Defence Manufacturing Industry in India

Introduction

The Indian defence manufacturing industry is a significant sector for the economy. The industry is likely to accelerate with rising concerns of national security. 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.

Market Dynamics

India’s defence manufacturing sector has been witnessing a CAGR of 3.9% between 2016 and 2020. The Indian government has set the defence production target at US$ 25.00 billion by 2025 (including US$ 5 billion from exports by 2025). Export business contributed ~US$ 1.00 billion to the total value in 2019. Defence exports in India was estimated to be at US$ 2.0 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. Defence exports in the country witnessed strong growth in the last two years. India targets to export military hardware worth US$ 5 billion (Rs. 35,000 crore) in the next 5 years. As of 2019, India ranked 19th in the list of top defence exporters in the world by exporting defence products to 42 countries.

Recent development/Investments

Foreign Direct Investment (FDI) equity inflow in the defence sector for April 2000 – June 2020 stood at US$ 9.52 million (Rs. 56.88 crore) as per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).

• In November 2020, the fifth Scorpene submarine of Project-75 named ‘Vagir’ was launched at Mazagon Dock Shipbuilders Limited (MDL) in Mumbai, positioning India as a submarine building country and contributing to the government’s initiative towards 'Make in India' and 'Aatmanirbhar Bharat'.
• In November 2020, the fifth Scorpene submarine of Project-75 named ‘Vagir’ was launched at Mazagon Dock Shipbuilders Limited (MDL) in Mumbai, positioning India as a submarine building country and contributing to the government’s initiative towards 'Make in India' and 'Aatmanirbhar Bharat'.
• On October 29, 2020, the Indian Army developed a ‘Secure Internet Application (SAI)’, a simple and secure message framework, which supports stable end-to-end voice, text and video calling services on an android platform.
• On October 28, 2020, the Indian Army introduced ‘Infrastructure Management System (IMS)’ software to empower defence stakeholders; make operations more efficient, transparent and enhance accountability.
• On October 27, 2020, India and the US signed the ‘Basic Exchange and Cooperation Agreement for Geo-Spatial Cooperation (BECA)’ to strengthen defence ties between two countries.

Government Initiatives

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.

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. In November 2020, the Department of Defence, in partnership with the DGDE and the Armed Forces, established a land management system (LMS) as part of efforts to enhance overall defence land management.

To increase defence manufacturing in India and make the country a reliable weapon supplier to friendly countries, the Indian government allowed the following FDI limits in September 2020. For new licensees – FDI allowed up to 74% through automatic route; FDI beyond 74% would need to be permitted under the Govt. route. For existing Licensees – Infusion of new foreign investments up to 49% can be added by making declarations of change/transfer within 30 days.

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).

Road Ahead

The Indian government is focussing on innovative solutions to empower the country’s defence and security via ‘Innovations for Defence Excellence (iDEX)’, which has provided a platform for start-ups to connect to the defence establishments and develop new technologies/products in the next five years (2021–2026).

Working through partner incubators, iDEX has been able to attract the start-up community to participate in the Defence India Start-up Challenge (DISC) programme.

The Defence Ministry has set a target of 70% self-reliance in weaponry by 2027, creating huge prospects for industry players.

Note: Conversion rate used for November 2020 is Rs. 1 = US$ 0.013

References: Ministry of Defence, Government of India, Defence Reports, Press Releases, Press Information Bureau, Department for Promotion of Industry and Internal Trade (DPIIT), Hindustan Times, Defence News, Financial Express

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.