The backbone of national security

India's stature on the global stage in the defence sector is underpinned by it having the world's second-largest  active armed forces and its position as the world’s fourth-largest spender on military resources. Within India's  intricate security framework, the defence sector emerges as a cornerstone, not only safeguarding national  sovereignty but also exerting considerable influence on regional geo-politics and forging strategic alliances.

As India confronts a complex security landscape, its defence forces tackle various challenges. These range from  traditional threats posed by some neighbouring countries to the ever-evolving realm of cyber warfare. This means  that India's defence system is always evolving, with ongoing innovations, strategic planning, and technological  upgrades. By strengthening its defences against both old and new threats, it aims to demonstrate its reliability and  responsibility on the global stage in matters of defence and security.

India ranks no 2 in active armed forces 

2023 – in million

India is the 4th largest spender on military resources 

 2023 – in billion

Source: World Population Review Source: Stockholm International Peace Research Institute  (SIPRI)

India's defence production journey

Since gaining independence in 1947, India has gradually transitioned from relying on imported military hardware  to enhancing its indigenous defence capabilities. This shift is driven by domestic manufacturing and technology  transfer agreements. Today, India's defence sector includes a diverse mix of public and private enterprises involved  in various aspects of defence, from research and development to production.

In recent years, India's defence budget has consistently ranged between 1.90% to 2.80% of its Gross Domestic  Product (GDP). For the fiscal year 2024-25, a substantial allocation of Rs 6.22 trillion has been dedicated for the  defence sector. Furthermore, India has set an ambitious annual defence production outlay of Rs 1.75 trillion for  FY25 which is expected to grow at a CAGR of around 20% to Rs 3 trillion (as per Ministry of Defence) by FY29,  underscoring its commitment to becoming a self-reliant defence powerhouse.

At the forefront of this ecosystem are prominent government-owned entities such as Hindustan Aeronautics Limited  (HAL), Bharat Electronics Limited (BEL), Cochin Shipyard Limited (CSL), Mazagon Dock Shipbuilders Limited (MDL), BrahMos Aerospace Private Limited and Bharat Dynamics Limited (BDL) alongside the restructured Ordnance  Factory Board (OFB), now divided into seven corporatised entities. These organisations form the core of India's  indigenous defence research and manufacturing, spanning arms and ammunition, aerospace, missile systems,  electronics, and naval technologies.

Complementing these public sector giants is the gradually growing private sector participation, comprising both  domestic firms and multinational corporations. Notable players such as the Tata Group, L&T, Mahindra Defence  Systems, Kalyani Group, etc are expected to play a pivotal role in advancing defence modernisation, leveraging  their engineering and technological expertise.

The Indian government's proactive policies, including the 'Make in India' initiative and the liberalisation of FDI  norms (74% though automatic route and 100% through Government route), have significantly facilitated private  sector participation and investment in defence manufacturing. These measures have enhanced domestic R&D  capabilities, attracted foreign investments, and reinforced India's position as a hub for defence innovation and  production.

India's growing role in the global defence market

Historically, India has been a net importer of defence equipment, heavily relying on foreign suppliers to meet its  critical military needs. However, concerted efforts to promote indigenous defence manufacturing and technology  development, supported by policy reforms such as the ‘Make in India’ initiative, is bringing about a gradual shift.  Today, India boasts an expanding defence industry encompassing a wide range of advanced weaponry and  systems.

India’s defence exports include a diverse array of products such as aircraft, naval systems, missile technology, and  military hardware. Despite challenges like regulatory hurdles and competition, there are significant opportunities  to penetrate emerging markets by leveraging India’s cost-effectiveness, skilled workforce and technological  expertise. Over the last six years ending FY24, Indian defence exports have grown at a healthy CAGR of  approximately 28%. CareEdge Ratings anticipates that India’s defence exports will grow in tandem with  government spending in the sector, at an estimated rate of about 19% during next 5 years (i.e. from FY24 to FY29)  on a larger base.

The growth of India’s defence exports not only bolsters its economy but also enhances its strategic influence  globally. By establishing itself as a reliable defence partner, India can strengthen diplomatic ties, foster regional  security cooperation, and assert itself as a key player in the defence sector.

Government defence companies to maintain robust credit metrics

According to the analysis conducted by CareEdge Ratings on major DPSUs, new DPSUs and other PSUs/JVs which  together constitute about 85% of all their aggregate defence production, there is a consistent upward trend in the  total operating income (TOI). Historical data indicates a CAGR of approximately 14% in TOI during the last 3 years  ending FY24, a trend expected to improve in the medium term on the back of their healthy order book. Profit  Before Interest, Lease, Depreciation, and Tax (PBILDT) is anticipated to remain about 20% during FY25,  underscoring the healthy profitability of these entities. It is anticipated that going forward these DPSUs will play a  pivotal role in reducing defence imports and bolstering exports, thereby positioning India prominently in the global  defence landscape.

CareEdge Ratings’ view

“India’s defence sector is on the cusp of significant modernisation, with a strong emphasis on indigenous production to make us more self-reliant in the matter of national security. Under the ‘Make in India’ initiative, there is an  expected increase in collaboration between both domestic and international defence firms to develop cutting-edge  military equipment.

Geo-political dynamics, and maritime security concerns, will shape defence priorities, influencing procurement  strategies and strategic partnerships. Emerging technologies such as artificial intelligence (AI) and hypersonic  weapons will be crucial in enhancing defence capabilities, which in turn could drive substantial investments in  research and development (R&D).

Counter-terrorism and border security will remain key areas of focus, necessitating investments in intelligence and  surveillance. Budgetary allocations will play a crucial role in the sector’s growth, while India may also explore export  opportunities to strengthen its position in the global defence market.

Regulatory reforms aimed at streamlining procurement processes and promoting private sector involvement will  foster a conducive environment for innovation and investment in the defence sector. All the above factors together are expected to drive the industry growth by around 20% during FY24-FY29”, says D Naveen Kumar, Associate  Director, CareEdge Ratings.