India Reserves 75% of Defence Acquisitions Despite USD 26.5m FDI

India reserved 75% of its FY2026-27 defence capital-acquisition budget for domestic procurement, earmarking Rs 1,39,000 crore from Rs 1,85,000 crore. Defence-sector foreign direct investment, or FDI, totalled only USD 26.5 million over the 25 years through September 2025, despite progressively liberalised ownership limits.

How large is India's domestic-procurement reservation?

India's domestic-procurement reservation is Rs 1,39,000 crore, or 75% of the FY2026-27 Rs 1,85,000 crore capital-acquisition budget. The wider capital allocation to the Defence Forces exceeds Rs 2,19,000 crore, 21.84% above FY2025-26 Budget Estimates, while capital acquisition is approximately 24% higher. Capital acquisition is the equipment-buying component of the larger capital head, rather than all capital spending.

The reservation directs a defined part of a growing modernisation budget to domestic suppliers. Frost & Sullivan estimates capital outlay at USD 26.04 billion in FY2026-27 Budget Estimates, equal to 29.44% of total defence expenditure, compared with USD 22.25 billion and 28.24% in FY2025-26 Revised Estimates. The increase is therefore measured both in capital outlay and in its share of the total budget.

Capital expenditure accounts for 27% of FY2026-27 defence outlays, while revenue expenditure accounts for 73%, according to the report. The 75% domestic-procurement rule consequently does not cover the whole defence budget, including salaries, pensions and routine operating expenditure.

Why has India reserved 75% of defence acquisitions for domestic suppliers?

India has linked the 75% reservation to Atmanirbhar Bharat, or Self-Reliant India, which seeks domestic value addition and Indian design-and-production capability. Five Department of Military Affairs positive indigenisation lists cover 509 items, ranging from fighter aircraft and unmanned aerial vehicles to artillery guns and spares, with procurement restricted to domestic sources by specified cut-off dates through FY2027.

The Defence Acquisition Procedure, or DAP, 2020 provides the purchasing categories behind this approach. Buy (Indian-IDDM), Buy (Indian), Buy and Make (Indian), and Buy (Global-Manufacture in India) have indigenous-content requirements of 50% to 60%. Buy (Indian-IDDM), meaning Indigenous Design, Development and Manufacture, additionally requires Indian design ownership and at least 30% indigenous content.

Service budgets show why the policy is relevant to different equipment needs. Capital expenditure is 10% of the Indian Army budget in FY2026-27, against 53% for the Indian Navy and 52% for the Indian Air Force. The Navy has 43 vessels under construction towards a 175-platform force structure by FY2035, while the Air Force has 31 active fighter squadrons against a sanctioned strength of 42.

Why has defence-sector FDI remained at USD 26.5 million?

Defence-sector FDI remained USD 26.5 million over the 25 years through September 2025 because the report cites implementation challenges despite more permissive ownership rules. Since FY2014, the automatic-route limit has risen from 26% to 49%, and to 74% for new licence-holders. The USD 26.5 million figure is cumulative and cannot be directly compared with a single-year procurement reservation of Rs 1,39,000 crore.

Ownership limits also differ across DAP 2020 procurement categories. Buy (Indian-IDDM) permits up to 49% FDI under the automatic route, while Buy (Indian), Buy and Make (Indian), and Buy (Global-Manufacture in India) permit up to 74%. These rules can position foreign original equipment manufacturers, or OEMs, as equity partners, technology providers or subcontractors instead of primary domestic system integrators.

The Make pathways provide further participation routes without demonstrating realised foreign investment. Make-I supports research and development with 70% government funding, capped at Rs 250 crore per agency, and a 49% FDI cap; Make-II is self-funded prototyping with a 49% cap; and Make-III covers import substitution for in-service equipment with a 74% cap. India is considering a 74% automatic-route limit for existing licence-holders, but the report presents this as a proposal rather than an adopted rule.

What does the gap mean for India's import and export strategy?

The gap means India is using procurement demand, local-content conditions and import restrictions to develop domestic capacity while recorded foreign investment remains limited. Since August FY2020, the five positive indigenisation lists have set domestic-procurement deadlines for 509 items, and defence public-sector undertakings have issued parallel lists, including a fifth list covering 346 items in FY2024.

Domestic procurement has not eliminated overseas purchases. Defence imports fell from USD 3,958 million in FY2021 to USD 1,540 million in FY2023, then recovered to USD 2,863 million in FY2025; the reported FY2015-FY2025 compound annual growth rate was 0.47%. The FY2025 recovery followed emergency procurement and operational requirements in the report, showing that import substitution depends on domestic availability and production capacity.

Exports moved in the opposite direction, rising from USD 42 million in FY2015 to USD 4,416 million in FY2025, a reported 59.3% compound annual growth rate. The government has revised its FY2029-30 targets to Rs 3,00,000 crore in defence production and Rs 50,000 crore in annual defence exports. The source does not state that the USD 26.5 million of cumulative FDI is sufficient to support those targets.

Conclusion

India's 75% domestic reservation channels Rs 1,39,000 crore of FY2026-27 capital acquisitions towards Indian procurement and reinforces DAP 2020 content rules and the 509-item indigenisation programme. The scale of the reservation contrasts with USD 26.5 million of cumulative defence-sector FDI through September 2025, indicating that liberalised ownership rules have not yet produced comparable recorded investment.

The disclosed development to watch is the possible increase of the automatic-route FDI limit to 74% for existing defence licence-holders. Its effect will depend on formal adoption and project execution, as well as whether domestic suppliers can meet demand while FY2026-27 capital outlay reaches USD 26.04 billion and indigenisation-list deadlines run through FY2027.