The foundations were laid by the Industrial Policy of 1991, which marked India’s transition from a state-controlled framework to a market-oriented economy, says Pawan Khatter, Partner and National Aerospace and Defence Leader at EY India. “Defence production was shifted from a ‘reserved’ category to a licensed regime and subsequently liberalised further through progressive foreign direct investment (FDI) and defence procurement policies, as well as private sector participation.”
Captain Vishal Kanwar (Retired), Partner and Leader for Aerospace, Defence and Space at PwC, identifies this as the single most structurally impactful reform in defence manufacturing. It culminated in the Defence Acquisition Procedure (DAP) 2020 and the revised DAP 2026 expected this year.
“Previously, defence was a near-exclusive preserve of the public sector undertakings (DPSUs) and the Defence Research & Development Organisation (DRDO),” says Kanwar. The shift began with the Kelkar Committee recommendations in 2005, and accelerated with the Defence Procurement Procedure (DPP) 2016 introducing the ‘Make in India’ categories, and crystallised with DAP 2020’s indigenous content mandates.
Kanwar also cites the institutionalisation of the Positive Indigenisation Lists (PILs), which identify items that can no longer be imported after a specified date, and the post-2020 restructuring of the defence acquisition framework as milestones in the sector’s reform journey.
Structural Hurdles
Nonetheless, the private sector’s efforts to carve out a meaningful role in an ecosystem historically dominated by the public sector have been marked by structural hurdles, a reality reflected in the numbers.
Between FY17 and FY25, domestic defence production more than doubled, rising from Rs 74,054 crore to Rs 1.54 trillion. Over the same period, output from private firms grew even faster, from Rs 14,104 crore to Rs 33,978 crore.
Yet their share remained broadly unchanged at around 19-21 per cent between FY17 and FY24, before rising to 22 per cent in FY25. The FY26 figures suggest that that equilibrium has finally been broken. Since FY17, overall output has risen by about 140 per cent to roughly Rs 1.78 trillion, while production by private firms has nearly trebled, growing by about 198 per cent to around Rs 42,000 crore, or about 23.60 per cent of the national total.
At present, principal surface combatants, combat aircraft and submarines continue to be built exclusively by DPSUs. Armoured vehicles, artillery and small arms, however, have emerged as areas where private firms have made inroads.
Changes afoot
That dynamic, however, is expected to change. First, the Ministry of Defence (MoD) has committed to doing away with nomination, with aircraft carriers and strategic missiles and submarines perhaps remaining a relatively limited exception. Second, a major programme has gathered momentum, with the private sector set to be its assured beneficiary.
Towards the end of May, the Aeronautical Development Agency issued a Request for Proposal (RFP) for the development and production of prototypes of the country’s first radar-evading fighter jet, the Advanced Medium Combat Aircraft. Significantly, the RFP was issued to three shortlisted bidders from the private sector, with state-run Hindustan Aeronautics Limited (HAL) having failed to qualify at the expression of interest stage.
Whichever of the three contenders—the Tata Group and two consortia, one led by the Kalyani Group and the other by Larsen & Toubro (L&T) —ultimately prevails, HAL’s monopoly on combat-aircraft manufacturing is set to end.
“India is at an inflection point, poised for a breakout, with strong industry momentum and the capacity to scale,” says EY India’s Khatter.
He stresses that the next phase should focus not only on platforms but also on critical components, electronics, materials, semiconductors, propulsion technologies, sensors and artificial intelligence infrastructure.
Rahul Rawat, a research assistant with the Observer Research Foundation’s Strategic Studies Programme, says with the defence industry growing in scale, production and exports, it was critical to establish benchmarks and assessment parameters to track the progress of the defence industrial base.
He also notes that the private sector, as a late entrant, was competing with the DPSUs despite structural disadvantages. “As shown by its higher export ratio vis-à-vis overall domestic production, there is potential to foster competitiveness and create a more conducive ecosystem.”
Between 2016–17 and 2025–26, total defence exports increased more than 25-fold, from Rs 1,521.86 crore to Rs 38,424.01 crore. Over the same period, private-sector defence exports grew nearly 90-fold, from Rs 194.35 crore to Rs 17,352.86 crore. Notably, private-sector firms accounted for more than half of India’s defence exports in seven of the ten years.
Encouraging outlook
Captain Kanwar (Retired) notes that investor interest has been activated. “We are seeing private equity and strategic capital begin to flow into defence manufacturing, particularly in drones, electronics, missile systems and maintenance, repair and overhaul, which is a reliable indicator that the sector is transitioning from being policy-dependent to commercially viable.”
He stresses that while the Indian aerospace and defence industry today may be roughly a decade behind the automotive sector, its outlook is highly encouraging.
A senior industry leader, speaking on condition of anonymity, says meaningful private-sector participation only began to gain momentum after 2015. He adds that continued reforms — including faster acquisition timelines, possible reconsideration of the lowest-bidder framework, and a shift from platform procurement to capability acquisition — would enable the sector to realise its potential.
The government aims to achieve Rs 3 trillion in annual defence production by 2028-29 and has called on the private sector to eventually account for at least half of that output. Recent policy signals — from the draft DAP 2026’s push for “civil-military fusion” to the MoD’s vision of “a unified dual-production pipeline” — suggest that meeting both objectives may depend as much on cooperation between private firms and DPSUs as on competition between them.
