In the realm of defense, India’s landscape is transforming rapidly. With healthy order books, expanding revenues, and strong governmental support for localization, India’s defense sector is poised for remarkable growth. The sector is now uniquely positioned to capitalize on the burgeoning domestic and export markets, driven by recent global conflicts that have highlighted the need for stock piling of supplies, self-reliance and local production of defense equipment.
The recent conflicts across the globe have underscored the critical importance of new defense equipment, including drones, anti-drone systems, missiles, and air defense systems. During these conflicts, countries at war struggled to secure reliable supplies, emphasizing the necessity for India to reduce reliance on external sources. This urgency has led to a substantial push for the localization of defense equipment production, which is expected to create significant and sustainable opportunities for domestic players.
Furthermore, as countries across the Indo-Pacific are actively seeking more avenues for cooperation in response to the evolving geopolitical landscape, further avenues for partnership are opening up. In this context, the United States’ efforts to expand its influence across the Indo-Pacific and counter Chinese power have found a valuable partner in India. India’s strategic location at the opposite end of the Indo-Pacific from American bases in Japan and South Korea makes it a coveted ally. The ship repair agreement between the U.S. and India exemplifies the warming relations and highlights India’s potential as a logistics hub for the U.S. military in the Indo-Pacific. This partnership not only strengthens India’s defense capabilities but also aligns with its vision of becoming a global hub for defense manufacturing and maintenance, making it a valuable example of the increased avenues for cooperation among nations in the region.
The government has undertaken major reforms in the defense sector to bolster India’s defense capabilities and reduce dependence on imports. Simplified procurement procedures, government funding of up to 70 percent of development costs, and increased foreign direct investment (FDI) limits to 74 percent via the automatic route have created a conducive environment for investments in defense. Indigenization in the defense sector, aimed at increasing domestic manufacturing capacity, research and development, and boosting exports, is at the heart of these reforms. The ban on the import of several defense components by the Ministry of Defence is a clear indication of the favorable policy framework for defense companies.
In recent years, the government has introduced a series of booster schemes and measures that have attracted capital and investment to the sector. Cumulative FDI inflow in the defense industry has reached $15.71 million from April 2000 to September 2022. The increased FDI limit to 74 percent from 49 percent under the automatic route and up to 100 percent through the government route in the defense sector has further incentivized foreign investments. India’s commitment to fostering innovation is evident in the presence of around 194 defense start-ups building innovative tech solutions. The government has set an ambitious target of achieving Rs 1.75 lakh crore in defense production by 2025, which includes Rs 35,000 crore in exports. In the FY23 budget, the allocation for defense stands at Rs 5.3 trillion, marking a 10 percent increase over the previous year.
The Indian private sector has evolved significantly since the opening of the defense sector. It has progressed from producing components and sub-systems to developing complete equipment, systems, and platforms. The sector’s dynamism is evident in the fact that more than 90 percent of defense exports come from private defense companies. To further enhance efficiency, the industry is adopting modern manufacturing practices, including Industry 4.0, for serial production and additive manufacturing, for the rapid development of high-tech components. The defense industry is closely monitoring requests for proposals (RFP) and the award of orders for critical projects like light combat helicopters (LCHs), light utility helicopters (LUHs), quick reaction surface-to-air missiles (QRSAM), medium-range surface-to-air missiles (MRSAM), and Akash prime and next-gen corvettes.
The ‘Make in India’ initiative, the simplification of drone regulations, the Production-Linked Incentive (PLI) scheme and the Prime Minister’s vision to establish India as the “Drone Hub of the World” by 2030 have opened up diverse applications for drones in India. Recent fast-track procurements post-conflicts have accentuated the need for homemade drones and solidified the Indian Army’s confidence in domestic drone capabilities. Incentives such as tax holidays for new investments in the defense manufacturing sector will encourage existing players to expand and new entrants to invest. Additional tax deductions and incentives for research and development in the defense sector could further stimulate innovation.
While India’s defense budget as a percentage of GDP (2 percent) appears comparable to other economies, increasing the allocation for acquiring capital equipment is imperative. Prioritizing self-reliance in defense not only saves foreign exchange but also ensures a smooth supply of defense equipment during geopolitical conflicts. Developing the local value chain within the defense industry positions Indian companies to seize export opportunities. India’s multi-domain engineering talent pool, low manufacturing costs, and diplomatic relations with most nations make it well-placed to explore global export potential.
Prime Minister Narendra Modi’s government is actively promoting self-reliance, but India is still developing its industrial base for military equipment. The process of shifting manufacturing of spare parts to India has begun, but it may take a few years to significantly reduce supply shortfalls. India’s Defense Ministry has also signed offset contracts worth over $13 billion by 2027, requiring foreign suppliers to invest in India’s defense industry and technology development. The Indian government aims to ensure that 68 percent of all capital defense procurement benefits indigenous manufacturers. In an effort to attract foreign companies with advanced technologies, India has increased the FDI limit to 74 percent in its defense manufacturing units. The government’s two defense industrial corridors in Uttar Pradesh and Tamil Nadu are set to attract $2.7 billion in investments by 2024, further stimulating the growth of the sector.
In conclusion, India’s defense sector is at a critical juncture, with a confluence of factors that favor its growth. The government’s push for ‘Make in India,’ favorable policy frameworks, increased FDI limits, and ongoing reforms have positioned the sector for substantial development. India’s journey towards self-reliance in defense is not just a strategic imperative but also a pathway to becoming a global hub for defense manufacturing and maintenance. The opportunities are boundless, and as India strengthens its defense capabilities and expands its manufacturing ecosystem, it inches closer to becoming a global powerhouse in the defense industry.
