India’s Defense Manufacturing Sector: Policy Support, Top Exports, Key Firms

India’s defense manufacturing sector is steadily growing, driven by policy reforms, increased budget allocations, technological advancements, and a focused push for domestic production. The country is keen to become a global defense manufacturing hub, combining indigenous capability development with strategic international collaboration.

India’s defense manufacturing policy

India is keen to achieve self-reliance in defense manufacturing, making necessary changes to its policy framework. The Union Budget 2024-25 showcased this ambition by allocating a record INR 5.9 trillion (US$68.255 billion) to the defense sector, including INR 1.8 trillion (US$20.8 billion) earmarked for capital outlay. A major portion of this budget is directed toward indigenous procurement, signaling strong support for domestic manufacturers.

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Further, India’s Ministry of Defense (MOD) has published “Positive Indigenization Lists” (PILs) that prohibit the import of specific defense equipment. Items on these lists must be exclusively procured from domestic manufacturers, including public and private sector enterprises, as well as micro, small, and medium enterprises (MSMEs). These PIL lists include Line Replacement Units (LRUs), systems, sub-systems, assemblies, sub-assemblies, spares, components, and raw materials, ranging from hardware and electronics components to small arms and advanced defense technology such as unmanned aerial vehicles (UAVs) and fighter jets.

Streamlining procurement with the Defense Acquisition Procedure  

India’s defense indigenization push via the PILs aligns with the Defense Acquisition Procedure (DAP) 2020, a cornerstone policy for defense procurement in India. Introduced as an overhaul of the earlier Defense Procurement Procedure (DPP), the DAP aims to streamline procurement processes, promote domestic manufacturing, and enhance transparency, efficiency, and accountability.

The DAP serves as the procedural framework for implementing acquisitions based on the PIL, ensuring that items on the list are procured in compliance with domestic manufacturing guidelines. It includes detailed provisions for evaluation processes, vendor selection, and production timelines. The policy prioritizes indigenous design and development, emphasizing collaboration between private players, public sector entities, and foreign original equipment manufacturers (OEMs).

Key procurement categories under the DAP include “Buy (Indian – Indigenous Design, Development, and Manufacturing),” “Buy and Make (Indian),” and “Make I and II.” These classifications incentivize domestic industries, particularly MSMEs, to actively participate in the defense sector. Additionally, DAP introduces leasing as a cost-effective alternative to outright purchases, optimizing expenditures on certain defense assets.

The 2023 amendments to India’s Defense Acquisition Procedure

Amendments to the DAP were introduced in 2023 and seek to incorporate technological advancements and operational requirements. They also focus on reducing procedural delays and further incentivizing indigenous production. Some key changes are noted below:

1. Promotion of indigenous content: The minimum indigenous content requirement has been increased across various categories of procurement, reinforcing the government’s emphasis on local manufacturing and technology development.
2. Incentives for startups and MSMEs: Specific measures have been introduced to simplify processes for startups and MSMEs, including fast-tracking approvals and offering greater flexibility in project execution.
3. Introduction of iDEX (Innovations for Defense Excellence): The amendments highlight the role of the iDEX framework, allowing smaller firms and innovators to contribute to defense R&D and procurement. This initiative promotes innovation and accelerates the introduction of cutting-edge technologies.
4. Simplified Make-II process: The “Make-II” category, which involves industry-funded projects for prototyping without government funding, has been further simplified. Timelines for approvals have been reduced to enable faster development and deployment.
5. Leasing provisions: Updates to the leasing mechanism now include clearer guidelines, making it a viable option for acquiring non-core equipment while avoiding high capital costs.
6. Digitalization of processes: The entire procurement lifecycle has been increasingly digitized, improving transparency and reducing administrative inefficiencies.
7. Strategic partnerships: Amendments encourage deeper strategic partnerships between Indian and foreign companies, particularly in the development of advanced systems like fighter jets, submarines, and armored vehicles.

FDI in India’s defense sector

Foreign direct investment (FDI) plays a critical role in bolstering India’s defense manufacturing capabilities and reducing reliance on imports. Under India’s FDI policy, up to 74 percent FDI is permitted via the automatic route for defense manufacturing, while investments exceeding this threshold require central government approval in cases involving advanced technology transfer or strategic national interests.

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This policy aims to attract foreign capital, facilitate technology transfer, and enhance India’s defense industrial base. It also promotes partnerships between domestic firms and foreign OEMs to develop cutting-edge technologies and modern defense systems.

However, despite these reforms, FDI inflows in the defense sector remain modest. According to India’s Department for Promotion of Industry and Internal Trade (DPIIT), the sector received a cumulative FDI inflow of just US$21.74 million from April 2000 to September 2024.

Defense industrial corridors in India

To enhance the Indian defense sector’s manufacturing capacity, two Defense Industrial Corridors have been set up—one in the northern state of Uttar Pradesh and another in the southern state of Tamil Nadu.

Aligned with the “Make in India” initiative, these corridors aim to boost indigenous production of defense and aerospace items, foster collaboration between the government and private players (including MSMEs and start-ups), generate employment, and promote R&D.

1. Uttar Pradesh Defense Industrial Corridor

Managed by the Uttar Pradesh Expressways Industrial Development Authority (UPEIDA), this corridor comprises six key nodes:

• Agra
• Aligarh
• Chitrakoot
• Jhansi
• Kanpur
• Lucknow

2. Tamil Nadu Defense Industrial Corridor

Developed by the Government of Tamil Nadu, this corridor includes five major nodes:

• Chennai
• Coimbatore
• Hosur
• Salem
• Tiruchirappalli

India’s defense exports

India’s portfolio of defense exports include missile systems like the Akash Surface-to-Air Missile (SAM), Advanced Towed Artillery Gun Systems (ATAGS), naval platforms such as fast attack craft and offshore patrol vessels, as well as aerospace assets like the Light Combat Aircraft (LCA) Tejas and Advanced Light Helicopters (ALH Dhruv). Small arms, ammunition, and UAVs also contribute to India’s expanding defense exports.

India is also improving its reputation as a supplier of military equipment having achieved a record defense export value of over US$2 billion in 2024. New Delhi has set an ambitious target of US$5 billion in annual defense exports by 2025.

Source: Department of Commerce, GoI

Source: Department of Commerce, GoI

India’s defense export network spans over 100 countries, with key markets including the Philippines, US, Turkey, Egypt, France, and Armenia.

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Notably, the US, France, and Armenia featured among leading importers of Indian defense equipment in 2023 and 2024. The US imports a substantial volume of aircraft and helicopter parts manufactured for global defense companies like Lockheed Martin and Boeing. France relies on India for software and electronic components, while Armenia has procured advanced systems, such as ATAGS artillery guns, Pinaka multi-barrel rocket launchers, and Swathi weapon-locating radars.

Defense manufacturing in India

India’s defense industrial base has expanded considerably, with contributions from 16 defense public sector units (PSUs), 430 licensed firms, and over 16,000 medium and small enterprises.

India’s defense manufacturing ecosystem has witnessed a threefold increase in production value per government data, growing from INR 464.29 billion (US$5.38 billion) in FY 2014-15 to INR 1.27 trillion (US$14.72 billion) in the FY 2023-24. The private sector plays a vital role, accounting for 21 percent of the total defense production value.

Key private companies involved in defense manufacturing in India include Tata Advanced Systems, Larsen & Toubro (L&T), Bharat Forge, and Adani Defense. These firms have expanded their operations to manufacture components and complete systems for both domestic use and export to international markets. Their collaboration with global OEMs has facilitated technology transfers and joint ventures, boosting domestic production capabilities.

In addition, India’s strategic partnerships with international allies have strengthened India’s defense manufacturing ecosystem. India has joint development and co-production agreements with the US, Israel, and France. Notable projects under these collaborations include UAVs, advanced missile systems, and next-generation fighter aircraft.

Additionally, the India-US Defense Technology and Trade Initiative (DTTI) is a key platform for accelerating technology transfer agreements and co-development programs.

Source: Department of Defense Production, GoI

Major achievements and developments in India’s defense sector

• The indigenously developed Light Combat Aircraft (LCA) Tejas Mk-2 is expected to enter mass production by 2029 with the first prototype expected by 2026. As per reports, it has attracted export interest from Southeast Asian and African nations.
• Advanced Towed Artillery Gun System (ATAGS), designed by the Defense Research and Development Organisation (DRDO), has been inducted into the Indian Army, a milestone in indigenous artillery development.
• The Indian Navy commissioned multiple domestically built warships, including stealth frigates under Project 17A and submarines under Project 75(I).
• Cochin Shipyard and Mazagon Dock Shipbuilders have become leading hubs for naval vessel production in India.
• India’s UAV segment has witnessed rapid growth, with platforms like DRDO’s Rustom-II and Hindustan Aeronautics Limited’s (HAL) Combat Air Teaming System (CATS) gaining traction.
• India is currently developing the Advanced Medium Combat Aircraft (AMCA), next-generation tanks, and autonomous underwater vehicles. The country is expected to roll out the first operational AMCA units by 2035.

Challenges and opportunities for investors in India’s defense sector

India’s defense manufacturing sector faces several challenges despite recent progress. The industry remains reliant on imports for critical components, such as engines, avionics, and sensors. Advanced technologies, including AI-driven systems, hypersonic missiles, and stealth technologies, require further investment in research and development to bridge technological gaps. A shortage of highly skilled professionals shows the need for specialized training programs and stronger collaboration between academia and industry. Additionally, regulatory hurdles, including bureaucratic gaps in procurement and project approvals, continue to impede progress.

India’s defense exports, though growing, encounter stiff competition from established global players like the United States, Russia, and France. Challenges include overcoming quality perceptions and addressing technological gaps in advanced platforms such as stealth fighters and high-end UAVs.

Looking forward, India aims to position itself as a reliable supplier of cost-effective, high-quality defense equipment. Strategies include strengthening government-to-government agreements, enhancing exports of advanced systems like drones and radar technologies, and fostering joint ventures with global players.

Summary

India’s defense manufacturing sector saw a surge in exports in 2024, indicating that policies seeking to facilitate self-reliance and global competitiveness are working.

However, addressing persisting challenges like supply chain dependencies and technological gaps will be crucial to sustaining the growth momentum and achieving long-term strategic goals.

Through the combined efforts of private sector players, PSUs, strategic partnerships, and robust export and production policies, India can cement its position as a global base for defense equipment manufacturing.

(US$1= INR 86.44)

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