Private Sector in Defense Production

The growth in private sector participation in India's defense production marks a significant shift in the country’s defense strategy and industrial landscape. The private sector share in defense production reached a record 23% in FY 2024-25, continuing a trend of growth for the third consecutive year. Several factors have driven this increase in private sector involvement, from institutional reforms to policy changes and industrial infrastructure development. However, despite these gains, there are still challenges to overcome for India to truly achieve self-reliance in defense production.

Key Drivers Behind the Increased Share of Private Sector in Defense Production:

1. Institutional Reforms:

   • Creation of the Chief of Defence Staff (CDS) and the Department of Military Affairs (DMA) have played a crucial role in improving coordination between various branches of the armed forces, ensuring a more cohesive approach to defense strategy, and pushing for indigenous equipment.

2. Policy and Regulatory Reforms:

   • Defence Acquisition Procedure (DAP-2020): Focuses on prioritizing domestic procurement, opening contracts to private players, and fostering indigenous manufacturing.

   • Liberalized FDI Policy: Since 2020, India has allowed foreign direct investment up to 74% under the automatic route and up to 100% via the government route. This has enabled global defense companies like Tata and Airbus to transfer technology to Indian firms, such as in the C-295 aircraft project.

   • Positive Indigenization Lists (PILs): By restricting imports of over 5,500 items, India is encouraging domestic sourcing and creating a guaranteed demand for Indian defense manufacturers.

   • Make in India: This flagship initiative has significantly boosted private sector engagement by providing incentives and encouraging investment in indigenous manufacturing, such as the SRIJAN Portal, which helps connect suppliers and manufacturers.

3. Industrial Infrastructure and Budget Support:

   • Defence Industrial Corridors: Special manufacturing hubs have been set up in Uttar Pradesh and Tamil Nadu. These corridors offer incentives, infrastructure, and investment-friendly policies to attract private sector players.

   • Budget Prioritization: For FY 2025-26, the Ministry of Defence has earmarked 75% of its modernization budget (₹1.11 lakh crore) specifically for procurement from Indian firms, reflecting a strong commitment to indigenous capabilities.

4. Innovation and Ease of Doing Business:

   • iDEX and ADITI: These innovation ecosystems support startups and MSMEs to develop cutting-edge technologies like AI, drones, and quantum systems, helping India become a global hub for defense innovation.

   • Ease of Doing Business: Simplified processes such as extending license validity and de-licensing many defense items have lowered entry barriers, making it easier for private companies to engage in defense production.

Key Challenges in India’s Defense Production:

1. Production Lag:

   • Despite significant reforms, India’s defense industry is still behind target in terms of exports. For example, HAL lost the Malaysian LCA contract, and Garden Reach Shipbuilders failed to win a tender in the Philippines.

2. Heavy Reliance on Imports:

   • India continues to depend heavily on imports for raw materials, high-tech components, and advanced systems. S-400 delays due to the Russia-Ukraine conflict highlight the vulnerabilities of this reliance.

3. Technological Challenges:

   • Foreign OEMs (Original Equipment Manufacturers) are often protective of their intellectual property, restricting technology transfer to Indian firms. This limits India’s capability to develop advanced manufacturing systems, particularly in emerging technologies like AI, hypersonics, cyber warfare, and stealth tech.

4. Funding Gaps:

   • India’s defense budget remains under 3% of GDP, with over half of it allocated for personnel costs, leaving limited funds for modernization and R&D.

5. Dependence on Foreign Technology:

   • Despite the Make in India initiative, India remains reliant on countries like the US and France for cutting-edge defense technologies, which limits its ability to achieve true self-reliance in defense.

Background of Defence Indigenisation in India

India's defense indigenisation journey has been a long and evolving process, influenced by strategic needs, geopolitical challenges, and the desire for self-reliance in defense production. Over the decades, India has made concerted efforts to reduce dependence on foreign suppliers while building an indigenous defense manufacturing ecosystem.

Early Recognition of Need (1950s-1970s)

In the post-independence period, India realized the strategic necessity of self-reliance in defense production. This understanding grew particularly strong following the wars of 1962, 1965, and 1971, which exposed the vulnerabilities in India's defense preparedness, especially due to reliance on foreign suppliers for weapons and equipment. These conflicts acted as a catalyst, pushing India to focus on domestic defense production and reducing dependence on foreign arms sources.

Key Milestones in Defence Indigenisation

1. Integrated Guided Missile Development Programme (IGMDP) - 1983:

   • One of the most notable initiatives in India's indigenisation efforts was the IGMDP, initiated in 1983 under the leadership of Dr. APJ Abdul Kalam. This program aimed to develop a range of strategic missile systems, such as Agni and Prithvi, bolstering India's indigenous missile capabilities.

   • The program concluded in 2008, marking a significant achievement in India's defense technology and further cementing the country's move towards self-reliance in military technology.

2. Self-Reliance Index (SRI) and Abdul Kalam’s Vision (1992):

   • In 1992, India had a low Self-Reliance Index (SRI) of 0.3, meaning a small fraction of its defense procurements were sourced indigenously. Dr. Abdul Kalam, recognizing this gap, set up a committee to create a 10-year plan targeting an SRI of 0.7 by 2005. Although this target was ambitious, it helped lay the foundation for future policies and reforms.

3. Responsibility Transfer (2000s):

   • By the 2000s, responsibility for indigenisation shifted from the Department of Defence Production (DDP) and Directorate General of Quality Assurance (DGQA) to the Ordnance Factories Board (OFB) and military services. During this period, the Army and Navy developed 15-year Perspective Plans to push for greater self-reliance.

4. Project 75 (1997):

   • In line with the push for indigenisation, Project 75 was launched with the goal of building indigenous submarines. This project sought to develop a self-reliant submarine manufacturing capability in India, reducing dependence on foreign designs and technologies.

Need for Defence Indigenisation

India’s goal of defense indigenisation is driven by several factors:

1. Global Arms Market Share:

   • India’s share in the global arms exports market is minimal, accounting for just 0.2%. This small share reflects the need for India to strengthen its position in the global defense market, enhancing its geopolitical standing while reducing trade imbalances.

2. India as the Largest Importer of Arms:

   • Despite significant efforts to ramp up domestic production, India remains the largest importer of arms globally. In 2018-2022, India accounted for 11% of global arms imports. This heavy reliance on foreign sources is a major driver for indigenisation.

3. Development of Military Industrial Complex:

   • Establishing a military-industrial complex is essential for fostering national security. This complex includes a network of industries and institutions involved in producing defense technologies, weapons, and systems. By focusing on indigenisation, India seeks to reduce reliance on foreign suppliers and build a robust national defense industry.

4. Technology Transfer and Independence:

   • Technology transfer through foreign collaborations is essential for India to develop and maintain advanced defense capabilities. Indigenisation would facilitate this process, while also empowering India with the ability to independently design, develop, and manufacture sophisticated defense technologies.

5. Exports:

   • As India becomes more self-reliant in defense production, it also aims to expand its export base. For example, India is in the process of exporting Brahmos Cruise Missiles to the Philippines, a key milestone in boosting defense exports.

6. Research and Development (R&D):

   • Indigenisation drives significant investment in defense R&D, which not only contributes to the military but also benefits other sectors of the economy through technology spin-offs and industrial innovation.

Government’s Initiative towards Defence Indigenisation

In the last decade, the Indian government has introduced several measures to boost indigenous defense manufacturing, focusing on policy, infrastructure, and technological innovations. Key reforms include:

1. Defence Procurement Policy, 2016:

   • The Defence Procurement Policy (DPP) 2016 was designed to promote indigenous defense production, with the "Buy (Indian-IDDM)" category encouraging the procurement of indigenously designed, developed, and manufactured products.

   • The policy also introduced the "fast-track" route for acquiring critical weapons, facilitating quicker and more efficient procurement processes.

2. Innovations for Defence Excellence (iDEX), 2018:

   • The iDEX initiative promotes innovation and R&D in the defense sector, especially among MSMEs, startups, and academic institutions. iDEX provides funding, grants, and support to innovative projects, contributing to the development of new technologies for defense.

   • In 2022, iDEX Prime was launched to further support this ecosystem and encourage cutting-edge innovations.

3. SPRINT Challenges:

   • The SPRINT initiative, launched by the Naval Innovation and Indigenisation Organisation (NIIO) in 2022, aims to integrate at least 75 new indigenous technologies into the Indian Navy. This project is a significant step toward increasing the Navy's self-reliance in defense technologies.

4. Indigenous Manufacturing and Simplification of Processes:

   • The government has worked on simplifying the industrial licensing process, extending the validity of licenses, and liberalizing the FDI policy to allow up to 74% foreign direct investment in defense manufacturing.

   • Domestic procurement has seen an uptrend, rising from 54% in 2018-19 to 68% in recent years, with 25% earmarked for private industry.

5. Defence Industrial Corridors:

   • The Defence Industrial Corridors in Uttar Pradesh and Tamil Nadu aim to create dedicated hubs for the aerospace and defense industries. These corridors provide infrastructure, incentives, and a conducive environment for both public and private players.

6. Positive Indigenisation Lists (PIL):

   • The PILs prioritize the procurement of defense equipment from domestic sources, further strengthening India's indigenisation efforts. These lists create embargoes on the import of specified items, pushing the defense industry to develop alternatives locally.

7. E-Biz Portal and Vendor Development Guidelines:

   • The digitization of defense licensing processes through the E-Biz Portal has improved operational efficiency. The Vendor Development Guidelines focus on strengthening private sector participation, particularly from SMEs, by encouraging outsourcing and creating development opportunities within public sector units (PSUs) and the Ordnance Factory Board (OFB).

Defence Acquisition Procedure (DAP) 2020

The DAP 2020 is a crucial initiative under the Atmanirbhar Bharat Abhiyaan, aiming to streamline procurement processes while fostering self-reliance in defense production:

• Reservation for Indian Vendors: The DAP encourages domestic manufacturers by giving preference to Indian vendors, with provisions allowing up to 100% FDI in defense production.

• Enhancement of Indigenous Content: There is an increased focus on enhancing the indigenous content in defense procurement across various categories.

• Make and Innovation Categories: The Make categories (I/II/III) support domestic innovation, funded both by the government and the industry.

• Global Manufacturing in India: The DAP mandates that part or all of the manufacturing process for defense equipment, spares, or maintenance be conducted by Indian subsidiaries of foreign investors.

• Ease of Doing Business: The DAP facilitates easier operations for defense manufacturers, offering faster decision-making and preference for companies producing complete defense systems.

Way Forward:

1. Enhance Indigenous R&D:

   • India must increase its investment in defense R&D to at least 2% of GDP, in line with global standards. This will require strengthening research institutions like DRDO and increasing private sector involvement in innovation.

2. Absorption of Technology (AoT):

   • India should focus on joint ventures with foreign OEMs, with an emphasis on technology sharing, co-development, and co-manufacturing. This will help build technological depth while avoiding dependence on foreign suppliers.

3. Skill Development:

   • Expanding specialized defense education and vocational training programs can provide the skilled workforce necessary for cutting-edge defense manufacturing and R&D.

4. Boost Export Competitiveness:

   • By encouraging DPSUs and private companies to jointly bid for foreign contracts, India can become a stronger player in the global defense export market, enhancing its geopolitical influence.

5. Foster Innovation Ecosystem:

   • India should provide sustained funding and capacity-building support to smaller enterprises, integrating them into defense supply chains and enabling them to scale up their technological capabilities.

6. Vijay Raghavan Committee Recommendations:

   • Empowering a PMO-led Defence Technology Council and refocusing DRDO primarily on research and development can enable better decision-making in the defense sector. Encouraging greater participation from private sector and academia in defense R&D will help foster indigenous innovation.

Conclusion:

India stands at a crossroads, with an unprecedented opportunity to position itself as not just a manufacturer but as an innovator in defense technologies. The next decade could see India playing a central role in shaping the future of warfare, from AI-driven systems to space and cyber defense. By leveraging its demographic dividend, building global partnerships, and nurturing a vibrant startup ecosystem, India has the potential to transform into a major player in the global defense value chain, enhancing its strategic autonomy and national security