A new era of transformation for India’s defence sector

India’s defence sector is undergoing a major transformation, as the country moves from a major importer to a growing global manufacturing hub for defence products. The country is redefining its role in the global defence economy with defence exports reaching ₹21,000 crore in FY24, a 20-fold increase over the past decade. The nation has set an ambitious target of ₹50,000 crore in defence exports by 2029.

This growth is fueled by a strategic push for self-reliance, with 75 percent of the modernisation budget allocated to domestic procurement and a surge in private sector participation. There is a strong emphasis on indigenous manufacturing of fighter jets, missiles, naval ships and UAVs and the rise of private players and DefenceTech start-ups spearheading innovation in Artificial Intelligence (AI), drones and cyber warfare technologies.

Money Konnect, a special series by Mint and Edelweiss Mutual Fund, saw senior defence analyst Col (Retd) Ajay Shukla talk about this critical shift, its economic impact and how it impacts our overall investment landscape. In the wide-ranging discussion, he discussed whether Indian defence firms can compete internationally and what promising opportunities lie for investors in this domain.

Watch the full video here.

Mapping the growth trajectory

Talking about the key factors triggering the growth in defence exports, Col Shukla enlisted 2-3 key factors. The strategic orientation of the West has shifted from building up China to de-risking by moving manufacturing and technology to India.

India’s strategic alignment with the West and existing partnerships with companies like Boeing, Airbus and Lockheed Martin make it a preferred alternative.

“If one had to identify a turning point, it would be the Indo-US defence framework agreement of 1995, which was then renewed to 2005, and then renewed to 2015 and now currently they’re discussing renewing it to 2025. That recognised India as a key US partner, a country that had a certain stature, a certain size, and a certain ability to be the regional peacekeeper and that meant shifting a lot of the manufacture from China to India,” he said.

The recognition of the private sector as a viable defence partner in 2001, coupled with subsequent policy reforms, has been pivotal. “There were other turning points as well. The Defence Procurement Procedure (DPP) 2012 was another major change that also galvanised the sector, along with increased US-Indian industry partnerships, which were not there earlier,” he added.

Shift in procurement policies

The current government policy mandates that 75 percent of defence procurement be from Indian companies, with a specific allocation for the private sector.

“If one has to look at one single trend that has changed the landscape, it is the recognition by successive governments – first the UPA government and now three NDA governments in a row – that India is a country where you cannot just leave everything to the public sector. The private sector has its efficiencies, abilities, and technological prowess. In the latest budget, you have seen incentives being given to the private sector for manufacture and that is what has galvanized defence production in the sector,” he said.

It is not just the public sector or the private sector. They are both working in tandem. Earlier, the private sector acted as a feeder that used to get the overflow from the public sector. But now, they work in tandem.

Emerging sub-sectors and future trends

Today, the umbrella of defence is expanding to cover aerospace and defence. In fact, a lot of the aerospace manufacture is actually not meant for military transports and military aircrafts, but for private industry players like Boeing, Airbus, Embraer, which are all sourcing from India.

The landscape of warfare is also evolving, with sub-sectors like missiles, UAVs, naval defence, and cyber warfare gaining prominence. India has developed significant capabilities in the nuclear and ballistic missile fields, even under international sanctions.

“The Atma Nirbhar Bharat or Make in India story actually began in the early 1960s when the Indian Navy decided that it had to be a builder’s Navy not a Buyer’s Navy. We just could not afford the Western warships at the prices at which they were being sold, so we started building our own carriers and starting from the Leander Class Frigates at the end of the 1960s, it has been a story of added capabilities gradually and the development of one’s own warship capabilities,” Col Shukla pointed out.

He added: “Then came the nuclear blasts and the sanctions on missile technology. India in the teeth of those sanctions, developed its own ballistic missile capabilities. Now, every single missile and every single Indian nuclear warhead is mounted on domestic capability.”

The rise of India's IT sector has also played a crucial role in the digitisation of weaponry, coupled with India's IT prowess, which has advanced our defence capabilities. Today, the country is at the forefront of drone and autonomous vehicle development. Defence simulations are another area of strength. "We are able to completely simulate a missile even before building the first rivet," he added.

Private sector collaboration

The entry of the private sector has injected a new dynamism into India's defence industry as it brings a different business ethos, bringing in competition and greater efficiencies. While some public sector undertakings hold monopolies in certain areas, the private sector is now a vital partner.

Regarding technology development, collaboration is key. It's about focusing on areas where you can add value rather than duplicating existing efforts. “You cannot develop everything yourself. For example, American fighter aircraft use a British ejection seat because that's the one of the key systems that actually contributes to keeping the pilot alive. The US, with all its technological prowess, does not feel necessary to build the ejection seat itself. For example, American fighter aircraft use British ejection seats,” Col Shukla advises.

Investment avenues in the defence sector

For investors, understanding government priorities is paramount.

“Investors should first look out for what the government of India is emphasising and what it prepares to fund the making of, because this is a field where there's just one customer – the government of India. Foreign companies start looking at you only after that, making it the second layer of customers,” he said.

He spoke about the importance of production numbers. “I've always maintained that the first thing that one looks at is the numbers because unless you have a large number of that particular weapon system or defence equipment going into production, you're never going to have an economic rationale for making it or not. So, you have to get the numbers right. The government of India has to be prepared to spend,” he said. Export potential is crucial for boosting numbers.

Risk assessment is another critical factor. “When an investor is sort of making his decision he has to be very sure that the government will support that the military will support that and that there is enough of a market both inside and outside the country to justify it,” he said.

Note to the Reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.