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Editor’s Note
This article argues that India can no longer depend on incremental budgeting to develop the military capabilities required for modern, AI-driven warfare. The authors propose setting up a sovereign Defence Fund of Funds, anchored in the assets of DPSUs. This initiative aims to unlock substantial capital for indigenous defence manufacturing, deep-tech innovation, and resilient supply chains. By drawing on financing models that the government has already implemented for infrastructure development and asset monetisation, this proposal seeks to adapt these mechanisms to meet national security needs.
The Issue
The nature of contemporary warfare and the current geopolitical climate both demand accelerated defence indigenisation, which is also the government’s top priority. Today’s battlefields are marked by extraordinary diversity – such as short-duration engagements (Operation Sindoor), lightning operations (Venezuela), and protracted campaigns (the Russia-Ukraine theatre and Iran). But each theatre has also simultaneously witnessed the rise of new, technology-intensive and AI-enhanced capabilities that are changing the nature of war while underlining the critical importance of a strong indigenous defence industrial base.
To survive modern AI-enabled warfare, India must double down on its efforts to develop an advanced, integrated, sovereign industrial base with resilient supply chains free from external control – as the surest way of guaranteeing national security, creating high-skilled jobs, and driving economic growth.
To deliver these capabilities in a reasonable time frame, innovative approaches are required, as the budgetary allocation of Rs 1.80 lakh crore (or around US$18.7 billion at current exchange rates) for capital expenditure in the 2026–27 defence budget of RS 7.85 lakh crore falls short of the scale of resources required.
The Solution
Fortunately, huge amounts of capital can be raised through novel funding mechanisms leveraging government assets that have been successfully trialled in other sectors in India.
Thus, forming a Sovereign Strategic Defence Fund-of-Funds (SSDFF), with government-owned equity in Defence Public Sector Undertakings (DPSUs) as its core initial asset, would address many of the issues, including capital shortfalls, standing in the way of creating an indigenous high-tech defence industrial base.
DPSUs, with their high profitability, debt-free status, surging order books, and valuations, provide a logical and excellent anchor for such a Fund. The proposed SSDFF could spin off (i) several private equity funds to provide capital for public and private sector System Integrators/ Aggregators that deliver advanced, AI-enabled defence platforms and systems, but depend on dozens, and even hundreds, of smaller companies for critical components, and also (ii) several offspring or even stand-alone strategic venture capital funds for start-ups and MSMEs specialising in critical high-tech components and technologies for the system aggregators – along the lines of the CIA funded In-Q-Tel.
Both kinds of funds – for system aggregators and SMEs – are necessary as (i) funding only platforms perpetuates dependency, as system integrators remain free to white-label imported components and thus fail to incentivise indigenisation of supply chains, which also require risk capital; (ii) India lacks the market-based funding mechanisms for the huge capital needs of large system integrators in the US, with the US government additionally providing procurement assurances. Preferential procurement and support for indigenous firms—through the US Buy America Act, the Defence Production Act, SBIR, and the plethora of legislation that underpins US technological supremacy—have been decisive in building US capabilities.
India must adopt a similar approach, supporting domestic firms through transparent procurement targets and appropriate legislation on the US lines, thus providing demand certainty and R&D investment incentives.
The In-Q-Tel model cited above is highly relevant, as In-Q-Tel leverages government equity to crowd in private capital and gives procurement guarantees, both of which derisk the investor. In-Q-Tel also embeds retention of technology and IP ownership and targets dual-use technologies while ensuring that national security objectives are met. The CIA model, which has been copied by other US departments and agencies, shows how government equity can validate and derisk investment in high-risk, R&D intensive companies, crowd in private capital, and align innovation with strategic priorities.
By incubating/ investing in disruptive companies like Keyhole (later acquired by Google as Google Earth), Palantir, FireEye, Shield AI, and Anduril, etc., it catalysed one of the most significant shifts in US defence innovation since World War II. Companies incubated by In-Q-Tel now lead the defence and innovation charge, their valuations climbing to stratospheric levels and their leaders practically dictating the future course of US arms acquisitions and development.
It must be kept in mind that In-Q-Tel only works because it is autonomous, professionally managed, and governed by leaders from industry, technology, and national security. The India Fund would have to emulate these characteristics and function autonomously, imposing strategic conditions, including IP retention within national borders, prohibition on foreign acquisition of critical firms and technologies, and reinvestment of returns in strategic sectors.
For national security oversight, a National Technology Commission reporting directly to the Prime Minister could provide overarching guidance, as in the case of the Space and Atomic Energy Commissions. Its remit would obviously cover national technology missions in other domains.
Once set up, the India Fund would be a highly attractive proposition due to several factors: firstly, the proposed SPV structure would not dilute the government’s ‘controlling stake’ in the DPSUs; secondly, the Fund would crowd in capital at several multiples of the government’s contribution; indeed, conservative estimates suggest such a fund could mobilise Rs 7–10 lakh crore (up to US$100 billion) in its first round itself — far exceeding current defence budgetary allocations. Thirdly, the Fund would be an enticing proposition for private-sector investment, because many of the core technologies required for ‘intelligentised warfare’ are dual-use with considerable market potential in non-defence sectors. Fourthly, foreign institutional investors that have been exiting India will be enticed back to invest in the Fund. And finally, the proposed Fund can generate financial returns for the government while minimising its fiscal outlay.
This is why innovative infrastructure financing models are multiplying in other sectors of the Indian economy, with the National Highways Infra Trust having raised enormous amounts of funding and the National Asset Monetisation Plan 2.0 leveraging sovereign assets to mobilise capital at scale.
The nation will have an efficient financial mechanism to fund the development of an R&D-intensive, high-tech defence industrial base capable of generating transformative, world-class defence capabilities. The creation of a sovereign-anchored defence fund of funds could lead to a transformative outcome, spurring a reorientation of the economy to meet the challenges of the modern era, while the current economic scenario also underscores the urgency of this necessity.
Ashish Sonal, CEO Orkash, and Smita Purushottam, former Ambassador (Authors are Co-Chair and Chair of SITARA – Science, Indigenous Technology & Advanced Research Accelerator, a “Do Tank” promoting high-tech indigenisation and a scientific spirit in India)
Ashish Sonal
