Indian Defence Manufacturing Industry Analysis

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Indian Defence Manufacturing Industry Analysis

December, 2020

India’s defence manufacturing sector has been witnessing a CAGR of 3.9% between 2016 and 2020. Demand growth is likely to accelerate with rising concerns of national security. The overall production sector deceased in 2019; however, growth was observed in the value of production by Defence PSUs due to numerous key product developments through research and development initiatives, in addition to various products and equipment being manufactured through transfer of technology.

The defence exports in the country witnessed strong growth in the last one decade. Defence exports in India was estimated to be at US$ 1.29 billion in 2019-20. India’s defence import value stood at US$ 463 million for FY20 and is expected to be at US$ 469.5 million in FY21. To boost the domestic defence sector manufacturing, the Ministry of Defence, in December 2020, approved the export of indigenously-developed surface-to-air Akash missile system and set up a panel to ensure faster approvals for acquisition proposals by various countries.

India’s defence budget for 2021-22 is Rs. 478,195.62 crore (US$ 65.64 billion), 18.75% higher than the budget estimates FY21. The total allocation for defence services and other organisations/departments under the Ministry of Defence for FY22 is Rs. 362,345.62 crore (US$ 49.74 billion) (excluding defence pension), an increase of Rs. 24,792.62 crore (US$ 3.40 billion) over FY21. Ministry of Defence (MoD’s) gap between resource requirement and allocation, which briefly narrowed from a high of 30% in 2018-19 to 25% in 2019-20. In October 2020, India and the UAE have agreed to take their defence cooperation further through joint production and mutual trade. This move is expected to boost domestic defence exports and achieve defence export targets worth US$ 5 billion in the next five years. The country plans to spend US$ 130 billion on military modernisation in the next five years and is also achieving self-reliance in defence production. Additionally, 100% FDI is allowed in the defence industry, wherein 74% is allowed the under automatic route and beyond 74% is through the government route.

Demand for defence equipment in India has been growing due to the ongoing territorial disputes with Pakistan and China over the ownership of the Northern State of Kashmir and the North Eastern State of Arunachal Pradesh, respectively.

Over the last five years, India has been ranked among the top importers of defence equipment to gain technological advantages over rival countries such as China and Pakistan. To modernise its armed forces and reduce dependency over external dependence for defence procurement, several initiatives have been taken by the government to encourage ‘Make in India’ activities via policy support initiatives.

Defence ministry plans to put 101 defence items (artillery guns and assault rifles) under import embargo to offer potential military hardware manufacturing opportunities to the Indian defence industry. The defence ministry estimates potential contract worth ~Rs. 4 lakh crore (US$ 57.2 billion) for the domestic industry in the next 5-7 years (2025-2027).

To encourage more participation from start-ups and micro, small & medium enterprises (MSMEs) in Defence Research & Development (R&D) in achieving the ‘Atmanirbhar Bharat’ goal, the Defence Minister Mr. Rajnath Singh released a new version of ‘Defence Research and Development Organisation (DRDO) Procurement Manual 2020’ on October 20, 2020. There are plans to establish new infrastructure including a defence park in Kerala to manufacture defence equipment for forces. The project is aimed at promoting MSMEs and boosting ‘Make in India’ initiative in defence manufacturing.

One of the key successes of ‘Made In India’ initiative in defence manufacturing has been the Advaced Towed Artillery Gun system (ATAGS). ATAGS is being jointly developed by the Defence Research Development Organisation’s (DRDO) Armament Research Development Establishment (ARDE) Pune, Defence Electronics Application Laboratory, Dehradun, and Centre for Artificial Intelligence and Robotics, Bengaluru, along with key corporates such as Bharat Forge, TATA Power SED, Ashok Leyland and Cummins. This 155-mm, 52-caliber artillery gun is undergoing the last stages of the trial and could soon be inducted into the Indian Army.  A total of 201 MoUs, product launches and technology transfers were concluded at Aero India 2021 by the Ministry of Defence.

India is also developing high-altitude long-endurance unmanned aircrafts for surveillance and reconnaissance applications. The vehicle is being designed to fly 70,000 ft. for several days, providing real-time feedback to controllers while remaining beyond the range of most air defence systems.

Indian government policies to promote self-reliance in defence manufacturing under the Aatmanirbhar Bharat Scheme. E.g., 74% FDI in defence manufacturing, ‘Import embargo’ on 101 military items and Defence Production and Export Promotion Policy 2020. Government formulated the ‘Defence Production and Export Promotion Policy 2020’ to provide impetus to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat’ scheme. The ministry aims to achieve a turnover of Rs. 1 lakh 75 thousand crore (US$ 25 billion), including an export of Rs. 35 thousand crore (US$ 5 billion) in the aerospace and defence goods and services by 2025.

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