Defence Sector Reforms in India
The liberalization of the Indian economy in 1991 by the P V Narasimha Rao government notably excluded the defence sector. It wasn't until 2001 that defence was opened to private enterprises.
Historical Context and Reforms
- The Industrial Policy of 1991 shifted defence from a 'reserved' category to a licensed regime, later liberalized by foreign direct investment (FDI) and defence procurement policies.
- Key reforms included the Defence Acquisition Procedure (DAP) 2020, with a revised DAP 2026 expected soon.
- Previously, the sector was dominated by public sector undertakings (DPSUs) and the Defence Research & Development Organisation (DRDO).
- The Kelkar Committee recommendations in 2005 and Defence Procurement Procedure (DPP) 2016 facilitated 'Make in India' initiatives.
- Noteworthy policies also include the institutionalisation of Positive Indigenisation Lists (PILs).
Structural Hurdles and Progress
- Despite doubling domestic defence production from FY17 to FY25, the share of private firms remained around 19-21%, rising to 23.60% in FY25.
- Major defence productions, like surface combatants and combat aircraft, are still primarily produced by DPSUs.
- Structural challenges include:
- Ongoing programmes initiated by DPSUs decades ago.
- The nomination basis of orders, which limits competition.
Upcoming Changes
- The Ministry of Defence plans to eliminate nomination-based orders, except in limited cases.
- A significant programme, the Advanced Medium Combat Aircraft, has been opened to private bidders, challenging HAL's monopoly.
- Emphasis is on expanding into critical components, electronics, AI, and other technologies.
Export Growth and Industry Potential
- Defence exports grew from Rs 1,521.86 crore in 2016-17 to Rs 38,424.01 crore in 2025-26.
- Private sector exports increased from Rs 194.35 crore to Rs 17,352.86 crore in the same period.
Encouraging Future Outlook
- Investor interest is increasing, particularly in drones, electronics, and missile systems.
- The industry is seen as commercially viable, transitioning away from policy dependence.
- The government targets Rs 3 trillion in defence production by 2028-29, with private firms accounting for half of this.
