By Dr Ananth S
The recent hostilities between India and Pakistan, just as in the case of any other conflict, will invariably have an economic cost. Wars need huge amounts of money to wage and sustain. The changing nature of warfare is clearly visible as the recent hostilities with Pakistan and Ukraine-Russia: the reading on the wall is that methods in waging a war are constantly evolving. Importantly, post-election of Donald Trump, it has shown that for any country to rely on imports of defence needs is dangerous, if not militarily suicidal. An interesting aspect of the Indian economy is that though the share of manufacturing as a contributor to the economy has been steadily declining, a recent silver lining is the gradual increase in defence manufacturing both in the public sector and private defence manufacturing. The changed dynamics of China actively providing arms and ammunition to Pakistan have created a new urgency.
Indigenisation Drive
India is the fourth largest spender on defence, after the USA, China and Russia, with about 40% of India’s defence needs being imported. Between 2020 to 2024, the most important suppliers of arms to India were Russia (36%), France (33%), Israel (18%) and others (13%). India's defence budget has increased from Rs 2.53 lakh crore in 2013-14 to an estimated Rs.6.8 lakh crore in 2025-26. The recent budget set aside nearly Rs 1.7 lakh crores for defence procurement.
In the past, defence-related manufacturing was always seen as the exclusive purview of the public sector with 16 different Public Sector Enterprises (PSEs) undertaking specialised production tasks. The defence manufacturing sector now, apart from the 16 PSEs also includes nearly 430 licensed companies with nearly 16000 other MSMEs providing various goods and services.
The total value of overall defence production at the end of the Financial year 2023-24 was estimated at approximately Rs.1.27 lakh crores and had already reached about Rs.90,000 crores before the start of hostilities with Pakistan. This excludes the nearly Rs 2.09 lakh crore worth of 193 defence contracts issued in 2024-25: 92% were given to indigenous companies, mostly the public sector shipyards and Hindustan Aeronauticals Limited (HAL).
The Defence Procurement Board has reportedly approved purchases worth nearly Rs 4.25 lakh crores, out of which nearly 90% will be made locally. Most of the new defence projects are expected in the "UP Corridor" and “Tamil Nadu Corridor” while Tatas have made Vadodara, Gujarat as their base.
However, these are still a minuscule of the amount of money that is needed to be spent for modernisation of the existing equipment and systems in the Armed Forces and excludes the cost of the fresh investments that take in account technological advances. Almost all aspects of the equipment and structures in our Armed Forces need to be modernised, keeping in mind the changes in geo-political environment and advances in technology over the past five years. Example: the mainstay of India’s troop transportation aircraft are mostly based on the old soviet models, most of which may not be very efficient in the present era.
Similarly, the need to have an advanced early warning system and ways to combat cheap drone raids in a cost-effective manner is the need of the hour. Further, in the changed conditions, it is essential to constantly maintain an inventory so that there are no supply-side problems. This is in itself a herculean task since it is estimated that the Indian Navy alone stores nearly 400 different types of equipment, including ammunition.
The past two decades have seen gradual steps in the direction of allowing the private sector to also participate, with a focus on indigenisation is bound to create a substantial military-industrial base. The focus on immediate indigenisation now covers more than 310 items, apart from the early 2500 imported items already indigenised.
The total list offered to the private sector includes a list of 36,000 items slated for indigenisation. India hopes to achieve full indigenisation by 2032. These measures will invariably have cascading economic consequences by not only increasing economic activity but also generating employment. The advantage of jobs in the Defence sector is that they are largely immune from the vagaries of the economic cycle since expenditure on defence is always a necessity. Hence, the spin-off on in economic terms is substantial and is essentially a work in progress that will unfold over the next few years.
Road Ahead & Spending Impact
There is little doubt that the economic contribution of the defence sector is growing in India, it is still a small component of when compared to the Indian economy itself and an even smaller component when compared to other large economies. In the USA defence manufacturing and service sector or the Aerospace and Defence sectors, excluding the Armed forces, contributes nearly 4% to the economy and its base includes about 2 lakh companies and employs more than 22 lakh or about 1.4% of the total employment base.
The European Union employs around 10 lakh people and has added 8% new jobs this year. Thanks to Donald Trump, the European Union is at the cusp of huge increase in defence spending – though it may not reach his demand that EU spend 5% of its budget on defence. Interestingly, in countries like the USA, Aerospace and Defence jobs also pay higher than most others: studies have found that on average they pay about 50% higher than the comparable national average wages, mostly due to the requirement for higher skills. Hence, it is clear that the defence sector is bound to be seen as a “sunrise” sector that can increasingly offer educated and skilled youth a possibility of employment that is less volatile than other sectors like the technology sector. However, it would require constant updating of skill sets to remain competitive.
The road ahead is a very difficult one. First, creating a military-industrial base is not easy: it needs to be sustained and, more importantly, it constantly requires heavy investments in Research & Development (R&D), and it cannot remain one where larger companies put in some initial investment in the hope that they can gain large and regular contracts.
This is because in the changed global geo-political scenario where China has emerged as a titan in science and technology investments, it requires other countries, especially India to run faster just to remain in the same place. Secondly, the economic impact of joint ventures and collaboration with major countries and companies is yet to play out: India now allows for 74% foreign direct investment in approved defence production units.
Little wonder that countries like Russia are very keen to enter into collaboration due the possibility of profits as well as the fact that there is now a conscious attempt to create a military industrial base in the country. This may well have been an important consideration for Russia to renew its March 2025 offer to co-produce its advanced S-500 missiles in India.
The third important aspect is of the need to maintain high quality, which India lacks in almost every place. Hence, quality assurance and quality control of the equipment provided will have to be the most important, and the concerned department overseeing quality control should work without fear or favour. Otherwise, any amount of investment will lead to no useful result.
Lastly, while the economic benefits are substantial and attractive, especially at a time when other segments of the economy are not growing as much as they should, the most important aspect is that the Government will have to create a sufficiently robust system so that defence hardware or parts do not fall into the wrong hands.
(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)
