The government is looking at easing the nomination-based system of awarding defence contracts in some key segments by moving to open tendering to encourage greater participation from private sector, including micro, small and medium enterprises (MSMEs), which would boost competition, a senior official has said.
The government is also reviewing offset policy to make procurement rules more industry-friendly, competitive and flexible as India looks to step up defence modernisation, the official said.
“The government is reviewing the defence acquisition procedure to increase private sector and MSME participation. One of the proposals is to ease the nomination-based tenders in many areas towards open bidding, which would help bring in more private players,” the official told Moneycontrol on condition of anonymity.
At present, procurement in many defence segments continues be on a nomination basis where contracts are directly awarded to public sector undertakings such as Hindustan Aeronautics Ltd (HAL) and Mazagaon Dock Shipbuilders.
A move towards open tenders is expected to create a more competitive landscape, giving private industry wider access to contracts and accelerating innovation in India’s defence sector.
Under the nomination-based system, the defence ministry often awards contracts to state-owned entities such as Hindustan Aeronautics Ltd (HAL) or Bharat Electronics Ltd (BEL), bypassing a competitive bidding process.
This approach, while ensuring timely supply and safeguarding strategic projects, limits private sector participation as private firms are left out of large orders and are confined mostly to sub-contracting roles.
DAP being reviewed
Alongside tender reforms, the government is reviewing the defence offset policy, which requires foreign defence suppliers to reinvest 30 percent of the contract value in India, the official said.
The offset policy, introduced in 2005, is aimed at leveraging India’s large defence imports to build a stronger domestic industrial base. Under this system, a foreign manufacturer winning a big-ticket contract must fulfil obligations such as sourcing components from Indian companies, setting up manufacturing facilities, or transferring technology to local partners. The idea is to ensure that large defence deals translate into long-term benefits for the Indian industry instead of only adding to the import bill.
The policy continues to mandate a 30 percent reinvestment for competitive global contracts exceeding Rs 2,000 crore. The Defence Acquisition Procedure (DAP) 2020 also adds a host of reforms such as reward MSME sourcing, regional investments, and technology transfers.
The revision is part of a broader attempt to make DAP more industry-friendly. In recent years, the government has sought to reduce import dependence by setting up defence corridors in Uttar Pradesh and Tamil Nadu.
DAP is the defence ministry’s overarching policy framework governing how India plans, approves, and executes procurement of military equipment and systems. It sets rules for categories such as “Make in India”, offset requirements, and acquisition models for domestic as well as foreign vendors.
With defence modernisation accelerating and private industry capacity expanding, the official said a fresh update is aimed at making procurement rules more flexible, competitive, and attractive for private players.
The FY26 budget set aside Rs 6.8 lakh for defence ministry, which is 13.45 percent of the total outlay, the highest among the ministries, and 9.53 percent more than the budgetary estimate of FY25.
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