India’s Defence Industry: The 65% Flip

India’s defence story has not changed overnight.

It has evolved steadily, visible only when you look at the numbers.

Today, India is the fifth-largest defence spender globally, allocating close to 2% of its GDP to the sector.

And for much of that spending’s history, the country relied heavily on imports.

That dependence is now giving way to domestic capability, as defence becomes central to strategic independence and economic priorities.

To understand this shift, let us first look at what the defence industry actually includes.

It covers everything required to build and sustain military capability across land, air, and sea, and increasingly in space and cyber domains.

This makes defence an integrated ecosystem spanning manufacturing, electronics, software, and advanced engineering.

But for a long time, much of this ecosystem depended on imports.

In FY15, nearly 65-70% of defence equipment was sourced from abroad.

Over time, that dependence has reduced significantly.

In FY26, import reliance has come down to roughly 35%.

The system is shifting from import-heavy dependence to domestic capability.

This shift becomes clearer when you look at production numbers.

In FY15, India’s defence production stood at ₹46,429 crore.

By FY24, this had risen to ₹1.27 lakh crore and is expected to reach ₹1.75 lakh crore by FY26.

In just ten years, production has more than tripled. But production alone does not capture the full picture.

The real signal of capability lies in exports.

India’s defence exports have grown from just ₹686 crore in FY14 to ₹21,083 crore in FY24, and further to ₹38,424 crore in FY26.

The private sector leads with exports of ₹17,353 crore, while the Defence Public Sector Undertakings contribute ₹21,071 crore.

Today, Indian defence products are exported to more than 80 countries.

From being a buyer in the global defence market, India is gradually becoming a supplier.

Behind this transformation lies a combination of policy push, capital allocation, and structural reform.

To begin with, defence spending itself has expanded significantly.

From ₹2.84 lakh crore in FY14, the defence budget is expected to reach ₹7.85 lakh crore by FY27.

This steady increase has created a strong demand base for domestic manufacturing.

Alongside spending, policy has played a defining role.

The Atmanirbhar Bharat initiative placed clear emphasis on sourcing locally designed, developed, and manufactured products.

Positive indigenisation lists were introduced to systematically reduce imports.

So far, more than 5,500 items have been identified for localisation, with over 3,000 already indigenised.

This has created visibility and opportunity for domestic players.

At the same time, the government has actively encouraged innovation.

The Innovations for Defence Excellence (iDEX) initiative has opened the sector to startups and MSMEs, offering grants of up to ₹1.5 crore.

This has expanded the defence ecosystem beyond traditional manufacturers.

The production process has also been simplified.

Under the ‘Make’ procedure, the government now funds up to 70% of development costs under Make-I, while Make-II offers relaxed eligibility and minimal paperwork.

These changes reduce entry barriers and accelerate project timelines.

Capital flows have also been made more flexible.

Foreign Direct Investment (FDI) in defence has been liberalised, allowing up to 74% through the automatic route and up to 100% with government approval.

FDI inflows remained modest at ₹154 crore between 2000 and 2025, while startup funding grew from ₹27 crore in 2016 to ₹1,653 crore in 2025.

Physical infrastructure has also kept pace with policy intent.

Defence industrial corridors in Uttar Pradesh and Tamil Nadu have attracted investments of over ₹9,000 crore, with a potential pipeline exceeding ₹66,000 crore.

These corridors aim to create manufacturing clusters, improving efficiency and supply chain integration.

Amid these structural shifts, a set of companies has emerged at the centre.

Companies like Hindustan Aeronautics Limited, Bharat Electronics Limited, Garden Reach Shipbuilders & Engineers, Bharat Dynamics Limited, and Data Patterns (India) Limited highlight the scale and diversity of capabilities.

Their growing order books and expanding execution pipelines reflect sustained demand as well as increasing complexity in domestic manufacturing.

Looking ahead, the direction is clearly defined.

India is targeting ₹3 lakh crore in defence production and ₹50,000 crore in exports by 2029.

The aim is to achieve 70% self-reliance by 2027, with defence spending expected to grow at 7-8% annually over the next five years.

Together, these trends point to a structural shift, not a cyclical one.

And as production scales, exports expand, and capabilities deepen, defence is evolving from a strategic necessity into a long-term industrial engine.

Sources:

Confederation of Indian Industry (CII)
KPMG
PIB
The Hindu Business Line
IBEF