India’s Defence Sector Gears Up For Reform In 2025: A Roadmap To Self-Reliance

The Ministry of Defence has declared 2025 as the “Year of Reforms” for India’s defense sector, marking a significant milestone as the country looks to accelerate its path to self-reliance.

The announcement comes in the wake of impressive growth in Indian defense production, which increased by more than 50% from FY21 to FY24. Exports also surged 31 times over the last decade, albeit from a small base. This progress has been driven by key policy measures, including prioritizing indigenization, introducing positive indigenization lists, and easing foreign direct investment (FDI) policies.

With major events like Aero India, the Union Budget, and a revision of the Defence Acquisition Policy (DAP) 2020 on the horizon, the coming year holds significant potential for further advancements. The vision of a “Viksit Bharat” (Developed India) by 2047 hinges on the steps India takes now. Here are some key areas of focus:

Fostering Innovation
To drive innovation, it is crucial to include research and development (R&D) within the framework of indigenous content. While initiatives such as the Make in India programs and the Technology Development Fund (TDF) have shown promise in nurturing innovation, restrictions like the “resident control” condition limit their effectiveness. A re-evaluation of these conditions could unlock more potential for India’s defense innovation.

Expanding the Maintenance, Repair, and Overhaul (MRO) Market
India’s MRO market is set to grow to $4 billion by 2031, according to Niti Aayog. With a competitive advantage in low-cost, English-speaking, and highly skilled engineering talent, India has the potential to become a global MRO hub. While the government has already reduced the goods and services tax (GST) on MRO services from 18% to 5%, further action, such as a complete exemption, could help India compete with established MRO hubs like Singapore.

Overhauling Procurement Processes
The Indian government has acknowledged that its weapons acquisition processes are outdated and need to be simplified and made more time-sensitive. There is widespread anticipation for a procurement overhaul, with the adoption of international best practices to streamline the system.

Incentivizing Defence Manufacturing
India’s success with concessional manufacturing tax rates and the production-linked incentive (PLI) scheme has demonstrated the effectiveness of targeted incentives. It is now time to extend these schemes to the defense sector, including offering a 15% concessional corporate tax rate for defense manufacturers, which could further boost growth.

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Building Capital and Capability
The Indian defense sector is still in its early stages, requiring significant capital infusion and technological expertise from advanced economies. One potential solution is to allow wholly-owned subsidiaries of foreign original equipment manufacturers (OEMs) to operate as “Indian vendors” without restrictions on control and ownership under DAP 2020. This would facilitate the transfer of intellectual property and help strengthen India’s defense capabilities.

Addressing Budgetary Challenges
Despite the government’s commitment to defense reforms, capital expenditures in defense saw only a modest 6% increase last year. To meet India’s growing strategic aspirations, there needs to be a substantial increase in capital expenditure in the upcoming years.

Rethinking Indigenous Content Targets
The DAP 2020 mandates that OEMs source 50-60% of their materials locally. However, this requirement is ambitious given India’s limited supply of raw materials. A more practical approach could be to reduce this threshold to around 30%, similar to the offset regime. Additionally, the current definition of Indigenous content in DAP 2020 focuses primarily on manufacturing and overlooks critical services such as engineering support, after-sales service, and skill development, which are essential to building a thriving defense ecosystem.

Supporting Defence Industry Growth
The absence of strategic incentives for domestic sourcing and investment in defense corridors, as well as a lack of clarity regarding micro, small, and medium enterprises (MSMEs), continues to pose challenges for India’s defense industry. A more coherent strategy is needed to foster growth and development in these areas.

A Collaborative Path Forward
A close collaboration between the private sector and the government will be key to realizing India’s defense ambitions. The good news is that the government is actively engaging with industry stakeholders to address their concerns and shape policies accordingly. As India steps into the “Year of Reforms,” there is hope that these continued efforts will lead to significant strides toward self-reliance in the defense sector, helping India achieve its goal of “aatmanirbharta” sooner than anticipated.