Why India’s defence sector needs a policy push

Improved private participation, optimised public sector capabilities can transform defence manufacturing

As India prepares for the 2025-26 Union Budget, the question of how the defence allocation will address current challenges is front and centre. Despite consistent increase in allocation – now exceeding Rs 6.2 lakh crore – the defence industry remains heavily dominated by public sector
enterprises. The private sector, despite showing promise, continues to play
a limited role in manufacturing and innovation. This persistent gap raises an important question: why hasn’t India fully tapped into the capabilities of its private sector to bolster defence manufacturing?

In this context, the Ministry of Defence has declared 2025 as the ‘Year of Reforms’, signalling a renewed commitment to restructuring and modernising defence production. These reforms are aimed at streamlining procurement processes and encouraging private sector participation, along with a strong focus on achieving self-reliance in defence manufacturing. This move is in line with India’s ‘Aatmanirbhar Bharat’ mission, which aims to reduce dependence on imports and develop indigenous capabilities across sectors.

India’s defence budget has consistently shown a commitment to reducing reliance on imports. About 75% of the modernisation funds are reserved for domestic manufacturers, which is a reflection of the government’s mission to strengthen indigenous production. Over the years, policies like the 2020 Defence Acquisition Procedure (DAP) were created to prioritise domestic manufacturers.

Yet, in practice, state-owned giants like Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL) have been central to this endeavour. It is important to highlight that these organisations have developed capabilities over decades and remain vital for handling sensitive technologies and national security projects.

However, public sector enterprises alone cannot meet the growing demands of modern defence requirements. The overreliance on public sector enterprises has created inefficiencies that drain the defence budget. Challenges such as production delays and technology gaps often arise due to the sheer scale and complexity of their responsibilities.

For instance, the Light Combat Aircraft (LCA) Tejas project has taken years longer than expected. This forced India to import equipment to fill the gap, which undermined the very goal of self-reliance. These kinds of setbacks aren’t a failure of the PSUs but rather an indication of the need for complementary contributions from the private sector to enhance capacity and efficiency.

The hesitancy to involve private companies in defence manufacturing stems from both historical and strategic concerns. After independence, India adopted a centralised approach to defence production, focusing heavily on public sector control to safeguard sensitive technologies and ensure secrecy.

While this approach served its purpose during the early years of nation-building, it created a culture of mistrust towards private enterprises. Decision-makers have long worried that private companies could prioritise profits over national security or fall victim to monopolistic tendencies. These concerns, while valid, have inadvertently limited the potential for private sector innovation to play a transformative role in defence.

The private sector, with its capacity for innovation, efficiency, and competition, could address many challenges. Programmes such as Innovations for Defence Excellence (iDEX) have already begun encouraging startups and small businesses to develop cutting-edge technologies for defence. Yet, systemic issues like bureaucratic red tape, inconsistent procurement processes, and limited access to government contracts have hampered private companies from scaling their involvement.

PPP in play

In countries like the United States, private companies like Lockheed Martin and Boeing play a pivotal role in defence manufacturing and developing advanced technologies under strict government oversight. These partnerships have not only driven innovation but also created robust industrial ecosystems that benefit the broader economy.

For India, the challenge is to replicate such models while trying to ensure that sensitive technologies and national security concerns remain protected. While private entities like Larsen and Toubro (L&T) have made commendable contributions in the development of the nuclear-powered Arihant-class submarines, such examples are more of an exception rather than the rule. There is a lot of room to institutionalise such collaborations with a strong Public Private Partnership (PPP) framework.

PPP represents an important area of opportunity. Projects like the Advanced Medium Combat Aircraft (AMCA) could benefit from private sector involvement. These collaborations, however, must be underpinned by clear guidelines to ensure that national security is not compromised. Transparency in bidding processes and fairness in awarding contracts will also be essential to build trust between the government and private players.

While the defence budget should encourage private sector involvement, it is equally important to recognise the areas where public control must remain paramount. Sectors that involve highly classified technologies, such as missile systems or nuclear capabilities, are best managed by state-owned enterprises due to their direct impact on national security. Similarly, strategic assets like cybersecurity systems and critical infrastructure should remain under strict government oversight to prevent vulnerabilities. Balancing these priorities will require a nuanced approach that distinguishes between the areas where private innovation can flourish and those where government control is essential.

Apart from financial numbers, the substance of the Union Budget and the Prime Minister’s vision are critical for shaping our developmental trajectories. Prime Minister Narendra Modi’s vision that underscores the importance of indigenisation in defence manufacturing demands more than budgetary allocations; it requires a policy thrust that translates words into action. The 2025-26 budget offers an opportunity to outline clear initiatives to boost private participation in the sector. A balanced approach of combining the strengths of the public and private sectors could transform India’s defence manufacturing ecosystem into one that is efficient, innovative, and self-reliant.

(The writer is a research assistant at the Chintan Research Foundation)