India has the third largest armed force in the world and the Indian government spends more than USD 34 billion per annum to maintain. Of the total defence budget, 40% is spent on acquisition of weapons and other capital expenditure. India is heavily reliant on foreign countries for defence equipments, with about 70% of the requirement met through imports.
Major players in India’s defence industry are the Defence Research and Development Organisation (DRDO), Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB) in the public sector. Some of the DPSUs in the country are Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), Mazagon Dock Shipbuilders Limited (MDL), Garden Reach Shipbulders and Engineers Limited (GRSE), Hindustan Shipyard Limited (HSL) etc.
In the private sector, major corporate houses such as Reliance Industries Ltd (RIL), Tata Group, Larsen and Toubro Ltd (L&T), Godrej Group and the Mahindra Group have entered the defence manufacturing sector. Apart from them, there are many small and medium companies in the defence manufacturing sector.
Government policy is a major growth driver for this industry in recent years. In order to reduce our reliance on imports, Government of India has taken various measures such as introducing Defence Procurement Procedure (DPP 2016) and defence offset policy. DPP includes a new procurement category called the Buy Indian – IDDM (Indigenously Designed, Developed and Manufactured) category. This category was introduced to promote indigenously designed products and bring significant investment in defence research and development.
Government of India had adopted a ‘Strategic Partnership’ approach to create capacity in the private industry on a long term basis. Government has also improved the ease of doing business in the defence sector by streamlining licensing policy and liberalizing foreign direct investment norms. Government has increased the initial validity period of industrial licenses from 3 years to 15 years, which can be further extended for a period of 3 years.
Government allows foreign direct investment (FDI) up to 49% under the automatic route in this sector. Government also allows foreign investment beyond 49% in case it enhances access to modern technology or for other reasons to be recorded.