Strengthening India’s defence supply chains: The role of policy, taxation, and investment reforms

The Government has introduced two major policy shifts in succession - the Defence Procurement Manual 2025 and the draft Defence Acquisition Procedure (DAP) 2026 aimed at overhauling the acquisition ecosystem and accelerating indigenisation.

Draft DAP 2026 marks one of the most significant shifts in India’s defence acquisition philosophy signaling a doctrinal shift from “manufacturing in India” to “ownership of design and technology”. The increasing emphasis on Indigenous Design across most procurement categories is steering acquisition toward design-led self-reliance, making Indian-origin intellectual property just as critical as manufacturing content.

Procurement categories as well as timelines have been further streamlined. Further, the minimum Indigenous Content (IC) requirement has also been raised from 50 per cent to 60 per cent across several key categories with Cost of Maintenance, Repair and Overhaul (MRO) hub proposed to be included in IC computation.

Despite these advances, certain challenges remain. Meeting the higher IC requirements add complexity and may limit Original Equipment Manufacturer (OEM) participation, especially where technology transfer is difficult. Likewise, the incentives introduced for IC are modest relative to the cost implications of deep indigenisation. These gaps could constrain participation and slow ecosystem‑wide capability development.

Strengthening India’s defence supply chain requires investment reforms that attract both domestic and foreign capital, while enabling meaningful technology transfer. India’s ability to attract high‑quality capital will depend on aligning procurement rules, Foreign Direct Investment (FDI) norms, and incentive structures.

While the Government has permitted FDI of up to 100 per cent in the defence sector, the approval process would benefit from further simplification and clearly defined, time‑bound decision‑making. Predictability and speed are critical if India is to compete with other global defence manufacturing hubs for capital and technology.

A key friction in the current framework is the mismatch between ownership and control norms under defence procurement policies and India’s FDI regime. This could be addressed by allowing wholly owned subsidiaries of foreign OEMs to qualify as ‘Indian Vendors’ across all DAP 2026 acquisition categories, without restrictive ownership or control conditions.

Further, the government has already begun signaling strong intent to strengthen domestic capacity. In FY 2025-26, Ministry of Defence earmarked 75 per cent of the modernisation budget amounting to INR 1,11,544 crore (~USD 11.9 Bn) for procurement through domestic industries³ signaling a strong push towards localised capability development.

Expanding Production Linked Incentive (PLI) schemes for the defence sector and targeted R&D funding would further encourage participation from private industry including MSMEs, and startups, accelerating the creation of a technologically advanced and competitive defence ecosystem. Moreover, incentivising civil-defence interplay, particularly in dual‑use technologies and shared infrastructure such as MRO, drones, cybersecurity, and advanced materials, will enable India to leverage the dynamism of its civilian industrial base for military readiness.

By strengthening the three foundational pillars of policy, taxation, and investment reforms, India can build a defence supply chain that is robust, future‑ready, globally competitive and export oriented.