projects have been divided into three categories. The third category—MAKE-III—involves manufacturing in India pursuant to ToT arrangements with foreign OEMs.
Buy (Global – Manufacture in India): This category refers to an outright purchase of equipment from foreign vendors, followed by indigenous manufacture of the entire, or a part of the entire, equipment, along with spares, (sub)assemblies, or ‘maintenance along with repair and overhaul’ (MRO) facilities (when these are part of the main contract) through: (a) a subsidiary in India, (b) a joint venture, or (c) an Indian production agency (with ToT involving critical technologies), meeting a minimum of 50% IC.
Buy (Global): This category refers to outright equipment purchases from foreign or Indian vendors. In case of procurement through foreign vendors, a Government to Government (“G2G”) route, or an inter-Governmental agreement, may be adopted, especially for strategic or long-term requirements. Foreign vendors will need to discharge offsets in all Buy (Global) cases. India’s offset policy requires foreign vendors to invest at least 30% of the contract value in India through one or more prescribed avenues for all capital purchases above a specified monetary threshold.
The Defence Offsets Management Wing (“DOMW”) runs an end-to-end web portal that digitizes the offset contract compliance process. OEMs can submit offset discharge claims through this portal. Submitted claims are processed, and offset discharge credits are assigned to OEMs, by the DOMW through such portal.

Depending on the entity and product involved, the provisions of the DAP 2020, along with may need to be carefully reviewed. The DAP 2020 will be in force until September 30, 2025 or until reviewed. News reports indicate that the DAP 2020 is in the process of being revamped, including for the purpose of moving towards a competitive pricing model, where both public and private sectors can compete for orders—an approach already under implementation with respect to shipbuilding.

In the last few years, while the budgetary allocation for defence has steadily grown, the utilization of funds as a percentage of GDP has not been optimal. However, reports suggest that the MoD has significantly reduced process timelines for procuring key military equipment.

Export of Dual-Use Items

India is a party to key international disarmament and non-proliferation treaties, including the Chemical Weapons Convention (CWC) and the Biological and Toxin Weapons Convention (BWC). Pursuant to United Nations Security Council Resolution 1540, all member states, including India, are obligated to prevent non-state actors – particularly those engaged in terrorist activities – from acquiring weapons of mass destruction (WMDs) and their means of delivery. The UN resolution further mandates the implementation of appropriate legal and regulatory measures to control WMDs, their delivery systems, and associated materials, equipment, and technologies.

The Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 together with the Foreign Trade (Development and Regulation) Act, 19929 (“FTDR Act”) regulate and control exports, re-exports, transit, trans-shipment, and transfer of specified goods, services, or technologies.

The Foreign Trade Policy 2023, issued under the FTDR Act, includes the list of special chemicals, organisms, materials, equipment and technologies (“SCOMET”), which comprises dual-use items that are subject to export control restriction or prohibitions. Dual-use items are goods and technologies that can be used for both civilian/industrial and military purposes. The SCOMET list covers munitions, nuclear-related items, and associated software and technologies, and is aligned with the control lists of all relevant multilateral export control regimes and international conventions.

The export of dual-use items listed under the SCOMET list is regulated, and specific authorizations are required from the Directorate General of Foreign Trade (“DGFT”), the Department of Atomic Energy, and the Department of Defence Production, depending on the category of the item and their respective jurisdictions. The DGFT has undertaken several initiatives to facilitate the export of dual-use items. These include strengthening its e-licensing platform, introducing a liberalized general authorization policy for export of dual use items after repair in India, easing restrictions on the export of dual-use chemicals and related equipment, and implementing a global authorization policy for intra-company transfers.

These measures have eased compliance burdens, encouraged domestic value addition through repair and re-export operations, and struck a balance between export facilitation and safeguarding of security interests.

Production-Linked Incentive Scheme for Defence Sector

The Government of India’s Production Linked Incentive (“PLI”) Schemes aim to boost indigenous manufacturing and innovation across key sectors; however, no dedicated PLI scheme currently exists for defence equipment manufacturing. The PLI Scheme for drones and drone components, introduced in 2021 with a modest outlay of INR 1.2 billion, incentivized domestic production through a 20% value addition incentive over three years but has since expired.

Building on its success, the Government is now contemplating a PLI 2.0 with an expanded financial outlay and a broader scope, potentially encompassing defence manufacturing. There is a strong case for expanding the PLI scheme to include a broader range of dual-use technologies, such as airborne early warning systems, surveillance equipment, jamming devices, radar systems, sensors, and robotics. Expansion of the scope of the PLI 2.0 is expected to accelerate self-reliance in high-tech defence capabilities, build domestic defence manufacturing ecosystem, and enhance the export potential of defence products from India.

Conclusion

Recent regional developments suggest that the Government of India will ramp up its efforts to increase production, innovation, international collaborations, investment, expenditure, and procurement in the defence sector. Given global dynamics and India’s stated ambitions, exports of locally manufactured defence products and technologies will also likely increase. Relatedly, the Indian regulatory framework surrounding the defence industry is poised to evolve further in response to urgent national security challenges.

Conflicting pressures may lead India to recalibrate its existing international relationships in respect of defence purchase and procurements, including on account of ongoing uncertainty in global trade dynamics. As of 2024, India remained the largest export destination for arms for both Russia and France. However, it appears that India is reducing its dependence on Russia and increasingly shifting towards US- and French-made military equipment. Such shifts are likely to produce new opportunities for global defence firms, even while Russia may remain an important defence supplier despite its decreasing share.

After designating India as a major defence partner (in 2016), the US elevated India to Strategic Trade Authorization Tier 1 status in 2018, which allows India to receive license-free access to a wide range of military and dual-use technologies regulated by the US Department of Commerce. As of January 2025, US-India defence trade cooperation continued to expand with the Logistics Exchange Memorandum of Agreement (LEMOA); Communications, Compatibility and Security Agreement (COMCASA); and the Industrial Security Agreement (ISA). Further, in 2020, the two countries signed the Basic Exchange & Cooperation Agreement (“BECA”) for geo-spatial cooperation. The BECA is a defence pact to facilitate the sharing of high-end military technology, geospatial maps, and classified satellite data between the militaries of both nations. In addition, the Initiative on Critical and Emerging Technologies (iCET) seeks to strengthen joint R&D and industrial co-development.

In February 2025, India and France elevated their defence relationship as part of their existing Strategic Partnership, including through an R&D framework for cooperation in defence technologies. Meanwhile, Israel’s strong defence-industrial alignment with India, comprising technology transfer protocols and joint ventures, covers UAVs, missiles, surveillance, air defence, artillery, rifles, and mortar systems.

With India’s strategic push for self-reliance, openness to FDI, and pursuit of international collaborations in defence manufacturing, G2G arrangements may help companies from India’s partner nations to (i) participate in joint ventures for domestic procurement and exports, (ii) benefit from Indian R&D incentives, and (iii) integrate into a growing, future-ready defence ecosystem.

This insight has been authored by Ajinkya Gunjan Mishra, Abhishek Tewari, Dr. Deborshi Barat and Prakriti Anand from S&R Associates. They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.

New Opportunities in India’s Defence Sector

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