Private Sector Participation: can it lead India’s domestic military growth story?

India is expected to remain a net weapons importer for the foreseeable future.

While India’s domestic military industrial complex (MIC) is fast turning into a runaway story, the private sector participation in the consolidation and expansion of the domestic MIC is less than satisfactory. This despite numerous public policy initiatives and whopping procurement orders under the indigenously designed, developed and manufactured (IDDM) category, like the recent Rs 7000-crore tender for procurement of 400 new-age artillery guns through private sector bidding. Unless the private sector comes forward with an entrepreneurial production culture and starts vigorously competing with the defence PSUs, it cannot lead India’s domestic MIC story.

Worrying Trends in Private Sector Growth

The private sector’s sluggish growth is worrying since it dilutes the recent vibrancy in India’s defence production turnover. According to the Department of Defence Production (DDP) dashboard, the defence production turnover increased from Rs 74,054 crore in 2016-17 to Rs 126,887 crore in 2023-24. During the same period, the defence private companies increased their turnover from Rs 14,104 crore to Rs 26,506 crore. Thus, while the overall defence turnover increased by 71.34 per cent, the private sector’s turnover rose by 87.93 percent. This is nothing since even the established defence PSUs increased their production by 82 percent. At 20.89 percent share of the domestic MIC, the private sector defence companies are still poor cousins of the defence PSUs and betray the ubiquitous faith in their entrepreneurial competency.

Comparison with Developed Countries

On the other hand, the MICs of developed countries are completely dominated by the private sector. For example, the top five entities in the SIPRI list of top 100 arms-producing and military services companies in the world are all US-based private sector firms. Collectively, these top five grab more than 50 per cent of Pentagon’s annual big-ticket defence procurement. Lockheed Martin Corporation, the numero uno in the list, had a turnover of $67.57 billion in 2023 that is more than the national defence budgets of all countries except the top six. The private sector's dominance in the US MIC mirrors its leadership in other sectors, showcasing its prowess in innovation, production, and selective proliferation of defence technology.

Challenges for Indian Companies

If the Indian private defence companies are laggards in the defence production business, there could be several explanations.

First, the classical economic proposition of the ‘state being lazy and the private sector being dynamic’ has been proved wrong in the case of expansion and consolidation of India’s domestic MIC. The Indian state has behaved as an ‘entrepreneurial state’, leading in whatever little indigenous defence production was taking place. All the defence labs were under the Defence Research and Development Organisation (DRDO), and weapons production was soldiered singlehandedly by the defence PSUs and the ordnance factories. The private sector was simply non-existence in defence production =until the beginning of the century.

Second, even when the economic reforms were ushered in the early nineties, the private sector kept an arm’s length from making inroads in the domestic MIC. Part of the reason was rather systemic, i.e. most areas of defence and strategic weapons production were still under license raj. But the other part was also intriguing – the private sector rather enjoyed having a parasitic existence over the achievements of the defence PSUs and feeding over them instead of coming out with substantial achievements of their own. Failure to capitalize on the incremental liberalised FDI norms and offset policy is probably the best example of private sector’s lethargy in mastering the defence production business.

Third, unlike many developed countries, India still does not have an established ecosystem where the scientific research and development serves the military and civil sectors simultaneously. The defence R&D largely worked in a silos atmospherics where only the defence PSUs benefitted from its ‘new knowledge’. Concurrently, the private sector did spend in innovative technology in many civil areas but never thought of converting them for producing defence goods.

Recent Policy Reforms and Opportunities

The last decade has been characterised with series of public policy reforms to boost and incentivise the productive capacity of the private sector. Manual reforms, technology roadmaps, constraining of arms imports through expansion of prohibited items lists, and increased budgetary share for defence procurements from domestic sources are some of the representative steps to create a conducive production atmospherics for the private sector. Government’s atmanirbhar scheme aims to galvanize the private sector to the best possible limit. For instance, in February this year, the Defence Acquisition Council (DAC) cleared the weapons procurement from the IDDM route for Rs 84,560 crore that would be staggered over several years. The private sector has an opportunity to compete for a share of this procurement cake.

Future Prospects

Despite the accelerated rate of defence production, India is expected to remain a net weapons importer for the foreseeable future, as the defence PSUs, which hold a significant share of the domestic MIC, are old war-horses and have almost reached their saturation levels. For example, while the Mazagaon Dock Shipbuilders increased its turnover from $7.84 billion in 2021 to $10 billion in 2022, the other two Indian entities (Hindustan Aeronautics and Bharat Electronics) listed in the SIPRI top 100 list of arms-producing companies saw marginal increases. On the other hand, the private sector has huge upward growth potential, enjoys flexibility of partnership with foreign arms companies and solicits requisite technology as well as investments. These privileges are not easily available with defence PSUs.

The private sector has, therefore, the potential to overtake the defence PSUs in terms of turnover sooner than later and lead India’s domestic MIC story to new heights. All they require is to throw out their marginalist approach, unleash entrepreneurial capacity and benefit from the new age public policy initiatives to boost their production. If properly strategized, we may just have an Indian private entity in the SIPRI top100 list of arms-producing companies in few years from now!