Industry Overview in India
India's defence and aerospace sector is one of the fastest-growing strategic industries globally, with the defence market expected to reach USD 30.52 billion in 2025 and projected to grow at a CAGR of 4.24% to USD 37.57 billion by 2030. The broader aerospace and defence market, valued at USD 28.68 billion in 2024, is projected to grow at 7.10% CAGR through 2034, driven by modernisation programmes, geopolitical tensions, and government policy reforms.
India is the world's largest arms importer, accounting for approximately 9.8% of global arms imports (2019–2023), though this dependency is rapidly decreasing as domestic production capabilities expand. The value of Indian defence production exceeded INR 1.27 lakh crore (USD 15.2 billion) in FY 2024-25, with defence exports reaching a record INR 21,083 crore (USD 2.5 billion). The government has set an ambitious target of INR 3 lakh crore (USD 35 billion) in domestic defence production by 2029.
The sector encompasses a wide ecosystem including defence equipment manufacturing, aerospace components, military electronics, shipbuilding, ammunition, missiles, unmanned aerial vehicles (UAVs), space technology, and maintenance, repair, and overhaul (MRO) services. With the government declaring 2025 as the Year of Reforms for defence acquisition and production, the sector presents significant opportunities for foreign direct investment and technology partnerships.
FDI Policy & Entry Routes
India's FDI policy for the defence sector has been progressively liberalised over the past decade, reflecting the government's Atmanirbhar Bharat (Self-Reliant India) vision. The current framework is as follows:
- Up to 74% FDI: Permitted under the automatic route — no prior government approval required. This was raised from 49% in September 2020.
- Above 74% up to 100% FDI: Permitted through the government approval route, subject to the investor demonstrating access to modern technology that will result in technology transfer to India.
- Up to 49% FDI without Industrial License: A simplified declaration to the Ministry of Defence post-investment is sufficient; no prior approval or industrial license is needed.
Key conditions and safeguards:
- Press Note 3 Restrictions: Any FDI from an entity in, or with a beneficial owner in, a country sharing a land border with India (including China, Pakistan, Bangladesh, Myanmar, Nepal, Bhutan, Afghanistan) requires mandatory government approval regardless of the percentage.
- Security Clearance: Mandatory security clearance from the Ministry of Home Affairs and Ministry of Defence for all substantial investments, with enhanced scrutiny under the updated Security Manual (2025).
- Indian Management Control: The board of directors and key management personnel must include Indian nationals, and the company's CEO/MD must be an Indian resident.
- Technology Safeguards: Post-investment scrutiny ensures national security review mechanisms remain in place even for automatic route investments.
A significant 2025 reform is the proposal to grant "Indian Vendor" status to 100% foreign-owned subsidiaries incorporated in India, subject to technology transfer commitments. This would unlock access to preferential procurement categories, including contracts with 75% domestic content thresholds — a transformative change for global defence OEMs considering India operations.
Required Licenses & Regulatory Bodies
Defence manufacturing in India requires navigating a multi-layered regulatory framework involving several government bodies. The licensing requirements depend on the specific defence items being manufactured.
| License/Approval | Issuing Body | Timeline | Purpose |
|---|---|---|---|
| Industrial License (IDR Act) | DPIIT | 5 months | Required for manufacturing items listed in Annexure-I of Press Note 1 (2019) — defence equipment, industrial explosives, hazardous chemicals for military use |
| Industrial License (Arms Act) | DPIIT + MoD | 5–7 months | Required for arms, ammunition, weapons above 12.7mm calibre, tanks, armoured fighting vehicles, and allied defence equipment |
| Security Clearance | MHA / MoD | 2–6 months | Background verification of promoters, directors, and key personnel; mandatory for all defence manufacturing licenses |
| DDP Registration | Dept of Defence Production | 3–5 months | Registration with the Department of Defence Production for participation in defence procurement programmes |
| DRDO TOTR Approval | DRDO | 3–6 months | Required for receiving technology transfer from DRDO for licensed production of defence systems |
| End-User Certificate | MoD / MEA | 2–4 weeks | Required for each import/export transaction of defence items; certifies end-use within India |
| DGCA Certification | DGCA | 6–12 months | Type certification, production approval, and airworthiness certification for civil aerospace products |
| CEMILAC Certification | CEMILAC, DRDO | 6–18 months | Airworthiness certification for military aircraft, systems, and components |
Applications for Industrial Licenses are submitted online through the DPIIT's G2B portal. Licenses under the Arms Act 1959 are issued without a validity period, provided the licensee sets up the manufacturing facility within 7 years. The Ministry of Defence's Defence Investor Cell provides a single-window facilitation service for foreign investors navigating these approvals.
Entity Structure Options
Foreign investors entering India's defence and aerospace sector must carefully choose their entity structure based on their investment level, technology transfer plans, and procurement eligibility objectives.
- Wholly Owned Subsidiary (up to 74% automatic / 100% government): A Private Limited Company incorporated under the Companies Act, 2013. This is increasingly preferred by global OEMs seeking full control over Indian operations. With the proposed "Indian Vendor" status reform, wholly owned subsidiaries could gain access to preferential procurement categories. Requirements: at least one Indian resident director, CEO/MD must be an Indian resident, and Indian nationals in key management positions.
- Joint Venture with Indian Partner: The most common and historically preferred structure in Indian defence. Over 50 JVs have been approved between foreign OEMs and Indian companies. Benefits include access to the Indian partner's defence procurement relationships, shared regulatory navigation, and compliance with indigenisation requirements. Examples: Tata Boeing Aerospace, Tata Lockheed Martin Aerostructures, L&T MBDA Missile Systems, BEL-Thales JV.
- Branch Office: Suitable for companies providing defence consultancy, maintenance services, or executing specific contracts awarded to the parent company. A branch office cannot manufacture defence items in India but can provide after-sales support, training, and technical services.
- Liaison Office: Useful as a preliminary market entry for understanding India's defence procurement landscape, building relationships with the Indian military and DPSUs (Defence Public Sector Undertakings), and identifying potential JV partners. Cannot earn revenue in India.
For companies focused on defence startups and innovation, registering as a Private Limited Company and enrolling in the Startup India programme provides access to the iDEX ecosystem, ADITI grants, and simplified compliance. LLPs are generally not preferred for defence manufacturing due to Industrial License requirements favouring companies incorporated under the Companies Act.
Tax Incentives & Government Schemes
India offers a compelling array of fiscal incentives and innovation schemes designed to attract foreign investment and build indigenous defence manufacturing capabilities.
Concessional Corporate Tax
New manufacturing companies can avail an effective tax rate of 17.16% (15% + surcharge + cess) under Section 115BAB, significantly lower than the standard 25.17% rate. This applies to defence manufacturing companies incorporated after October 1, 2019.
iDEX — Innovations for Defence Excellence
The iDEX programme, administered by the Defence Innovation Organisation (DIO), is India's primary defence innovation ecosystem. Key metrics as of February 2025:
- 549 problem statements issued across all three services and coast guard
- 619 startups/MSMEs engaged
- 430 contracts awarded
- 43 products procured by Armed Forces worth INR 2,400+ crore
- Procurement orders totalling INR 1,000+ crore for 26 iDEX products
- FY 2025-26 outlay: INR 449.62 crore
ADITI Scheme
The ADITI (Acing Development of Innovative Technologies with iDEX) scheme provides grants up to INR 25 crore per project for developing deep-tech critical technologies. With a total outlay of INR 750 crore over 2023–2026, ADITI targets 30 critical technologies spanning AI, quantum computing, cyber-tech, satellite communications, semiconductors, autonomous weapons systems, and underwater surveillance.
Additional Incentives
- SEZ Benefits: Defence manufacturing units in Special Economic Zones enjoy 100% income tax exemption for the first five years, 50% for the next five, plus customs duty exemptions on imports.
- Customs Duty Exemptions: Nil or concessional customs duty on specified defence inputs, raw materials, and capital goods. Complete exemption for DRDO-approved research imports.
- R&D Deductions: Companies with DSIR-approved R&D centres claim 100% weighted deduction on R&D expenditure under Section 35.
- Defence Budget Allocation: The FY 2025-26 Union Budget allocates INR 6.81 lakh crore to defence, with three-quarters of the modernisation outlay reserved for domestic sourcing — creating a massive captive market for India-based manufacturers.
- Positive Indigenisation Lists: Five lists covering 500+ items banned from import, creating guaranteed domestic demand for manufacturers operating in India.
Key Compliance Requirements
Defence and aerospace companies face stringent sector-specific compliance obligations beyond standard company law requirements, driven by national security considerations.
Security Compliance
- Security Manual (Updated 2025): Enhanced emphasis on cyber and physical security, risk-based categorisation of industries, mandatory compliance for all Industrial License holders under DDP
- Personnel Security Clearance: Character and antecedent verification including police checks for all personnel handling classified information, mandatory under the Official Secrets Act, 1923
- Third-Party Security: All subcontractors and consultants handling classified information must sign Non-Disclosure Agreements and undergo security checks
- Facility Security: Physical security standards for manufacturing facilities, secure storage for classified documents, and cybersecurity protocols for defence IT systems
Defence Offset Compliance
- Offset Obligations: Foreign vendors with procurement contracts exceeding INR 2,000 crore must invest 30–50% of contract value back into India's defence, aerospace, or internal security sectors
- Discharge Mechanisms: Direct purchase of eligible products/services from Indian defence companies, FDI in Indian defence manufacturing JVs, technology transfer to DPSUs/DRDO, or investment in defence R&D
- DOMW Portal: All offset discharge claims submitted through the Defence Offsets Management Wing (DOMW) digital portal for end-to-end tracking
Export Control
- SCOMET List: Dual-use items and defence technologies are controlled under India's Special Chemicals, Organisms, Materials, Equipment, and Technologies (SCOMET) list
- End-User Certificates: Required for each import/export transaction of defence items
- Wassenaar Arrangement: India joined the Wassenaar Arrangement in 2017, requiring compliance with international export control norms
Financial & Corporate Compliance
- FEMA/RBI Reporting: Annual Return on Foreign Liabilities and Assets, FC-GPR filings for FDI tranches, downstream investment reporting
- GST: 18% GST on defence products (exemptions for specified items supplied to Armed Forces), with input tax credit available
- Transfer Pricing: Arms-length pricing requirements for transactions with foreign parent/group companies
- Annual Filings: ROC filings, tax returns, DPIIT annual return on Industrial License utilisation
Setting Up Operations
Establishing a defence and aerospace business in India requires careful planning due to the multi-agency approval process. Below is a typical timeline for a foreign subsidiary:
| Step | Activity | Timeline | Key Requirement |
|---|---|---|---|
| 1 | Obtain DSC and DIN for directors | 3–5 days | At least one Indian resident director; CEO/MD must be Indian resident |
| 2 | Incorporate Private Limited Company via SPICe+ | 7–10 days | Memorandum must include defence manufacturing as object |
| 3 | Open Indian bank account and remit share capital | 10–15 days | File FC-GPR with RBI within 30 days of allotment |
| 4 | Register for GST, PAN, TAN | 5–7 days | Included in SPICe+ for PAN/TAN |
| 5 | Apply for Industrial License (DPIIT G2B Portal) | 5–7 months | Application reviewed by DPIIT + MoD; security clearance conducted in parallel |
| 6 | Obtain Security Clearance (MHA / MoD) | 2–6 months | Background verification of all promoters, directors, key management |
| 7 | DDP Registration for defence procurement eligibility | 3–5 months | Can be pursued in parallel with Industrial License |
| 8 | Set up manufacturing facility (lease/build) | 6–12 months | Must comply with facility security standards; must be operational within 7 years of license grant |
| 9 | Obtain product certifications (CEMILAC / DGCA) | 6–18 months | Type certification for each product category |
| 10 | Register on Defence Procurement Portal for bidding | 2–4 weeks | SRIJAN portal registration for identifying import substitution opportunities |
Total typical timeline: 12–18 months from company incorporation to production readiness, with the Industrial License and security clearance being the critical path items. Companies focused on non-licensable defence components or MRO services can commence operations faster (6–9 months).
The Defence Investor Cell under the Department of Defence Production provides single-window facilitation, assisting foreign investors with navigating the approval process, identifying Indian JV partners, and understanding procurement opportunities.
Case Studies / Major Foreign Players
Several global defence and aerospace majors have established significant operations in India through joint ventures and subsidiaries, serving as models for new entrants.
Boeing (USA) — Tata Boeing Aerospace Limited
Boeing's joint venture with Tata Advanced Systems Limited (TASL), Tata Boeing Aerospace Limited (TBAL), operates a state-of-the-art facility in Hyderabad that has delivered over 300 fuselages for the AH-64 Apache attack helicopter for customers worldwide, including the US Army and the Indian Army. The facility employs over 900 engineers and technicians, leveraging robotics, automation, and advanced aerospace manufacturing. Boeing also operates the Boeing India Engineering & Technology Centre (BIETC) in Bengaluru with over 5,500 engineers — its largest R&D centre outside the United States.
Lockheed Martin (USA) — Tata Lockheed Martin Aerostructures
Through their joint venture, Tata Lockheed Martin Aerostructures Ltd, India manufactures C-130J empennage assemblies for the global fleet, with more than 250 structures produced in India. The two companies are also establishing a depot-level MRO facility in Bengaluru for heavy maintenance, avionics upgrades, and structural inspections of the Indian C-130J fleet, with potential to serve regional operators.
Airbus (France/Germany) — Multi-Project Presence
Airbus has one of the most diversified presences among foreign defence OEMs in India, with three major initiatives: a Final Assembly Line (FAL) for C-295 military transport aircraft in collaboration with Tata Group (the first private-sector military aircraft FAL in India), an H-125 helicopter FAL with TASL under an eight-year contract for first deliveries by end 2026, and a USD 2 billion annual sourcing plan from Indian suppliers. Airbus employs over 3,600 people across India and supports 15,000+ jobs through its supply chain.
L&T MBDA Missile Systems (India/Europe)
Larsen & Toubro's joint venture with European missile manufacturer MBDA, established in 2017, develops and manufactures missile systems for the Indian military. The JV represents a model of deep technology transfer, with MBDA contributing system design and integration expertise while L&T provides manufacturing scale and defence procurement relationships.
Safran (France) — Engine Manufacturing
Safran Aircraft Engines has partnered with Hindustan Aeronautics Limited (HAL) for manufacturing components for the LEAP engine and other aerospace programmes. Safran has also signed agreements for potential co-development of engine technology for India's future fighter aircraft programmes, representing the highest level of technology partnership in the defence aerospace sector.
Frequently Asked Questions
Can a foreign company own 100% of a defence manufacturing business in India?
Yes, but with conditions. FDI up to 74% is permitted under the automatic route, while FDI above 74% up to 100% requires government approval and demonstration of access to modern technology that will benefit India. The company must be incorporated in India as a Private Limited Company, with an Indian resident as CEO/Managing Director and Indian nationals in key management positions.
What is the difference between an Industrial License under the IDR Act and the Arms Act?
The IDR Act license covers defence equipment, industrial explosives, and hazardous chemicals for military applications as listed in Annexure-I of Press Note 1 (2019). The Arms Act license covers arms, ammunition, weapons above 12.7mm calibre, tanks, armoured fighting vehicles, and allied defence equipment as listed in Annexure-II. Some products may require licenses under both acts. Arms Act licenses are issued without a validity period, provided the facility is set up within 7 years.
Is an Industrial License required for all defence-related manufacturing?
No. FDI up to 49% in defence companies not seeking an Industrial License requires only a post-investment declaration to the Ministry of Defence. Companies manufacturing non-licensable defence components (e.g., certain electronics, software, non-arms materials) may operate without an Industrial License. However, an Industrial License is mandatory for items listed in the IDR Act and Arms Act annexures.
What is the defence offset policy and when does it apply?
Foreign vendors with defence procurement contracts exceeding INR 2,000 crore (approximately USD 240 million) must invest 30–50% of the contract value back into India's defence ecosystem. Offset obligations can be discharged through direct purchases from Indian companies, FDI in Indian defence JVs, technology transfer to DPSUs/DRDO, or R&D investment. The policy has been revised multiple times (2005, 2012, 2016, 2020, 2023-24) to balance foreign participation with indigenisation goals.
How does the iDEX programme benefit foreign defence startups?
iDEX is open to Indian-registered startups and MSMEs, including those with foreign founders. Through Defence India Startup Challenges (DISC), iDEX issues problem statements from the Armed Forces, and selected companies receive grants up to INR 1.5 crore. The ADITI sub-scheme provides grants up to INR 25 crore for deep-tech projects. As of February 2025, iDEX has awarded 430 contracts and facilitated Armed Forces procurement worth INR 2,400+ crore. Foreign entrepreneurs can incorporate a Private Limited Company in India and register with Startup India to access the iDEX ecosystem.
What are the Positive Indigenisation Lists?
The Ministry of Defence has published five Positive Indigenisation Lists covering 500+ defence items that are banned from import beyond specified dates. These lists create guaranteed domestic demand for manufacturers operating in India, ranging from ammunition and armoured vehicles to radars, sonar systems, and electronic warfare equipment. For foreign investors, these lists signal which products have the strongest business case for India-based manufacturing.
Can a foreign defence company participate in Indian defence procurement tenders?
Foreign companies can participate directly as foreign OEMs in Buy (Global) and Buy & Make categories under the Defence Acquisition Procedure (DAP) 2020. However, preferential treatment is given to Indian companies (including foreign-invested Indian subsidiaries) under Buy (Indian-IDDM), Buy (Indian), and Buy & Make (Indian) categories. Establishing an Indian subsidiary or JV significantly expands procurement eligibility, especially for contracts with 50–75% indigenous content requirements.