The article was first published in The Economic Times Online on January 16 2026. Please click here to read the article.
The defence sector in India can emulate the success story of the IIMs – our very own premier management institutes, the first of which was established in Kolkata (then Calcutta) in 1961 and the latest (No. 22) in 2025 in Guwahati. An interesting fact is that the first one, i.e. IIM Calcutta, was established through collaboration with the Alfred P. Sloan School of Management at the Massachusetts Institute of Technology (MIT) and has become one of the world’s leading management institutions. India’s defence sector can also achieve similar global stature.
With Foreign Direct Investment (FDI) in defence opened up only in 2001 and further liberalised in 2020, one of the catalysts would be the Indian government actively fostering strategic collaborations with international partners to accelerate technology transfer and innovation, positioning India among the top defence nations. To scale these collaborations at a faster pace, the government should focus on co-development, joint research and innovation across defence technologies, and should consider relaxing norms on Indigenous Content (IC) computation by waiving foreign content brought in through technology transfer agreements.
Secondly, with the upcoming iteration of the Defence Acquisition Procedure (DAP), it presents a timely opportunity to further liberalise the defence ecosystem, streamline procurement timelines and effectively catalyse self-reliance in defence manufacturing by incorporating targeted reforms, including phased localisation, Micro, Small and Medium Enterprises (MSME)-focused multipliers, recognition of raw material unavailability, credit for export-linked IC and stronger vendor-driven ecosystem development.
India is progressing in the sector, but the road ahead is long. Despite ranking among the world’s top five defence spenders, India’s absolute defence expenditure is much lower when compared to the USA, China and Russia. However, encouragingly, defence manufacturing has grown more than threefold in the last decade, rising from Rs 0.46 lakh crore ($5.1 billion) in 2014–15 to Rs 1.50 lakh crore ($16.5 billion) in 2024–25, reflecting sustained policy support for domestic manufacturing. Building on this momentum, the country now targets achieving defence production of Rs 3 lakh crore ($33 billion) and annual exports of Rs 0.5 lakh crore ($5.5 billion) by 2029, signalling its intent to emerge as a trusted global defence market.
The third critical catalyst will be a sustained focus on capital expenditure. India’s defence capital expenditure has continued to expand, with the overall defence budget rising by ~10 per cent in Budget 2025–26 from 2024–25. However, growth in capital expenditure, which is critical for modernisation and indigenisation, was comparatively modest at around 5 per cent for Budget 2025–26 over the budget estimate of 2024–25. Recognising this gap, the Defence Secretary, at a recent event, indicated plans to raise defence expenditure by 20 per cent in the 2026–27 budget.
An instance that demonstrates the need to significantly increase the capital expenditure budget is the funds earmarked by the US government for only two projects -- the Golden Dome and next-generation air dominance fighters (NGAD) -- amounting to $24.7 billion and $2.75 billion respectively, which together exceed the overall defence capital expenditure of India for 2025–26.
Capital expenditure, however, must be complemented by a strong and sustained push on defence Research & Development (R&D). India’s contribution to defence R&D accounts for Rs 26,816 crore ($2.9 billion) out of a total defence budget of Rs 6.81 lakh crore ($74.8 billion) for 2025–26, which is far below the R&D budget of the global leader -- the US --which allocated $141.2 billion to the Research, Development, Testing and Evaluation (RDT&E) sector in 2025. This shortfall in India’s defence R&D budget hinders the country’s ambitions to emerge as a technology leader in defence. India’s current allocation is abysmally low and, to see quick and tangible results, the government should allocate at least 10 per cent of the budget to R&D to start with and empower industry to participate in R&D programmes at scale, while also allocating at least a 30 per cent increase in the capital expenditure budget.
Lastly, India must introduce bold tax incentives and policy measures to unlock greater private-sector, MSME and startup participation and sustain this growth trajectory. To catalyse defence manufacturing, the government should prioritise the following incentives:
