Why India's defence-industrial ecosystem remains in the State's hands

Two days later, Hindustan Aeronautics Ltd (HAL) was awarded contracts for 156 Prachand light combat helicopters — the largest order ever secured by the public-Sector aerospace firm. While both deals marked progress for ‘Aatmanirbharta’, they also highlighted the contract value gap between defence public-sector undertakings (DPSUs) and private firms.

The Rs 62,700 crore helicopter deal alone accounted for about 37 per cent of the Rs 1.69 trillion worth of contracts awarded by the MoD to domestic industry in 2024–25. In contrast, the ATAGS deal was about four per cent. The largest private sector order — the Rs 7,629 crore Vajra-T tracked artillery contract with Larsen & Toubro Ltd (L&T) — made up 4.5 per cent. 

HAL vs Private defence firms

 

The contrast is also clear in budgetary allocations: Of the Rs 12 trillion earmarked for domestic procurement in 2025–26, Rs 27,886 crore (25 per cent) was allocated to the private industry and about  Rs 83,659 crore (75 per cent) to the public sector.

Experts argue that this procurement pattern is one reason why, over two decades after the defence sector was opened to private players in May 2001, they remain absent from the design, development, and production of principal surface combatants, submarines, combat aircraft, and military helicopters. Their footprint remains largely confined to a narrow band of recent exceptions — artillery systems, light armoured vehicles, drones, and military transport aircraft.

India now has one of the largest defence industrial ecosystem in the developing world: 16 DPSUs, over 430 licensed companies, about 16,000 micro, small, and medium enterprises (MSMEs), and 46 DRDO labs and establishments. Between 2016–17 and 2023–24, India’s total defence production grew by more than 1.7 times from Rs 74,054 crore to Rs 1.27 trillion —while the private sector’s contribution rose by about 1.9 times, from Rs 14,104 crore to Rs 26,675 crore. Yet, its share in overall production remained largely range-bound, fluctuating between 19 per cent and just over 21 per cent. This suggests that despite higher output, the private sector’s relative footprint has remained effectively unchanged. This stagnation runs counter to the government’s aim of expanding the private sector’s role in defence production — an intent underscored by Defence Minister Rajnath Singh at Aero India 2025: “The time has come for the private industry to take a lead in India’s defence manufacturing sector.”

The private sector's longstanding complaint is that the lion's share of acquisitions continues to be made on a nomination basis — where a single government-owned company is given upfront approval for an acquisition programme, with the contract placed without competitive tendering or a chance for merit-based evaluation.

“Almost a decade ago, Prime Minister Narendra Modi had declared an immediate shift away from nomination,” says Jayant Patil, former whole-time director and member of the executive management committee at L&T. “However, implementation has remained inconsistent, with individual administrators influencing the process to sustain the DPSUs, despite growing order books, execution delays, and non-competitive costs,” he adds. 

DPSU vs private defence firms by budgetary allocation

 

Patil estimates that between January 2023 and December 2024, nomination accounted for  75–80 per cent of total domestic defence contracts by value. He adds that DPSUs leveraged their order book position to undercut private competitors even in the remaining competitive tenders, winning nearly half the bids and leaving the private sector with only 10–12 per cent. “Nominations prevent a level playing field, particularly since DPSUs incur no asset servicing costs. Meanwhile, private players must first invest in and service assets, adding to their costs, while still having to ensure better operational efficiencies.”

This does not mean that private players have not benefited from government support. “The private defence industry has grown over the past decade by integrating into the supply chains of global defence majors — made possible, in part, by the offsets policy, which required foreign vendors to reinvest a portion of the estimated cost of acquisition in India’s defence industry,” says Amit Cowshish, former financial advisor (acquisition) to the MoD.

Between 2020–21 and 2024–25, exports accounted for a growing share of defence production by private companies — starting above 40 per cent and rising past 70 per cent. Experts note that this otherwise positive trend may also point to challenges in the domestic market. While the MoD recently stated that it would expand the use of competitive bidding in defence procurement, experts caution that even a successful transition might not go far enough.

Partnership interrupted

Cowshish argues that private firms must recognise two basic constraints. First, no government can champion their growth at the expense of DPSUs, which employed roughly 130,000 people as of 2020–21. Second, achieving scale will be difficult while competing directly with DPSUs because the pipeline of domestic contracts accessible to private players remains narrow — constrained by a lack of large-scale projects with sustained funding.

“Keeping DPSUs in the black will always be a government priority,” says Cowshish. He also argues that ending nominations alone will not significantly boost order values or volumes for the private sector. “Because they have met the bulk of the armed forces’ requirements for over seven decades, major follow-on orders are likely to continue going to the DPSUs in the immediate future,”he adds.

This contention is backed by the fact that in 2025–26, HAL is slated to receive a Rs 65,000 crore contract for additional Tejas Mark 1A jets, while a contract worth over Rs 35,000 crore is to be signed between state-run Mazagon Dock Shipbuilders Ltd (MDL) and French original equipment manufacturer (OEM) Naval Group for three additional Scorpene-class submarines. These will be built by MDL in collaboration with Naval Group, as was the earlier batch of six submarines constructed under ‘Project 75’.

Also consider what unfolded earlier this year under Project-75 India — the next phase of the 30-year submarine plan, which was approved in July 1999 and intended to induct 24 vessels by 2030. This was to include foreign vessels built domestically, six each under Project-75 and Project-75 India as parallel lines, followed by 12 indigenous submarines under Project-76.

In January, the MoD invited MDL for commercial negotiations to construct six submarines under the Rs 70,000 crore Project-75 India programme. MDL will lead the project with German firm ThyssenKrupp Marine Systems (TKMS) under the Strategic Partnership (SP) Model. Their bid remained the only one in contention after L&T’s proposal with Spanish shipbuilder Navantia was declared non-compliant. The submarines will be designed by TKMS.

“The stated aim of the SP model was to ‘progressively build indigenous capabilities in the private sector to design, develop and manufacture complex weapon systems for the future needs of the armed Forces’. But the government reversed course by allowing MDL to participate in the Project-75 India deal,’’ says Cowshish.

A notable feature of the Project-75 India submarines will be their air-independent propulsion (AIP) system, enhancing underwater endurance. This played a role in the selection process, with the AIP system showcased by the MDL–TKMS combine meeting the requirement of being sea-proven — though it would need to be scaled for India’s needs, with new-generation hardware still to be proven — while the L&T–Navantia offering did not. 

A former industry official argues that the real issue is not who won the deal, but that a DPSU was allowed to compete under a model explicitly intended to promote the private sector, despite already being heavily involved in an existing programme that was delayed. Experts add that it was a settled matter that “strategic partnership” specifically referred to a tieup between the MoD and an “Indian private entity”. This was the basis on which the selected private partner was expected to make long-term investments. “But MDL was eventually allowed to participate under this model too, while already executing a nominated programme,” they say, adding that things could have unfolded differently had MDL not been included, as L&T had previously firmed up a partnership with TKMS.

After over a decade’s delay, only the six Project-75 submarines have been delivered so far.

“The SP model is struggling to survive as things stand today,” says Cowshish. The procedure, notified in May 2017 as Chapter VII of the Defence Procurement Procedure (DPP) 2016, followed a December 2015 report by a task force chaired by former scientific advisor to the defence minister, V K Aatre. The report laid down criteria for selecting strategic partners from the private industry to execute high-value defence projects.

Chapter VII’s preamble observed that the production of military aircraft, submarines, helicopters, and armoured vehicles remained concentrated in the public sector. Although defence manufacturing had been opened to private players for over a decade by 2017, they continued to flag the absence of a “level playing field” compared to their state-run counterparts. The latter retained a “commanding role” owing to legacy government support, including long-term purchase arrangements. It concluded: “There is thus a need to institutionalise a transparent, objective and functional mechanism to encourage broader participation of the private sector, in addition to capacities of DPSUs, in manufacturing of major defence platforms.’’

The government would select strategic partners for four segments —fighter aircraft, helicopters, submarines, and armoured fighting vehicles and main battle tanks. Typically, only one strategic partner was to be selected per segment, and they were to tie up with a foreign OEM to ensure the platform met the armed forces’ requirements and provided access to advanced technologies. However, Chapter VII still left space for the MoD to consider a role for DPSUs at an “appropriate stage”, depending on order book position, capacity, and price competitiveness.

The first project actually processed under the SP model was the procurement of 111 Naval Utility Helicopters, which received initial approval in November 2018. However, HAL later sought to compete for the Rs 21,000 crore deal, a move opposed by Bharat Forge, TASL, Mahindra Defence Systems Ltd, and Adani Defence & Aerospace — the four private contenders. The project, rechristened as the Utility Helicopter Marine, is today being handled by HAL, and design and development activities are underway.

Both SP model initiatives were meant to equip the Navy, which Admiral R Hari Kumar (retired), the former Chief of the Naval Staff, says supported building capacity within the private sector. “The Navy took the initiative under the SP model, conducting country-wide surveys to assess private-sector capabilities. Private contenders for these programmes underwent a capacity assessment by Naval Headquarters before being selected,” he adds.

“Three private shipyards the Navy attempted to source ships from went under over the past decade. That left a negative impression, and perhaps it was a premature step then. However, with policy hurdles being progressively removed, challenges better understood, and funding support forthcoming, there is a substantial opportunity today,” says Admiral Kumar (retired). 

 

Paradigm shift

Private firms have made progress in making armoured vehicles, ammunition, artillery and drones — from the Zorawar light tank, co-developed by DRDO and L&T, to Adani Defence and Aerospace manufacturing Israeli long-range drones.

While experts believe private players will capture a greater share of the market in these areas, they emphasise that policymakers must still ensure that they achieve sufficient scale without necessarily having to compete directly with DPSUs.

“Creating continuous business opportunities is critical because the project-based business model has its limitations. This will require synchronising global aerospace and defence supply-chain opportunities with domestic military requirements,” says Girish Thakur, partner and India co-lead, Aerospace & Defence Sector, BCG.

This is already within the sector's wheelhouse, but requires sustained government focus. “Buying military equipment from a foreign country is always a strategic decision, not merely a commercial one. It becomes intertwined with trade, alliances, and diplomatic support on key issues. It’s about the supplier becoming a long-term partner, which often requires its government to tip the scales. Thus, lines of credit alone may not boost our defence exports much,” says an executive at a major private defence firm.

Initial steps are already visible, with India and the European Union (EU) agreeing to explore a security and defence partnership, with a potential role for India's defence industry in EU supply chains.

Coming to building parallel production capacity for major platforms, the MoD already has a successful case study in the Airbus C295 programme, which saw India’s first private-sector military aircraft manufacturing facility inaugurated in Vadodara, Gujarat, last year. The final assembly line, set up by TASL in collaboration with Airbus Spain, is producing the aircraft for the Indian Air Force (IAF). The first 16 are being delivered in fly-away condition by Airbus, while the remaining 40 are being manufactured and assembled by TASL. “The Tata-Airbus model has a better chance of working under Indian conditions,” says Cowshish, who has first-hand knowledge of the programme’s evolution.

When the proposal gained traction around 2010, the IAF initially proposed importing all 56 aircraft, assuming the numbers didn’t justify local manufacturing. It later agreed to a substantial number being made locally through technology transfer. Cowshish highlights the MoD’s initiative to reach out to domestic private players and assess the project’s commercial viability before issuing the tender. He also credits the MoD with the conscious decision to exclude HAL. “Crucially, when a single-vendor situation arose with Airbus, the MoD still went ahead, even though the government is usually wary of proceeding in such cases to avoid allegations of wrongdoing,” says Cowshish. Lastly, he points out that the MoD did not nominate the Indian production agency (IPA) — unlike the usual practice under the then operative ‘Buy and Make’ category. “Nominating an IPA from the private sector would have been unprecedented and could have proved contentious. Instead, the Airbus–Tata tieup proceeded without MoD intervention,” he adds. Cowshish underscores how the programme was driven forward across governments and defence ministers, gathering pace under A K Antony and overcoming hurdles with support from the late Arun Jaitley.

There are early signs that another such programme can’t be entirely ruled out. The IAF has flagged the need to involve the private sector where DPSU capacity falls short. Progress in private sector participation is already visible in one of the most ambitious indigenous programmes. Over two weeks after Operation Sindoor was paused on May 10, the government approved the execution model for developing the prototype of the indigenous fifth-generation fighter, the Advanced Medium Combat Aircraft (Amca). Notably, domestic public and private defence firms will have equal opportunity to compete in building the stealth jet — a move that could end HAL’s monopoly in fighter jet production.

Enabling local manufacturing or assembly will still leave one crucial gap. “Manufacture and assembly in India can serve immediate operational needs using foreign platforms, but they are unlikely to address long-term defence capability requirements,” says a former defence secretary. “Such platforms, even with upgrades, are typically based on decades-old technology — not cutting-edge capabilities. The transfer of technology in these arrangements is rarely sufficient on its own to support the indigenous development of more advanced systems.”

The former official argues that private firms must understand the realities of the Indian defence sector, and points to a handful of savvy promoters who have done so by investing in complementing DPSUs rather than confrontation. “Despite the prevailing narrative that the lack of orders has constrained the private sector, there are companies that took the risk and built systems without securing pucca orders first. Their investments have paid off through both export and domestic orders,” he adds.

Revisiting the scenes at the Pune factory last year, even as KSSL awaited a domestic order, it had already secured an export contract for the ATAGS. In fact, Bharat Forge developed its first artillery gun, the ‘Bharat 52’, in 2012 — even before the ATAGS project was approved. “Even in our regular automotive and industrial businesses, we’ve always put capacity ahead of demand,” Baba Kalyani said last year.

If private firms hope to shift the status quo and claim a larger share of defence procurement, experts argue that they cannot afford to wait for public R&D funding to materialise — or use its absence as an excuse for their own anaemic investment. They point out that the private industry appears stuck fighting the wars of the past decade, with complaints, demands, and prescriptions that haven’t changed in years.

“Without new ways of competing, private players will miss the opportunity to deliver the platforms of tomorrow. R&D will be key, and one path worth exploring is leveraging startups and MSMEs that have succeeded under schemes like the MoD’s Innovations for Defence Excellence (iDEX) and the DRDO’s Technology Development Fund (TDF), where they address problem statements from the armed forces and DPSUs and work on futuristic technologies. While these innovators receive public funding, private firms can step in to scale their efforts — and in the process, gain from their breakthroughs,” says Navy Commander Gautam Nanda (retired), associate partner and lead for aerospace & defence, Government and Public Services, KPMG India.

An Indian Navy Project–75, Kalvari-Class submarine deployed at sea. Six are currently operational, with three follow-on vessels slated for production  An Indian Navy Project–75, Kalvari-Class submarine deployed at sea. Six are currently operational, with three follow-on vessels slated for production . Photo: PIB

  Experts agree that over the past decade, there has been a marked shift in how the MoD and armed forces engage with private firms — via clearer communication, access to requirements, and policy inclusion.

More inclusive efforts to enable private-sector participation are also critical. As BCG’s Girish notes: “Common R&D and skilling centres set up by the government could alleviate cashflow pressures and uncertainty for private firms during design and development cycles.” The former defence secretary agrees, stating that the capital-intensive infrastructure needed for defence R&D and manufacturing — unfeasible for private players to fund alone — must be established by the government and DPSUs.“This will, in turn, spur long-term investment by the private sector,” he says, noting that this model has been successful in other manufacturing industries like steel and cement.

Experts agree that over the past decade, there has been a marked shift in how the MoD and armed forces engage with private firms — via clearer communication, access to requirements, and policy inclusion. Trust, they argue, is not lacking. While there is clear intent to give them a fillip, initiatives that risk the perception of the government picking winners in the private sector have not worked. 

A senior industry leader notes: The sector has space for three artillery makers, one warship or submarine builder, and two aircraft manufacturers. Cowshish adds: “At the top, where ships and aircraft are built, the air is thin, and at best two or three private players will establish themselves in the coming years.” While the government must clarify long-term needs and decisively keep DPSUs out where capacity is full, which private players rise to challenge the likes of HAL and MDL remains to be seen.