The rise of India's defence sector: from importing to 'Make in India'

A brief overview of India's defence sector

First, the basics.

India has historically spent big on defence, ranking among the top five global military spenders.

Yet, nearly 60% of its military equipment was once imported, often at high cost and with long lead times. That's changing fast.

With the launch of the 'Atmanirbhar Bharat' (Self-Reliant India) mission, the government has placed the defence sector at the core of its indigenous manufacturing push.

Defence Public Sector Undertakings (DPSUs) have been restructured, private players have been given bigger roles, and the cap on FDI in defence manufacturing has been raised to 74% under the automatic route.

And if you need a single number to remember, remember this! India exported over ₹21,000 crore worth of defence equipment in FY24, a massive 32x increase over the last decade.

Key milestones in India's defence evolution

India's journey to defence self-reliance didn't happen overnight. These milestones show the trajectory:

2016: DPP revamp with priority to IDDM

So what changed? The Defence Procurement Policy (DPP) revamped procurement, and IDDM (Indigenously Designed, Developed, and Manufactured) became the top priority.

Foreign suppliers now had to think twice. To stay in India, they needed local partnerships or to set up manufacturing units.

2018–2020: Positive indigenisation lists

First List (2018): 108 items, ranging from optics to communication chips, were banned for import.

Latest List (2024): Over 500 items must be domestically sourced.

Implication: Every time the list expands, orders shift. MSMEs supply gear ranging from nuts and bolts to tactical radios.

2020: DAP 2020 and e-Procurement

Here's what's changed this year! Defence Acquisition Procedure (DAP) 2020 emphasized e-tendering, transparency, and fast-tracking trials.

The impact was quite significant, too. DAP 2020 introduced e-procurement and faster approvals to streamline acquisitions. Tenders moved online, reducing red tape and "surprise committee" delays.

2021–2024: Private sector surge

Key players: Adani Defence & Aerospace, Tata Advanced Systems, and L&T Defence won big contracts for drones, transport aircraft, and missile systems.

Startups and R&D: DRDO collaborated with iDEX startups on AI-driven surveillance drones and next-gen avionics.

Export boom: Exports rocketed from ₹1,941 crore (FY15) to over ₹21,000 crore (FY24), with buyers in Armenia, the Philippines, and parts of Africa.

So it is quite evident that from dithering in long tenders to accelerating home-grown innovations, India's defence sector is on warp speed.

What can investors do to maximize their possibility of potential for high returns? Well, you can simply choose the best smallcase company whose philosophy is rooted in fundamental research and strategic portfolio management. Such wealth management services give you access to industry experts with decades of experience in providing a research-backed, well-balanced, and systematic approach towards investment.

Top strategic challenges India needs to overcome

Still, it's not all smooth sailing. Scaling a complex, capital-intensive sector like defence comes with its own minefields.

R&D Deficit

Indigenous weapons systems require deep technological R&D, which has historically lagged. Defence R&D spend is 0.66% of GDP, which is quite modest compared to other countries.

Export competitiveness

Competing with established players like the US, France, and Russia in global arms markets requires not just products but diplomacy, delivery, and trust.

Private sector constraints

While private defence players are rising fast, they still face bottlenecks, especially in receiving large-scale defence contracts and navigating regulatory approvals.

Supply chain maturity

Building high-end systems needs deep and wide supply chains. Many of India's MSMEs are still catching up on capabilities and compliance.

How can investors identify potential opportunities in this?

Think beyond the big names.

Sure, HAL and Bharat Electronics Limited (BEL) are household names. But they often operate under cost-plus contracts with thin margins. Instead, consider:

Private Defence Play

Companies like Bharat Dynamics Limited (BDL), VEM Tech, or Agnigen Defence & Aerospace. They focus on missiles, surveillance systems, or avionics, often as Tier-1 or Tier-2 suppliers to larger integrators.

Defence-Adjacent Suppliers

Look for specialized players in advanced materials, semiconductors, or precision machining. When HAL needs a composite fuselage for Tejas Mark II, someone supplies the raw carbon fabrics.

Follow the indigenisation roadmap

Every time the MoD drops a new Positive Indigenisation List, it's a signal for opportunity.

If a subcomponent or subsystem shifts from "imported only" to "must be made in India," investors should research who's likely to bid on that contract.

You need to keep a watch on:

• Notification Dates: Check the MoD's website for list updates.
• Vendor Licenses: Firms with recent DGCA (Directorate General of Civil Aviation) or MoD certifications are often first to snag new projects.
• R&D Partnerships: Companies collaborating with DRDO or iDEX startups usually get a first-mover advantage.

Choosing thematic smallcase portfolios

For many retail investors, picking individual defence stocks can feel like defusing a bomb blindfolded.

That's where thematic smallcase portfolios come in. Instead of picking one or two names, ride the wave with a basket of well-researched companies.

If you prefer a more balanced strategy, look at portfolios like PINC Classic Compounder Fundamental.

This curated smallcase includes fundamentally strong companies, some with defence exposure, designed to deliver stable compounding over the long run.

These smallcase portfolios let you stay invested in India's growth story without trying to time every policy change.

Watch government tendencies, not just budgets

While headline defence budgets get all the media attention, the capital expenditure (CAPEX) vs. revenue expenditure (RECAPEX) mix is more telling.

When you see a rising CAPEX, the share implies more spending on equipment and manufacturing, translating to higher orders for OEMs and suppliers.

Also watch for:

• Bengaluru defence expos: Annual expos showcase which products are gaining traction.
• MoD press releases: Announcements around trials, contracts, or certifications.
• Global partnerships: Bilateral defence pacts (e.g., India-US, India-France) often pave the way for technology transfer agreements or joint ventures.

Conclusion

India's defence sector is at a pivotal juncture, transitioning from import dependency to becoming a global exporter of defence equipment.

This transformation, driven by policy reforms, technological advancements, and increased private sector participation, offers a compelling narrative for investors.

We at PINC Wealth offer expert-curated smallcase portfolios that align with India's growth story, providing investors with opportunities to participate in sectors like defence, manufacturing, and technology.

Our portfolios are designed to capture long-term structural trends, ensuring that your investments are aligned with the nation's progress. Start your investment journey today!