India has become the fifth largest economy, joining the “Fabulous Five” economies of the world, with a GDP of US$ 3.5 trillion. Additionally, India is expected to be the third largest economy by 2027 after the US and China. The Indian aerospace and defence industry has been estimated at US$ 9.7 billion (Rs 80,000 crores) in 2019-20, with a spurring private sector contribution of US$ 2.05 billion (Rs 17,000 crores). The Indian defence sector has been growing substantially in recent years due to major government efforts for localisation and enormous revenue expansions, attracting long-term opportunities, partnerships, and capitalising on the synergies in defence and space. In order to strengthen the nation’s defensive prowess, the defence sector has undergone major reforms to decrease the expenditure on defence procurement from foreign sources from 46% to 36% in the past four years between 2018-21. In the union budget for FY2022-23, the total allocation of capital was enhanced to US$ 18.65 million (Rs 1.52 lakh crores) (~68%), to promote indigenous manufacturing infrastructure supported by requisite research and development ecosystem. The government’s persistent efforts in the promotion of Indian defence exports, are steadily marching India from the vision of “Make in India” to “Make for the World”. Presently, India is exporting defence equipment to more than 75 countries around the globe. In the last 5 years, defence exports have grown by 334%, reaching a remarkable record of US$ 1.55 billion (Rs 12,815 crores) in the FY2021-22. Moreover, the Government of India has set a target of US$ 22 billion (Rs 1.75 lakh crores), including defence exports of US$ 5 billion (Rs 35,000 crore) by the fiscal year 2024-25.
Indian Defence Industry Ecosystem
India has been one of the world’s largest importers of major arms constituting 11% of the total global market share between 2017-21. While India’s imports have decreased from US$ 19,432 million to US$ 15,356 million, in the past 5 years, the government is pushing to reduce defence imports and promote exports made by its domestic industry. The government has launched several measures and reforms in the area of defence that is aimed at increasing domestic manufacturing capacity while also encouraging the use of new technology. Early in the 2000s, the government permitted 100% private sector participation in defence production with a cap of up to 26% in Foreign Direct Investments (FDI). However, this incentive did not ease the accessibility of defence contracts as the Ministry of Defence’s (MoD) (Defence Procurement Procedure) DPP lacked sufficient features to encourage private enterprises' participation. The major list of defence items exported is personal protective items, offshore patrol Vessels, ALH helicopters, SU avionics, Bharati radio, coastal surveillance systems, Kavach MoD II launcher and FCS, spares for radar, electronic systems, and light engineering mechanical parts, etc.
The aerospace and defence sector has 16 central Defence Public Sector Undertakings (DPSU) under the MoD’s jurisdiction to manufacture equipment and platforms for defence and internal security forces. Hindustan Aeronautics Limited (HAL) is the largest DPSU, under the DDP, MoD, India. The Ordnance Factory Board (OFB), consisting of 41 Indian Ordnance Factories are being restructured into 7 DPSUs under the jurisdiction of DDP, MoD, India. The private sector players include Original Equipment Manufacturers (OEMs) and Foreign OEMs (FOEMs), who have the expertise and years of excellence. The base of the Indian supply chain comprises more than 12,000 Micro, Small and Medium Enterprises (MSMEs) and 194 new defence tech solutions. The following pie chart represents the percentage share in the production of defence apparel during the fiscal year 2021-22. The public sector (i.e., DPSUs and OFBs) has the largest share, accounting for 71% of the manufacturing space.
The following chart illustrates the percentage contribution of different stakeholders in the defence industry. The contribution by the public sector (DPSUs and OFBs) is the largest in FY2021-22 by more than 71% as compared to the private sector companies with a share of 21%. Moreover, other PSUs or joint ventures can either be private or public companies or combined ventures.
Source: Department of Defence Production (DDPD)
Note: 1 INR= 0.01227 USD
Indian Defence Budget
The following graph depicts the increasing budget allocations in the defence sector to facilitate localisation and indigenous manufacturing, pumping the private sector to boost the defence exports making India a hub for armed equipment.
Source: Ministry of Defence
Note: Values of FY22-23 are budget estimates
1 INR= 0.01227 USD
India’s Defence Export Status
India achieved a new milestone in the fiscal year FY2021-22, with India’s defence exports estimated to be US$ 1,572.6 million. The value of defence exports increased by US$ 536.5 million, a 51% rise between 2020 and 2021. Despite the ravages of the COVID-19 pandemic in 2020 and 2021, Indian defence exports were not adversely impacted and only dropped by 7.5% from 2019. The export since 2016 has picked up by ~740% till 2021, showcasing the expansion of private players in the defence sector highlighting, the capability advancements made by the Indian private sector. During the FY2021-22, the government's "export authorisations" given to these businesses were responsible for 47% of the export value worth US$ 732 million. The value of export authorizations granted to the private sector for the third quarter of FY 2022–23 was US$ 780 million. Moreover, the defence exports in FY2021-22 have hit the highest record of US$ 1,572.60 million, demonstrating India’s efforts towards the target US$ 3 billion (Rs 25,000 crore) by 2025.
The following figure depicts the Indian defence exports between the timespan of FY2016-17 to FY2022-23:
Source: Department of Defence Production (DDPD) Dashboard
Note: The values of 2022-23 are as of 26th December 2022
1 INR= 0.01227 USD
The Road Ahead
The major reforms complement the greater goal of making India an exporter of defence equipment that can compete with the offerings of established global competitors and are a positive step toward enhancing the "Make in India" effort in the defence industry. Measures including streamlining the process for purchasing defence equipment, allowing the government to fund up to 70% of development costs, and increasing foreign direct investment (FDI) to 74% through the automatic route are projected to significantly increase investments in the sector. From initially just producing parts to now indigenously producing from scratch, the liberalized private sector players have progressed and expanded. India is in a good position to seize the potential export opportunity from the current pool of multi-domain engineering talent, cheap production costs, and friendly connections with the majority of countries.