India’s Path to Defence Self-Reliance: A Windmill Capital Report

Introduction

The Indian defence industry has undergone a substantial transformation in the last decade and more so in the last five years with strategic reforms, policy shifts, and a focus on indigenous production driving growth. As the world’s third-largest defence spender, this space is pivotal not only for national security but also as a significant contributor to the economy. The government’s ambitious initiatives, such as ‘Make in India’ and ‘Atmanirbhar Bharat’ (Self-Reliant India), have set the stage for the country to emerge as a global defence manufacturing hub. To put forth some context, the domestic capital spent in the sector has gone up from ~₹246 billion to ~₹833 billion.

Data from Jeffries indicate that this spending will grow to almost ₹2,400 billion by FY2030. 

Industry Size and Opportunity

This industry is currently valued at around $70 billion, with projections indicating robust growth in the coming years. This growth is driven by increasing defence budgets, geopolitical tensions, and the need for modernization of the armed forces. The Defence Production Policy (DPrP) 2018 aims for a turnover of $25 billion by 2025, including $5 billion in exports. This ambitious target reflects the vast opportunities within the sector, especially as India strives to reduce its dependence on foreign suppliers.

The domestic defence market is expected to grow at an annual rate of 8-10%, underpinned by substantial government spending on modernization programs and new acquisitions. India’s increasing focus on high-tech defence equipment and platforms presents lucrative opportunities for both domestic and international players. According to Jefferies, the defence capital spend is poised to go from ~₹819 billion in FY15 to ~₹1572 billion by FY24. 

Sector Developments 

The past five years have witnessed significant developments that have reshaped the Indian defence landscape. One of the most critical changes has been the increase in Foreign Direct Investment (FDI) limits in the defence sector. The government raised the FDI limit from 49% to 74% under the automatic route in 2020, which has made the sector more attractive to foreign investors and facilitated the transfer of advanced technologies to India.

Additionally, the establishment of defence corridors in Uttar Pradesh and Tamil Nadu has been a game-changer. These corridors are designed to act as manufacturing hubs, enhancing the supply chain and providing the necessary infrastructure for defence production. They have attracted significant investments from domestic and international companies, contributing to the rapid expansion of the sector.

The Defence Acquisition Procedure (DAP) 2020 introduced a new paradigm by prioritizing indigenization. A list of 209 defence items has been identified for a phased import ban to boost domestic production. This list includes complex systems like combat aircraft, helicopters, and submarines, which are now expected to be manufactured in India, either indigenously or through strategic partnerships. As a result, the government has been generous with its Budget allocation to the defence space. As per Nomura report, between FY12 to FY18, the Indian Defence budget has witnessed an annualized growth of ~10%, between FY18 to FY24, the growth has been ~8%, and it is projected that between FY24 to FY30, the growth will be around ~9%.

Government Policies and Their Impact

Government policies have been instrumental in driving the growth of this industry. The ‘Make in India’ initiative, launched in 2014, has been particularly influential in promoting domestic manufacturing. This policy aims to reduce India’s reliance on defence imports, which historically accounted for a significant portion of the country’s defence procurement. The success of this initiative is evident in the increasing number of defence contracts awarded to Indian companies.

Another pivotal policy is the Strategic Partnership Model, which facilitates collaboration between Indian private sector companies and global Original Equipment Manufacturers (OEMs). This model is designed to build indigenous capabilities in critical defence technologies by leveraging the expertise of foreign partners while ensuring that the intellectual property and knowledge base are retained within the country.

The Atmanirbhar Bharat campaign has further bolstered these efforts, emphasizing the need for self-reliance in defence production. The campaign has led to the creation of a dedicated defence manufacturing ecosystem, including the establishment of Defence Industrial Corridors and the Defence Innovation Organisation, which focuses on fostering innovation in defence technologies. The defence production is expected to rise by almost 91% from ~$13 billion in 2023 to ~$25 billion in 2025.

Effect of Global Events on the Indian Defence Sector

Global geopolitical events have had a profound impact on the Indian defence industry. The ongoing Russia-Ukraine conflict, for instance, has underscored the importance of self-reliance in defence production. India’s reliance on Russian defence equipment has faced challenges due to supply chain disruptions, prompting a renewed focus on indigenization.

Similarly, tensions in the Indo-Pacific region, particularly concerning China, have led to increased defence spending and accelerated modernization efforts in India. The need to maintain a robust and technologically advanced military has never been more critical, given the strategic importance of the region.

The global shift towards multi-polarity, with increasing assertiveness by nations like China, has also driven India to diversify its defence partnerships. India has increasingly collaborated with countries like the United States, Israel, and France for defence equipment and technology transfers, reducing its dependence on any single country.

That being said, we still account for ~9% of the world’s defence imports even after a sharp fall of 32% in 2022. Hence, a long way to go.

Role of Private Sector and Startups in the Defence Industry

The Indian private sector has become increasingly involved in defence production, thanks to the liberalization of the industry and supportive government policies. Startups have also begun to play a crucial role, especially in niche areas like drone technology, artificial intelligence, and cybersecurity. The government’s Innovation for Defence Excellence (iDEX) initiative has provided a platform for startups to collaborate with the defence sector, fostering innovation and bringing cutting-edge technology to the fore.

The inclusion of private players has not only increased competition but also brought in new ideas and technologies, contributing to the overall efficiency and effectiveness of the Indian defence manufacturing ecosystem. Private companies have made a meaningful contribution to our country’s defence production.

Defence Exports: India’s Growing Footprint

India’s defence export market has grown significantly in recent years, with the country now exporting to more than 42 countries. The government’s target of achieving $5 billion in defence exports by 2025 is a testament to its commitment to transforming India into a global defence exporter. Key exports include naval vessels, helicopters, and missile systems, which have been sold to countries in Southeast Asia, Africa, and Latin America.

The Indian government has also streamlined export procedures and provided incentives to defence exporters, which has helped boost the sector’s global presence. The establishment of defence export promotion councils and the identification of target markets have further facilitated this growth.

In FY24, India’s exports reached a peak of ~$2.5 billion, witnessing a growth of 32.5% on a year-on-year basis.

Challenges Facing the Indian Defence Industry

Despite the significant progress made, the Indian defence industry faces several challenges. One of the most pressing issues is the complexity of defence procurement processes, which can lead to delays in acquiring critical equipment. The bureaucratic nature of procurement, coupled with lengthy decision-making processes, often results in delays that can hamper modernization efforts.

Another challenge is the need for a skilled workforce. As the industry becomes more technology-driven, there is an increasing demand for highly skilled engineers and technicians. Addressing this skill gap is essential for the continued growth and success of the sector.

Additionally, while the push for indigenization has been successful to some extent, India still relies on foreign suppliers for critical technologies, especially in high-tech areas such as aerospace and advanced electronics. Overcoming this dependency will be crucial for achieving true self-reliance in defence production.

Future Outlook for the Indian Defence Industry

The future of the Indian defence industry is promising, with several factors contributing to its expected growth. The increasing defence budget, which is projected to continue rising, provides a stable foundation for ongoing and future projects. The government’s commitment to indigenization and self-reliance is likely to lead to further growth in domestic manufacturing capabilities.

Technological advancements will play a key role in shaping the future of the industry. The integration of AI, robotics, and unmanned systems into defence operations will not only enhance the capabilities of the Indian armed forces but also position India as a leader in next-generation defence technologies.

Moreover, the focus on defence exports will open up new markets and opportunities for Indian manufacturers, helping the country achieve its goal of becoming a global defence exporter. The continued involvement of the private sector and startups, combined with supportive government policies, will ensure that India remains at the forefront of global defence innovation and production.

Conclusion

The Indian defence industry stands at a pivotal juncture, poised for unprecedented growth and transformation. Over the past decade, the sector has evolved from being heavily reliant on imports to becoming a burgeoning hub for indigenous manufacturing and innovation. The strategic initiatives undertaken by the Indian government, such as ‘Make in India’ and ‘Atmanirbhar Bharat,’ coupled with significant policy reforms, have laid a strong foundation for the future.

The industry’s expansion is underpinned by a growing defence budget, a robust pipeline of modernization projects, and a clear vision to enhance self-reliance. The increasing involvement of the private sector and the emergence of startups have injected fresh dynamism into the industry, bringing cutting-edge technologies and new efficiencies. Furthermore, India’s growing footprint in the global defence export market underscores its potential to become a major player on the world stage.

However, challenges remain, including the need for streamlined procurement processes, a skilled workforce, and reduced dependency on foreign technologies. Addressing these challenges will be critical to sustaining the momentum and achieving the ambitious targets set for the sector.

Looking ahead, the Indian defence industry is well-positioned to capitalize on both domestic and global opportunities. With continued focus on innovation, strategic partnerships, and government support, the sector is set to play a crucial role in enhancing India’s national security and contributing to the global defence landscape. The future promises not only growth but also the realization of India’s vision of becoming a self-reliant and globally recognized defence manufacturing powerhouse.

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