Overview – Defence Manufacturing in India
The Indian defence sector is strategically important to India. In 2021-22, the government allocated Rs. 4,78,196 crore (US$ 62.8 billion) to defence, 1.5% higher than the previous year. This accounts for 2.15% of GDP and 13.73% of total central government expenditure. In 2020-21, India was the third largest military spender and had the second largest army globally. In view of these factors, coupled with access to nuclear weapons, India is recognised as a strong military power.
The defence manufacturing industry is poised for significant growth considering the increasing security threats faced by India, thereby boosting demand for defence equipment. Incentivised by various government reforms, India is quickly ramping up its manufacturing capacity. It also aims to reduce import dependence, which can be ascribed to the defence import programme launched in the 1980s due to lower manufacturing capacity in domestic markets and better technology of foreign countries.
Make in India and Other Government Initiatives Boosting Defence Manufacturing
Under the Make in India initiative, the Indian government focuses on minimising import dependence, increasing domestic capacity and modernising armed forces. It plans to achieve these by scaling up domestic manufacturing capacity by promoting local Micro Small and Medium Enterprises (MSMEs) and bigger defence manufacturers and by inviting foreign manufacturers to start operations in India. Moreover, the government has announced various reforms on aerospace and defence manufacturing policy to provide a fillip to defence equipment manufacturers in India.
Some of the initiatives are as follows:
- Defence Acquisition Procedure (DAP) 2020: The DAP 2020 formulates rules for procurement of newer technology defence equipment products and services to act as a catalyst for the Make in India efforts and MSMEs. Rules include reservation of specific categories for Indian vendors, higher usage of indigenous content, and indigenisation of design and development. Additionally, DAP focuses on improving the ‘ease of doing business’ by rationalising compliances and procedures with the aim of encouraging foreign manufacturers to set up operations in India.
- Foreign Direct Investment (FDI): In 2020, the government allowed FDI not exceeding 74% under the Automatic Route. This would encourage foreign companies to invest in India, thus reducing import dependency.
- Import Embargo: In 2020, the Ministry of Defence notified a list of 101 items that were banned for import. Additional items were included in 2021, taking the total number to 209. These items include artillery guns, light combat helicopters, ammunition, assault and sniper rifles, radars and sonar systems. The embargo on import would aid in indigenisation and lower imports, thus supporting private defence manufacturing companies in India under the Atmanirbhar Bharat campaign.
- Technology Development Fund: This scheme aims to promote self-reliance in defence technology and boost Indian defence manufacturing companies, especially MSMEs and start-ups. The scheme also encourages public-private partnerships.
- Growth in Exports: Defence exports have witnessed substantial growth in the past few years, with exports surging from Rs. 1,940.6 crore (US$ 255 million) during 2014-15 to Rs. 8,434.84 crore (US$ 1.1 billion) during 2020-21, registering a compounded annual growth rate (CAGR) of 27.7%. Defence exports are estimated to reach US$ 5 billion by 2025.
Key Trends Promoting Defence Manufacturing
- Modernisation of Military: The government is increasing its focus on modernisation of armed forces with the allocation of Rs. 1,35,060 crore (US$ 17.7 billion) in Budget 2021-22, up 19% from Rs. 1,13,734 crore (US$ 14.9 billion) last year. Capital expenditure stands at Rs. 36,481 crore (US$ 4.5 billion) for army, Rs. 53,214 crore (US$ 7 billion) for air force and Rs. 33,253 crore (US$ 4.4 billion) for navy. The actual capital expenditure for FY 2020-21 was Rs. 1,34,510 crore (US$ 17.7 billion), indicating that India is spending heavily on modernisation. Moreover, appointment of the Chief of Defence Staff (CDS) is expected to act as a catalyst in this process. Modernisation is crucial for facing the threats faced by India.
- Make in India: The Make in India initiative is a significant trend driving supply-side growth in the defence manufacturing industry. The government has announced several reforms based on import substitution and ‘Make in India’ for incentivising capacity ramp-up, promoting MSMEs, banning imports, giving preference to Indian vendors and so on. Private defence manufacturing companies, in particular defence equipment manufacturing companies in India, have benefited from this initiative as it created greater demand opportunities. These reforms are helping to meet the Atmanirbhar Bharat objectives.
- Technology Improvement: One of the reasons for India’s high level of import dependency is to gain access to newer technology defence products. However, this is changing with the government’s increasing contribution to R&D. During 2020-21, expenditure on defence R&D stood at Rs. 19,327 crore (US$ 2.5 billion), constituting 4% of the defence budget and 9% higher from the previous year. Defence research is undertaken by the Defence Research and Development Organisation (DRDO), which is focusing on advanced technologies such as nanotechnology, artificial intelligence (AI), and quantum computing. The trend of high R&D spend is expected to continue and boost the defence manufacturing industry.
- Foreign Collaboration: The Indian government is entering into collaborations and partnerships with foreign nations to provide an impetus to the defence manufacturing industry. Some of the deals are mentioned below.
- AK-203 Assault Rifles: India inked a pact with Russia to produce 6,00,000 AK-203 assault rifles in Amethi, Uttar Pradesh.
- Military Technology Cooperation: India and Russia also signed a deal for military technology cooperation over the next decade.
- Predator Drones: India signed a deal worth US$ 3 billion with the US for supply of 30 multi-mission armed predator drones. These drones can remain airborne for 35 hours, and the missions include reconnaissance, surveillance and destruction of enemy targets.
- Next-Generation Technologies: India and Israel have partnered to develop next-generation defence technologies such as AI, robotics and drones. The Bilateral Innovation Agreement (BIA) was signed between India’s DRDO and Israel’s Directorate of Defence Research and Development (DDR&D).
- Strategic Partnership Model: France has agreed to manufacture aircraft engines in India.
India’s defence manufacturing industry is going through rapid changes, and higher demand is expected due to national security concerns. To meet this demand, the domestic share is likely to increase, given the various schemes introduced by the government. For example, the import ban on helicopters and aircraft is anticipated to profit Indian defence vehicle manufacturers, especially the defence aircraft manufacturers in India. Furthermore, the requirement for higher indigenous content is expected to help defence product manufacturers in India as well as encourage foreign companies to set up operations in India. France and Russia have already agreed to manufacture in India.
Defence Minister Mr. Rajnath Singh has forecast the Indian defence manufacturing industry would grow from US$ 850 billion currently to US$ 1 trillion in 2022 and US$ 5 trillion by 2047. This provides a huge opportunity and certainly paints a bright outlook for defence manufacturing.