Catalysing India’s Defence Exports for a $5 Trillion Economy

India has been primarily exporting low-value and non-lethal defence items like light weapons, army uniforms, trucks, patrol boats etc. In 2001 India deregulated the defence sector for private players.

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Lt Col Manoj K Channan
Lt Col Manoj K Channan
Lt Col Manoj K Channan (Retd) served in the Indian Army, Armoured Corps, 65 Armoured Regiment, 27 August 83- 07 April 2007. Operational experience in the Indian Army includes Sri Lanka – OP PAWAN, Nagaland and Manipur – OP HIFAZAT, and Bhalra - Bhaderwah, District Doda Jammu and Kashmir, including setting up of a counter-insurgency school – OP RAKSHAK. He regularly contributes to Defence and Security issues in the Financial Express online, Defence and Strategy, Fauji India Magazine and Salute Magazine. *Views are personal.

In any economy, all sectors contribute to the overall growth of its economy. The defence sector is critical, as it provides the wherewithal to protect the Nation from its internal and external threats.

One of the terms of reference one must understand is that the industry has only one customer: the Government of India. The other customers are from friendly foreign countries.

The first step for a $5 Trillion Economy, it is important to focus on this aim that our Prime Minister has defined. 

History Of Defence Infrastructure

After its independence in 1947, India inherited 16 ordnance factories, an aircraft plant and two shipyards from the British. However, during the 1950s, India needed more technical knowhow to produce sophisticated defence equipment. The requirements were made up through imports.

In the initial years after independence, the defence sector received less priority as the government’s threat perception after the war with Pakistan in 1948 in Kashmir was low. Prime Minister Jawahar Lal Nehru was of the opinion India did not need Armed Forces as India had achieved independence through Ahimsa. However, the defeat in 1962 broke this dream, and India’s defence expenditure increased from 2.0% in 1960 to 4.0% in 1963.

India’s defence ties with the erstwhile Soviet Union were strengthened with the Indo-Soviet Friendship Treaty of 1971. Soviets offered India technology through licenced production and favourable payment terms for buying defence equipment. This era lasted till the mid-1980s; there was minimal technological advancement as approved production arrangements with the Soviet Union consisted only of assembly and basic sub-component manufacturing. This was undertaken by the Defence Public Sector Undertakings (DPSUs), detailed below.

  • The Dutch Ostend Company created a Gun Powder Plant in Ichhapur in 1712, which is when the first Indian ordnance factory was founded.
  • HAL (1940 inception but full functioning started in 1964, amalgamation).
  • BEL (1954- Production began in 1956). 
  • NAL (1959 in Delhi. In 1960, the CSIR moved to Bangalore.)
  • DRDO was founded in 1958 by the consolidation of the Defence Science Organisation and several technical development institutes.
  • Initiated in 1941 as the Scandia Shipyard, in 1961, it was nationalised and renamed Hindustan Shipyard limited.
  • Mazagon Dock Shipbuilders Limited.

 Licence-Based Production to Co-Production

 In 1988, India signed a joint venture with Russia to develop a ‘Brahmos’, a supersonic cruise missile system. Besides this, India has also signed several agreements with Russia regarding space collaborations and developing sophisticated weapons.

India also established good relationships with prominent defence equipment-producing nations like Israel and the US. There was a significant improvement in India-US defence ties. In 2005 both countries signed a ten-year defence cooperation framework to strengthen the strategic relationship through higher collaboration in co-production and R&D.

 De-Regulation of the Defence Sector

 In the 1990s, India aggressively followed the export promotion of defence equipment. Traditionally, it has not supported the export of arms that can fuel conflicts indirectly and has been primarily exporting low-value and non-lethal defence items like light weapons, army uniforms, trucks, patrol boats etc.

In 2001 India deregulated the defence sector for private players. In 2002 procedural guidelines Procurement Procedure (DPP), to streamline the procurement of defence equipment for armed forces, was promulgated.

After 2014, strategies for promoting the export of defence products were formulated, and specific incentives were introduced under Foreign Trade Policy (FTP). The Ministry of External Affairs (MEA) was tasked to facilitate the creation of lines of credit for foreign countries to import defence items from India, and EXIM Bank has been requested to finance defence exports from India.

Encouraging Foreign Direct Investment in the defence sector, under its “Make in India” initiative, the government has now allowed up to 74% through automatic route (from the earlier 49%).

In August 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) also suggested several measures to attract foreign investors and boost domestic defence manufacturing. This includes capital expenditure and R&D subsidy, tax exemptions, cheaper finance and a one-stop shop for clearances.

It has been recommended that the Defence Procurement Policy will be revised sparingly.

Steps – To Enhance India’s Defence Exports

Instead of merely exporting defence hardware, India must supply comprehensive defence solutions, including the provision of technical expertise, replacement parts, and training to operate weapon systems. This will help India in gaining acceptance, especially among less developed nations.

There have been many policy decisions taken by the government recently to enhance domestic capabilities and attract FDI in defence manufacturing. It is important to translate this on the ground. Foreign and private players are encouraged to make investments; policy is being tweaked, and bureaucracy is up to speed to accord clearances and approve licenses.

The government has stepped up to help the marketing of ‘Made in India’ products. A full-fledged Directorate supported by Indian embassies in different countries has been tasked to work closely with the industry. They should not work just as facilitators but work proactively to identify opportunities in different markets and promote sales of Indian defence equipment.

India can realise the target of achieving exports of US$ 5 billion in the next five years and US$ 10-15 billion in the next decade. As of 2021, India is the 23rd largest arms exporter in the world. India’s share in the defence exports market is 0.2%. Ten countries (China, France, Germany, Russia, the US, Israel, Italy, South Korea, Spain, and Britain) have a 90% share of the defence export market.

The defence budget 2022-23 opened 25% of the R&D funds to the private sector, start-ups and academia. Moreover, the budget also mentioned that 68% of the capital outlay would be spent on procuring the equipment from domestic defence manufacturing companies. This is a big boost for the domestic defence industry and paves the path for Atamnirbhar Bharat.


The foremost is to have a clear National Strategy and Atmanirbharta through Technology Sovereignty, to quote Lt Gen Anil Kapoor, AVSM, VSM, Veteran. There is a need to have an appointment of a National Technology Officer who should be responsible and accountable to the Government of India to drive the Research and Development, delegate and decentralise the process and set timelines to achieve National Aims as spelt out in the National Strategy Perspective. Some recommendations are listed below for consideration by the decision-makers.

  • Remove restrictive lists on defence exports, and allow participation in the global market.
  • Explore providing services – MRO, training and training areas, to friendly foreign countries.
  • Segregate manufacturers, system integrators and MRO specialists.
  • Reform tendering process in which 50% of ancillaries are mandated to be new.
  • Ensure documentation from sourcing raw materials to end-product so that any system failure can be made accountable.
  • Transparent costing. The cost of licensed manufactured equipment vis a vis cost of OEM is a considerable variance. AK 203, T 90, Su 30 MKI.
  • Simplify the DPP and DPM.
  • Do away with No Cost, No Commitment trials. Ensure punitive costs on equipment failure.
  • Testing/trials organisation to ensure speedy and transparent trials and certification for induction in the armed forces.
  • Orders and repeat orders – are a must; the business does not survive on rhetoric.
  • Encourage sales to foreign customers; thereby, global competitiveness will ensure Quality Control and constant R&D to remain relevant.
  • End user advice.
  • Transparency must exist in terms of equipment performance in the given area of operations.
  • R&D is a continuous necessity.
  • Nominate a dedicated R&D organisation with budgetary support.
  • DRDO is project based – funds from service HQs.
  • Academia and Service technical personnel are engaged dedicatedly.
  • The government and industry work closely and bring about changes.
  • Remove bureaucratic controls.
  • Maximum governance, minimum government.


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