India's Defence Sector to Undergo Major Reforms in 2025

The Ministry of Defence has declared 2025 as the "Year of Reforms" for India's defence sector, marking a crucial milestone in the nation's journey toward achieving self-reliance and bolstering its military capabilities. 

This announcement comes on the back of impressive strides in Indian defence production, which has surged by over 50% from FY21 to FY24, alongside a 31-fold increase in defence exports over the last decade, albeit from a modest base. These advancements have been driven by pivotal policy measures, including prioritising indigenisation, rolling out multiple positive indigenisation lists, and easing foreign direct investment (FDI) norms.

With major events like Aero India, the Union Budget, and the revision of the Defence Acquisition Policy (DAP) 2020 on the horizon, there are high expectations for further reform. The vision of a "Viksit Bharat" by 2047 hinges on the reforms and steps India takes today, which can be encapsulated in several key areas:
Innovation at the Core

To fuel innovation, India needs to integrate research and development (R&D) within the indigenous content framework. While programmes like Make in India and the Technology Development Fund (TDF) are fostering innovation, the current conditions—such as "resident control"—restrict their potential. A reconsideration of these conditions would allow for a more effective application and growth of these initiatives.

The Growing Maintenance, Repair, and Overhaul (MRO) Market

India’s MRO market is projected to reach $4 billion by 2031, according to Niti Aayog. Leveraging the country’s low-cost, English-speaking, and highly skilled engineering workforce, India is positioned to not only meet this domestic demand but also emerge as a global MRO hub. While the government’s reduction of GST on MRO services from 18% to 5% is a welcome move, further exemption from GST could make India more competitive compared to global MRO hotspots like Singapore.

Overhaul of Procurement Process

The Indian weapons acquisition process has long been criticised for its inefficiencies and outdated procedures. The government has acknowledged the need for a simpler, time-sensitive approach to procurement, and the industry looks forward to the adaptation of international best practices to streamline the system.
Incentives for Growth

India’s success with concessional manufacturing tax rates and production-linked incentives (PLI) has proven effective in spurring growth. Now, there is a call to extend similar incentives to the defence sector. By offering the 15% concessional corporate tax rate to defence manufacturers, India could attract significant investment and further drive indigenisation.

Capital Infusion and Capability Enhancement

The Indian defence sector, though progressing, still requires substantial capital infusion and the development of capabilities from advanced economies. Allowing wholly-owned subsidiaries of foreign original equipment manufacturers (OEMs) to be classified as "Indian vendors" under DAP 2020 could significantly enhance India’s defence capabilities by facilitating the transfer of intellectual property (IP) rights.

Sustained Budget Increases

With capital expenditures seeing only a modest 6% increase last year amidst fiscal constraints, India’s strategic aspirations demand a substantial boost in defence budgets. The government’s commitment to the Year of Reforms necessitates a clear allocation of resources to support the sector’s growth and indigenisation efforts.

Revisiting Indigenous Content Requirements

While DAP 2020 sets ambitious targets for OEMs to source 50-60% local content, such requirements pose practical challenges due to India's lack of raw material resources and its relatively nascent defence manufacturing ecosystem. A rationalisation of these thresholds to around 30% would be a more achievable goal, similar to the offset regime.

Additionally, the current focus on manufacturing under DAP 2020 overlooks vital services such as engineering support, after-sales service, and skill development—elements crucial to nurturing India’s defence manufacturing ecosystem.

Collaborative Road to Indigenisation

The journey toward indigenisation requires close collaboration between the private industry and the government. Fortunately, the government has shown a strong commitment to engaging with industry stakeholders to understand their concerns and shape policies that foster growth. As India enters the "Year of Reforms" and prepares for revisions in the DAP 2020, it is hoped that this ongoing partnership will accelerate the nation’s journey towards self-reliance (Aatmanirbharat) and transform India into a global defence manufacturing powerhouse.

As India embarks on the "Year of Reforms," the defence sector is poised for a transformative shift. With key policy changes and a collaborative approach between industry and government, the dream of a robust, self-reliant defence industry is within reach.

By investing in innovation, strengthening procurement processes, and fostering indigenous capabilities, India can secure its position as a global leader in defence manufacturing, advancing its strategic aspirations and achieving the vision of a "Viksit Bharat" by 2047.