The global geopolitical landscape is evolving, and with it, the dynamics of defence spending and military preparedness. As investors look for robust opportunities, the Indian defence sector emerges as a promising area for strategic investments. Here’s why the Indian defence industry holds significant potential for growth and why it should be on your radar.
Rising Defence Expenditure in a Multipolar World
The shift from a unipolar to a multipolar world is driving increased defence spending across nations. With power distributed among several countries rather than dominated by one, many nations are bolstering their defence capabilities. Global defence expenditure is expected to rise, aligning with nominal GDP growth. For India, defence spending has consistently been around 2.5-3% of GDP, placing it among the top five defence spenders globally.
Economic Growth Fuelling Defence Budget
India’s economic growth significantly impacts its defence budget. The country’s defence capital expenditure has grown at a compound annual growth rate (CAGR) of 9% over the past decade. As India’s GDP continues to expand, so will its defence budget, ensuring sustained investment in military capabilities and infrastructure.
Self-Reliance and Indigenous Development
India’s push for self-reliance in defence is a critical growth driver. Historically, India has been the largest arms importer, accounting for 11% of global imports between 2018 and 2022. However, recent policies favouring indigenization, such as import embargoes on certain defence equipment and incentives for domestic production, are shifting this trend. The Defence Research and Development Organisation (DRDO) and private sector companies are spearheading R&D efforts, resulting in technological advancements and a robust domestic defence manufacturing ecosystem.
Export Potential and Global Market Reach
India’s defence exports have witnessed an eightfold increase over the past eight years, yet the country still holds a small share of the global arms market. With improved product capabilities and cost-effective solutions, India is well-positioned to capture a larger portion of the global arms trade, which exceeds $200 billion. The government’s initiatives to promote defence exports, including simplified export procedures and strategic international partnerships, further enhance this potential.
Technological Advancements and Modernization
The modernization of India’s armed forces is another key driver. Investments in sophisticated arms, such as drones, guided missiles, and advanced combat aircraft, are essential for maintaining defence readiness. The focus on technology not only enhances military capabilities but also opens up avenues for innovative companies to contribute to and benefit from the defence sector.
Favourable Policy Environment
Current government policies strongly support the growth of the domestic defence sector. These policies include prioritizing procurement from Indian vendors, allowing 100% private participation, and increasing foreign direct investment (FDI) limits. The establishment of defence industrial corridors and the emphasis on Make in India further boost the sector’s growth prospects.
Sources and References
HDFC Mutual Fund Research Report