The Indian Defence & Aerospace Sector : Challenges in the Opportunity

The Government of India (GoI) has been steadily creating an enabling ecosystem of policies and regulations to give the much-needed fillip to the Indian Defence Industrial Base (DIB). Over the last few years this has led to significant interest in this sector from domestic and foreign companies alike – which is primarily driven by defence equipment demand in India.

One of the interesting facets of this monopsony sector is the multitude of stakeholders that are involved even while there is only one primary buyer (the Government). To give a brief overview of the underlying dynamics, the ‘buyer side’ comprises of armed forces as demand drivers, while R&D is handled by Defence Research & Development Organization (DRDO), decision making lies with the Ministry of Defence (MoD) and the contractual responsibility is with the bureaucracy. The ‘sellers’ are similarly represented by Public Sector Undertakings (also owned by Government, which introduces an inherent conflict of interest), domestic private industry (large corporates, Micro/Small/Medium Enterprises (MSMEs) and now start-ups) and foreign OEMs/System Integrators, often represented by their own Governments.

Mirroring the complex industry structure, the procurement process too is mired with intricacies, which often leads to the sellers (and investors, in effect) facing significant uncertainty stemming from bureaucratic redtape, budgetary issues and other similar concerns. Despite the uncertainties in the order booking timelines, the industries need to infuse large capital to build capability and capacity, well in advance. In addition to this, the hi-technology industry calls for sustained funding requirements to manage technology upgrades and deal with obsolescence regularly.

Apart from such commercial issues, one needs to be equally cognizant of legal challenges such as information security, intellectual property protection, regulatory and transactional due diligence, etc.

However, despite all the challenges, defence & aerospace remains a critical sector for India, often referred to as the ‘sunrise’ sector, given that India is aiming to shift from being the largest importing nation to being a self-reliant and exporting nation.

In the following sections, we examine the unique set of opportunities and the challenges that characterise defence & aerospace sector in India and discuss potential solutions to ease the way for heightened private sector participation. We hope this makes for interesting reading and you find the information useful.