India's defence companies have been on a roll. Will it change under Modi 3.0?

Modi’s push towards making in India also catapulted various defence stocks in the last few years—the likes of HAL, MDL and Cochin Shipyard saw between 200 percent and 600 percent growth in the past year alone. Much of that has been on the back of India’s growing defence spend, coupled with the government’s decision to allow greater participation of the domestic defence manufacturers, especially public sector ones, while also substituting imported goods and providing a serious opportunity to private sector companies.

Of course, credit where it is due, and the prime minister has been instrumental in pushing that agenda of greater indigenisation, even though India’s defence ministry has been seeking greater domestic partnerships in defence projects even before he took centre stage.

In 2005, the government had launched an ambitious Defence procurement procedure (DPP) which would see foreign defence players invest a share of their contract value in building technology and skills locally. A year later, the government introduced offset obligations under which a foreign defence vendor would have to spend 30 percent of its contract value towards the programme. The share was later increased to 50 percent to help build up the domestic defence sector. “Certain companies started to provide non-value-added manufacturing or services to fulfil that 30 percent mark, leading to Indian companies being unable to reach the goal of self-reliance,” says Pavan Ranga, CEO, of Rangsons Aerospace says.

By 2020, the Modi government launched a Defence Acquisition Procedure 2020, under which the government even introduced a new category of purchase that sought global defence players to set up manufacturing in India for either the whole contracted items or parts of the equipment, including spares and assemblies.

“The last 10 years of the Modi-led government have witnessed significant liberalisation of the Indian defence sector,” says Abhijit Apsingikar, senior analyst at consultancy firm GlobalData. “The liberalisation has also led to greater involvement of the private sector in defence production, with private enterprises being contracted to supply critical equipment and subsystems. Previously, private sector involvement was limited to mostly non-critical component-level subcontracting. However, with the Indian government opening up the market, it has now become possible for private sector enterprises such as TATA Advanced Systems Limited (TASL), Larsen & Toubro (L&T), Data Patterns and Astra Microwave to be involved in the design, manufacturing and licence production of entire military platforms and systems as well.”

Alongside, the government has also put forward an indigenisation list, with over 4,500 items, which seeks to substitute imported components. The list includes items such as infantry combat vehicle, remotely piloted airborne vehicles (up to 25 km range with a payload of 2 kg for Army), shipborne unmanned aerial system, medium upgrade low endurance class tactical drones and next-generation low-level light radar for Army. The move has also meant that a record 75 percent of the defence capital procurement budget, or approximately Rs1 lakh crore, was allocated to the domestic industry.

Also read: India's defense sector: From increased spending to indigenisation

But with the government now moving into a coalition one, and political compulsions now seeking a change in decision-making, the defence sector could see some slowdown as priorities for coalition change. “Any fast-paced decisions on any high-value defence procurement projects are unlikely, as these projects would be routed through a formal tendering process while being subjected to intense scrutiny to avoid controversies,” says Apsingikar. “As such, the procurement of the impending 26 naval Rafale-M multirole fighter aircraft could also be routed through the tendering process to select a vendor.”

The government will also likely continue with government-to-government deals with most deals likely following a competitive tender process. “For instance, the procurement of three additional Scorpene submarines separate from the P-75I programme will possibly be finalised through a government-to-government deal by the end of 2024,” adds Apsingikar.

Still, it is quite likely that the government will continue to push for greater indigenisation, especially since the sector has now witnessed reforms in the last decade. That means, the Defence Public Sector Undertakings (DPSU), such as HAL, Mazagaon Dock Shipbuilders Limited, Hindustan Shipyard, and Cochin Shipyard, will continue to lead the indigenous design and production initiatives, and will account for most domestic orders, with the private sector being key suppliers.

“Two factors will affect this,” says Ranga. “One, the increased focus on encouraging the private sector in defence manufacturing, and two, the resource allocation priories of a potential coalition government. The priority on the spending for the defence sector, especially due to it being a multiple coalition government, may change as the government will have to fulfil the needs of various coalition partners. The budget allocation may vary, but the focus on creating a more self-reliant defence sector will remain the same due to the momentum created over the last few years.”

The big change in the defence sector though could possibly come in the government’s contentious Agneepath scheme, a tour of duty style for recruiting soldiers into the Army. The scheme had faced backlash in Bihar, a state run by Modi's new coalition partner Nitish Kumar. “The new NDA coalition government may have to re-evaluate its previously contentious decisions such as the Agneepath Scheme,” says Aprsingkar. “The execution of the Agneepath scheme’s ‘Tour of Duty’ programme could face challenges. The government may make some compromises with respect to the implementation of this scheme to continue retaining power in the Parliament.”

For now, though, the immediate priority for the Narendra Modi 3.0 government is a simple one: Choosing a new Army chief, with the current one expected to retire by the end of June. The previous government had given India's Army chief a one-month extension amidst the polling. How his successor will be chosen will be key to the prospects of the defence sector in the next five years.