Budget 2024: How can India achieve Rs 3 trillion defence production goal?

Centre has set annual defence production target of Rs 3 trillion by FY29, which would be an over three-fold jump from current levels

India's defence capital acquisition budget needs to grow 25 per cent year-on-year over the next five years, starting with the Union Budget for FY 2024-25 (FY25), compared to the current nine per cent rate of growth, for the country to achieve the ambitious annual defence production target of Rs 3 trillion by FY29, sources in the defence industry said on Wednesday.

According to the industry, at the very least, the capital acquisition budget will have to grow at a 20 per cent compound annual growth rate (CAGR), which will only be enough to meet the FY29 target if India's defence exports also witness substantial growth.

 

After assuming charge as the Union defence minister for a second consecutive term on June 13, Rajnath Singh said that the Ministry of Defence's (MoD's) objective would be to increase defence exports in the coming years. "Defence exports had touched a record Rs 21,083 crore in 2023-24 (FY24). It was historic. Our target will be to export over Rs 50,000 crore worth of defence equipment by FY29," Singh said, reiterating the ambitious target announced by him earlier this year.

In February, Singh had said that India's annual defence production was expected to touch Rs 3 trillion by FY29, while exports of military hardware could reach Rs 50,000 crore.

Ahead of the FY25 Union Budget, private sector companies accounted for a larger share of defence production in FY24 than has been seen in at least eight years. Department of Defence Production data shows that private companies accounted for Rs 16,411 crore, or a 22 per cent share, of the total FY24 defence production of Rs 74,739 crore. While FY24's private sector defence production was lower than the Rs 21,083 crore seen in FY23, the sector's share at the time was 19 per cent. The increased share in FY24 is a result of private sector defence production falling less than the overall numbers.

India's defence production in FY24 was Rs 74,739 crore, compared to Rs 1.09 trillion in the previous year. In fact, India's total defence production exceeded Rs 1 trillion for the first time during FY23.

Against this backdrop, the industry will be on the lookout for any measures taken in the FY25 Union Budget.

"Increased budgetary allocation for capital acquisition is necessary, along with taking the overall defence budget allocation closer to 2 per cent of gross domestic product (GDP)," says Jayant Patil, Member of Executive Committee of Management, Larsen & Toubro (L&T), and Advisor Defence and Smart Technologies to L&T CMD.

"The other requirements are increased allocation to indigenous acquisition, operationalisation of the FY23 announcement of 25 per cent allocation of the MoD's research and development (R&D) funds for R&D in industry and academia, and the creation of special dollar fund to support defence exports through Defence Export Councils," adds Patil.

The situation in India's neighbourhood could also inform allocation.

"Given the ongoing military challenges along its international borders, it's crucial for India to have a budget that supports a comprehensive defence indigenisation plan and promotes investments in modernising our defence sector," says Bharat Gite, Managing Director (MD) and Chief Executive Officer (CEO) of Taural India, a company that supplies the defence sector with essential high-strength and lightweight aluminium-casted components.

"To bolster national security and achieve the goal of becoming a 'Viksit Bharat' by 2047, it's imperative to prioritise capital expenditure in key infrastructure, upgrade weapons and defence systems, and encourage innovation and advanced tech-based research and development for the armed forces," adds Gite.

Budgetary focus on specific technologies, which require costly and time-consuming research but can prove to be core building blocks for future defence systems, can also benefit the industry.

"The government should consider providing higher R&D budget incentives for niche technologies, which would be a major boost for India's defence ecosystem," says Rajinder Singh Bhatia, President of the Society of Indian Defence Manufacturers and Chairman (Defence Business) at Kalyani Group.

In the interim Union Budget presented in February, the government allocated just over Rs 6.21 trillion to the MoD. While this was a 4.72 per cent increase over the FY24 Budget's defence allocation, it was a marginal fall compared to the revised allocation for the same year. Moreover, as a percentage of government expenditure, the allocation for defence stood at just 13 per cent, in what security experts have described as a multi-year trend of falling allocations.

Moreover, as a percentage of GDP, the interim Union Budget's defence allocation remained firmly below two per cent. Under the capital allocation head, which caters for military modernisation, defence was allocated Rs 1.72 trillion, which amounted to 27.67 per cent of the total defence budget. Meanwhile, security experts point out that a modern military in other parts of the world usually spends about 50 per cent or more of its total defence budget on the capital account.