India’s total expenditure on modernization and equipment in the defence sector has witnessed substantial growth over time. The defence budget accounted for nearly 15.5 percent of the total Central Government expenditure in 2020-21. Defence equipment in India are mainly manufactured by DPSUs and Ordnance factories, which together account for more than 68 percent of the total defence production in India. The Government has allowed defence production is allowed by the private sector. In 2019-20, private players accounted for approximately 23 percent of the total defence production in India. India’s defence production stood at ₹ 51807 crores in 2019-20, as compared to ₹ 80558 crores in 2018-19, witnessed a decline of (-) 35.7 percent. Production from ordnance factories recorded the largest decline of (-) 57.30 percent, followed by DPSUs (-32.7 percent), defence private companies (-31.56 percent) and Other PSUs/JVs (-22.29 percent).

Trends in Defence Production in India (As on 5/3/2020)

(₹ in Crores)

A total of 2593 projects have been approved by DPSUs/ OFB and 47 projects by Department of Defence Production for manufacturing of defence equipment(as on 24/4/2020). Under the Mission Raksha Gyan Shakti, an initiative to provide a major fillip to culture of innovation and Intellectual Property Rights(IPRs) in the defense industry, a total of 736 IPRs were filed by various production units in public and private sector(upto May 2020).

The export from defence sector stood at US$ 166 million during 2019-20 and registered a negative CAGR of (-)49.5 percent between 2014-15 and 2019-20. However, products such as spring, air or gas guns and pistols, truncheons, and other non-firearms;parts and accessories for weapons; bombs, grenades, torpedoes, mines, missiles, cartridges and other ammunition and projectiles; swords, cutlasses, bayonets, lances and similar arms and parts thereof, and scabbards and sheaths registered positive CAGRs over the same period of 70.40 percent, 14.31 percent, 22.85 percent and 1.18 percent, respectively. The export of vessels, warships and boats witnessed substantial CAGR of more than 136 percent during the same period.

Some of the major export destinations for defence products have been Italy, Maldives, Sri Lanka, Russia, France, Nepal, Mauritius, Sri Lanka, Israel, Egypt, UAE, Bhutan, Ethiopia, Saudi Arabia, Philippines, Poland, Spain and Chile etc. The major defence items being exported are Personal Protective items, Offshore Patrol Vessels, ALH Helicopter, SU Avionics, Bharati Radio, Coastal Surveillance Systems, Kavach Mod II Launcher and FCS, Spares for Radar, Electronic System and Light Engineering Mechanical Parts etc.

Trends in Defence Exports

(In US$ Million)

Investment climate in India for defence production has improved considerably in the recent years. FDI of 100 percent is allowed in defence through Government route andupto 74 percent is allowed under the automatic route. Between April 2000-March 2020, the defence industry attracted FDI worth US$ 9.52 million.

India’s current requirements of defence are catered largely by imports. The opening of the defence sector for private sector participation will help foreign original equipment manufacturers to enter into strategic partnerships with Indian companies and leverage the domestic markets, as well as aim at global markets. Besides helping in building domestic capabilities, this will also bolster exports in the long term. The Government has set to achieve a turnover of ₹ 1,70,000 Crores (US$ 26 bn approx.) in defence goods and services by 2025 involving additional investment of nearly ₹ 70,000 Crores (US$ 10 bn approx.) creating employment for nearly 2 to 3 Million people. In addition to this, defence goods and services exports are expected to target touch ₹ 35,000 Crores (US$ 5 bn approx.) by 2025.

The defence offset policy has been objectivized to leverage capital acquisitions to develop the domestic defence industry. Mandatory offset requirements of a minimum of 30 percent for procurement of defence equipment have been envisaged. This would ensure that an eco-system of suppliers is built domestically. Favorable government policy shallpromote self-reliance, indigenization, technology upgradation,achieve economies of scale andalso develop capabilities for exports in the defence sector. The country’s extensive modernization plans with an increased focus on homeland security will help to develop India as a defence sourcing hub. The outlook for the industry is positive in the medium term.