India's defence sector stands at a pivotal juncture as the nation eyes Budget 2026, with a clear mandate to accelerate Atmanirbhar Bharat initiatives. Emulating the triumphant trajectory of the Indian Institutes of Management (IIMs) offers a compelling blueprint.

Established starting with IIM Calcutta in 1961 through collaboration with MIT's Sloan School, these institutions have ascended to global prominence. Similarly, India's defence industry can attain world-class stature by forging strategic international partnerships to expedite technology transfer and innovation.

Foreign Direct Investment (FDI) in defence, liberalised progressively since 2001 and further in 2020, serves as a vital catalyst. The government must proactively nurture co-development and joint research endeavours across defence technologies.

Relaxing norms on Indigenous Content (IC) computation—particularly by waiving foreign content via technology transfer agreements—would hasten scaling of these collaborations, propelling India towards the ranks of premier defence powers.

The forthcoming revision of the Defence Acquisition Procedure (DAP) presents an opportune moment for ecosystem liberalisation. Reforms should encompass streamlined procurement timelines, phased localisation mandates, multipliers favouring Micro, Small, and Medium Enterprises (MSMEs), recognition of raw material shortages, export-linked IC credits, and robust vendor ecosystem development. These measures would decisively catalyse self-reliance in defence manufacturing.

Progress in the sector is evident, yet challenges persist. India ranks among the world's top five defence spenders, but its absolute expenditure pales against the United States, China, and Russia. Hearteningly, defence manufacturing has surged over threefold in the past decade, from ₹0.46 lakh crore ($5.1 billion) in 2014–15 to ₹1.50 lakh crore ($16.5 billion) in 2024–25, buoyed by consistent policy backing.

This momentum underpins ambitious targets: ₹3 lakh crore ($33 billion) in defence production and ₹0.5 lakh crore ($5.5 billion) in annual exports by 2029. Achieving these will cement India's status as a reliable global defence market player. Sustained emphasis on capital expenditure emerges as the third cornerstone catalyst.

India's overall defence budget grew by approximately 10% in Budget 2025–26 over the previous year. However, capital expenditure—essential for modernisation and indigenisation—expanded more modestly at around 5%. The Defence Secretary recently signalled intent to elevate defence outlay by 20% in the 2026–27 budget, addressing this disparity.

A stark illustration underscores the urgency: the US allocates $24.7 billion solely to the Golden Dome project and $2.75 billion to next-generation air dominance fighters (NGAD), surpassing India's entire 2025–26 defence capital expenditure. Such benchmarks highlight the imperative for substantial hikes to fuel indigenous capabilities.

Complementing capital outlays demands a vigorous thrust into defence Research and Development (R&D). India's 2025–26 allocation stands at ₹26,816 crore ($2.9 billion) from a total budget of ₹6.81 lakh crore ($74.8 billion)—a fraction compared to the US's $141.2 billion for Research, Development, Testing, and Evaluation (RDT&E).

This R&D shortfall impedes India's aspirations as a defence technology vanguard. To yield swift, tangible outcomes, the government should earmark at least 10% of the budget for R&D initially. Empowering industry for large-scale R&D participation, alongside a 30% capital expenditure increase, would bridge critical gaps.

Finally, audacious tax incentives and policies must galvanise private sector, MSME, and start-up engagement to perpetuate growth. Key proposals include product-linked incentives tailored for defence; investment-linked allowances for capital expenditure in manufacturing and Maintenance, Repair, and Overhaul (MRO) facilities; weighted deductions or tax credits for R&D expenditures.

For foreign entities transferring technology, mitigating Permanent Establishment (PE) risks through presumptive taxation would enhance ease of doing business. A 10-year tax holiday for new defence sector units would further ignite investments. These steps would unlock unprecedented private participation.

India's defence metamorphosis now pivots on flawless execution over mere ambition. Synergising sustained capital infusions, R&D-centric capability enhancement, IC norm liberalisation, and competitive global tax-policy frameworks is imperative.

These catalysts, pursued in unison, will reposition India as a formidable global manufacturer, technology collaborator, and exporter.

Agencies