Time to pull trigger: Defence R&D, production, export must scale sharply

India's annual defence production reached a record ₹1.46 trillion in FY25 - up almost 15 per cent over the previous high of ₹1.27 trillion in FY24

India’s defence modernisation budget — the outlay for acquiring weapons, systems, and platforms — must grow by nearly two and a half times by the start of the next decade to meet its ambitious defence production targets, equip the armed forces for 21st century warfare, and advance aatmanirbharta, say experts. Simultaneously, the share of research and development (R&D) in total defence expenditure needs to more than double, while the industry must triple the share of such spending in revenue.

 

With India fully utilising its military modernisation budget in 2024-25 (FY25), the first time in five years, and signing record ₹2 trillion defence contracts — twice the figure in FY24 — experts see the country well positioned to implement the lessons from Operation Sindoor and trigger a virtuous cycle in the domestic defence industry. 

 

Speeding up field trials

 

Rajinder Singh Bhatia, chairman of Kalyani Group’s defence business and president of the Society of Indian Defence Manufacturers (SIDM), underscores that full utilisation of the modernisation budget without surrendering funds is a welcome achievement, which, coupled with record contract signings by the Ministry of Defence (MoD), comes at a critical time. “A key learning from Operation Sindoor is the importance of indigenous equipment in ensuring sovereign control — from integration into command networks to timely capability upgrades. The government has sent a clear message to the industry: Scale up investments in production capacity and R&D across the board. These developments will help realise that goal,” he says.

 

However, Bhatia points out that efforts under the “Year of Reforms” initiative to streamline and accelerate the acquisition process must continue on a war footing — not only to sustain the benefits of budget utilisation but to make it the norm. “Reforms to the Defence Acquisition Procedure (DAP) 2020 are on the anvil and should materialise in the coming months. Steps have already been taken to shorten procurement timelines, but field-evaluation trials alone still consume most of the 5-7 years required for acquisition. This is one area that requires urgent focus,” he explains. He adds that ramping up infrastructure and using modern technology can enable trials simulating various temperature and altitude thresholds to run simultaneously — potentially at a single location — significantly reducing the time taken.

 

Addressing industry leaders at the Confederation of Indian Industry’s (CII’s) annual business summit in New Delhi last month, Defence Secretary Rajesh Kumar Singh noted that the MoD would previously surrender a portion of the modernisation budget due to protracted procurement procedures. “The process timelines for various steps in the procurement cycle have already been crunched. Hopefully, that will save us about 69 weeks overall. It’s important, but it’s not enough,” he stressed.

 

Later, a government source told Business Standard that the revision of the DAP 2020 document, aimed at streamlining the defence procurement policy, would be completed by the end of November. 

 

Capital outlay must multiply

 

Bhatia welcomes the trimming of the procurement timeline by over a year and a quarter, but underscores that now, with the focus on aatmanirbharta and domestic capital procurement accounting for the bulk of the MoD’s total procurement in recent years, modernisation budget utilisation and domestic production are positively correlated. An increase in domestic production will likely lead to greater budget utilisation, which in turn will drive further production, creating a positive feedback loop.

 

The share of foreign capital procurement in India’s total defence purchases declined steadily between FY15 and FY24, especially after FY19, when it peaked at 48.68 per cent. From an average of 39-40 per cent earlier, it fell to 27.68 per cent by FY24, and 12.49 per cent in FY25 (up to December 2024).

 

Against this backdrop, Bhatia views the nearly 15 per cent growth in annual defence production between FY24 and FY25 as a positive, but stresses that at this rate of growth the country will likely undershoot the ambitious target of ₹3 trillion by FY29-30, by at least a small margin. “We are on the right track and simply need to see the steps currently underway through to their logical conclusion and full implementation to achieve our targets.”

 

India’s annual defence production reached a record ₹1.46 trillion in FY25 — up almost 15 per cent over the previous high of ₹1.27 trillion a year before. The private sector contributed over ₹32,000 crore, or about 22 per cent of the total – up from 20.8 per cent in FY24. Defence exports also touched a record high in FY25, growing nearly 14 per cent over the previous year to cross ₹24,000 crore.

 

The Budget estimate (BE) for the modernisation of the armed forces grew from ₹80,959.08 crore to ₹1.49 trillion between FY20 and FY26— an overall increase of 83.7 per cent, at a compound annual growth rate (CAGR) of 10.67 per cent over the six-year period. However, the domestic private defence industry had last year estimated that the military modernisation budget would need to grow by at least 20 per cent CAGR over the next five years, starting with the Union Budget for FY25, for India to meet its FY29 annual defence production target. Industry insiders had also emphasised that this growth would still need to be accompanied by a substantial rise in defence exports to achieve the target.

 

Earlier this month, the defence secretary told Business Standard that conditions were now aligning for India’s defence budget to ideally rise to at least 2.5 per cent of gross domestic product (GDP) by FY30, up from the present 1.9 per cent. “Reaching the 2.5 per cent milestone would mark the first step towards a medium-term target of 3 per cent, with capital expenditure on the armed forces increasing to at least 0.8 per cent of GDP from the present 0.5 per cent, at a CAGR of about 20 per cent,” the secretary had elaborated.

 

The armed forces’ modernisation outlay of ₹1.49 trillion forms 21.88 per cent of the MoD’s total FY26 allocation of ₹6.81 trillion. Laxman Kumar Behera, associate professor at the Special Centre for National Security Studies, Jawaharlal Nehru University, says increases in the defence outlay must be urgently funnelled towards domestic capital acquisition and R&D to match global military powers. “As of 2019, the United States (US), United Kingdom, and France, respectively, allocated 28 per cent, 22 per cent, and 24 per cent of their defence budgets to equipment, compared with an average of 23 per cent for the North Atlantic Treaty Organization (Nato),” he added.

 

Between FY20 and FY24, actual expenditure on the armed forces’ modernisation surpassed the allocation by revised estimates (RE) in three years — by 0.97 per cent in FY20, 4.06 per cent in FY21, and 0.06 per cent in FY22. The actuals fell short of the RE in FY23 by 4.37 per cent, and in FY24 by 0.27 per cent. However, a service-wise breakdown offers sharper insight. Under the capital head in FY21, the army spent 79 per cent of its RE allocation, the navy 112 per cent, and the Indian Air Force (IAF) 106 per cent. In FY22, the army reached 99 per cent, the navy slightly under 99 per cent, and the IAF slightly above 100 per cent. FY23 saw the army spending 112 per cent, the navy just under 98 per cent, and the IAF slightly over 83 per cent. In FY24, the army spent just under 86 per cent, the navy over 100 per cent, and the IAF 104 per cent.

 

Since Budget FY25, capital outlay allocations for defence services are no longer being broken down by individual services. The Budget document now provides the breakup under “defence services” and classifies them by platform types — such as aircraft and aero engines, heavy and medium vehicles, and naval fleet — among other categories.

 

A former defence secretary, who does not wish to be named, explains that this change allows the MoD to seamlessly transfer unspent modernisation funds — whether due to delayed procurements or underutilisation by a service — to any of the three forces that either require more than their allocation under revised estimates or can deploy the funds promptly. This helps avoid surrendering a significant portion of the modernisation budget in any given year. “This is one of the changes brought in recently to ensure effective budget utilisation,” the person says. 

 

R&D framework now critical

 

The former defence secretary, however, emphasises that with enhanced domestic procurement set to underpin India’s military modernisation, budget utilisation will depend not only on MoD signing contracts but also on timely industry execution. “Private firms particularly need to increase capital expenditure on R&D and scaling up production. Sector participants should consider successful promoters who moved beyond cost-plus models and invested before pucca domestic orders materialised — they now secure both domestic and export orders,” he says, adding that government and defence public sector undertaking (DPSU) support will remain essential to spur private sector investments.

 

A report by KPMG India and CII, titled “Atmanirbhar, Agrani, and Atulya Bharat 2047: India’s Defence Industrial Sector Vision 2047”, unveiled at last month’s CII summit, highlighted that although India’s defence R&D expenditure rose in absolute terms from ₹14,358 crore in FY16 to ₹26,817 crore in FY26, its share in the total defence budget declined from 4.64 per cent to 3.93 per cent over the same period. “Expenditure on defence R&D has remained abysmal in terms of share in total defence spend, in comparison to leading nations which spend 10-15 per cent of their defence expenditures on R&D,” stressed the report.

 

The report recommended that India aim to increase its defence R&D budget to at least 10 per cent of total defence expenditure by 2032 — aligning more closely with leading countries like the US and China, which allocate substantial budgets to R&D. “In addition, the industry should increase its average R&D spend to about three per cent of their revenues from current levels of about one per cent,” asserted the report. “This enhancement can be substantially incentivised by suitable tax breaks, capital subsidies and research grants from deeptech R&D allocations by the government.” The report also noted as example that the French defence industry invested up to 10 per cent of its revenues in R&D.

 

Ultimately, the report recommended establishing and operationalising a National Defence Technology and Innovation Framework (NDTIF) to identify, prioritise, promote, and facilitate the development of future defence technologies. The NDTIF will function as an institutionalised framework of three interlinked bodies – the Defence Technology Planning Group to identify breakthrough technology areas; the Defence Technology Investment and Development Council to oversee milestone delivery, strategic investments, global collaborations, and long-term road maps; and Technology Centres of Excellence as collaborative R&D platforms involving industry, academia, the government, and the armed forces.

 

“The primary aim is to create an integrated ecosystem that accelerates technological advancements, promotes self-reliance, and strengthens the overall defence capabilities of the nation,” said the report’s coauthor, Navy Commander Gautam Nanda (Retd), associate partner and lead for aerospace & defence, government and public services at KPMG India.

 

As the former defence secretary quoted above stresses, rapid and substantive indigenisation — beyond mere assembly — will be essential to prepare for future conflicts in India’s challenging neighbourhood.