Indian defence sector is set to grow 20% during FY24-FY29

On the back of strong government backing and increasing private sector participation, CareEdge Ratings estimates, the Indian defence sector, set to grow at a CAGR of around 20% during FY24-FY29 while maintaining a PBILDT margin of around 20%. Indian defence sector companies are set to further enhance the country’s defence capabilities, reduce import dependency, and elevate its global stature.

India’s defence sector is characterised by its position as the world’s second-largest armed forces and significant military expenditure. The collaboration between government and private sector entities in India’s defence sector has driven advancements in arms and ammunition, aerospace, electronics, and naval technologies. Private sector entities, both domestic and multinational, are expected to play a pivotal role in advancing defence modernization, leveraging their engineering and technological expertise. This collaboration has been supported by policies such as ‘Make in India’ and liberalised FDI norms, which have enhanced domestic manufacturing capabilities, attracted international investments in defence innovation and driven notable growth in exports of military equipment.

India’s defence production set to grow at CAGR of around 20% during FY24-FY29

In recent years, India’s defence budget has consistently ranged between 1.90% to 2.80% of its Gross Domestic Product (GDP). For the fiscal year 2024-25, a substantial allocation of ₹6.22 lakh crore has been dedicated for the defence sector. Furthermore, India has set an ambitious annual defence production outlay of ₹1.75 lakh crore for FY25 which is expected to grow at a CAGR of around 20% to ₹3 lakh crore (as per Ministry of Defence) by FY29, underscoring its commitment to becoming a self-reliant defence powerhouse.

Naveen Kumar, Associate Director, CareEdge Ratings said, “India’s defence sector is on the cusp of significant modernisation, with a strong emphasis on indigenous production to make us more self-reliant in the matter of national security. Under the ‘Make in India’ initiative, there is an expected increase in collaboration between domestic and international defence firms to develop cutting-edge military equipment. Geo-political dynamics and maritime security concerns will shape defence priorities, influencing procurement strategies and strategic partnerships. Emerging technologies such as artificial intelligence (AI) and hypersonic weapons will be crucial in enhancing defence capabilities, which could drive substantial investments in research and development (R&D). Counter-terrorism and border security will remain key focus areas, necessitating intelligence and surveillance investments. Budgetary allocations will play a crucial role in the sector’s growth, while India may also explore export opportunities to strengthen its position in the global defence market. Regulatory reforms aimed at streamlining procurement processes and promoting private sector involvement will foster a conducive environment for innovation and investment in the defence sector. All the above factors together are expected to drive the industry growth by around 20% during FY24-FY29.”

Historically, India has been a net importer of defence equipment, heavily relying on foreign suppliers to meet its critical military needs. However, concerted efforts to promote indigenous defence manufacturing and technology development, supported by policy reforms such as the ‘Make in India’ initiative, are bringing about a gradual shift. Today, India boasts an expanding defence industry encompassing a wide range of advanced weaponry and systems.

India’s defence exports include various products, such as aircraft, naval systems, missile technology, and military hardware. Despite regulatory hurdles and competition, there are significant opportunities to penetrate emerging markets by leveraging India’s cost-effectiveness, skilled workforce and technological expertise. Over the last six years ending FY24, Indian defence exports have grown at a healthy CAGR of approximately 28%. CareEdge Ratings anticipates that India’s defence exports will grow in tandem with government spending in the sector at an estimated rate of about 19% during the next 5 years (i.e. from FY24 to FY29) on a more extensive base.

The growth of India’s defence exports bolsters its economy and enhances its strategic influence globally. By establishing itself as a reliable defence partner, India can strengthen diplomatic ties, foster regional security cooperation, and assert itself as a key player in the defence sector.

According to the analysis conducted by CareEdge Ratings on major DPSUs, New DPSUs and Other PSUs/JVs, which form about 85% of all their aggregate total defence production, there is a consistent upward trend in the total operating income (TOI). Historical data indicates a CAGR of approximately 14% in TOI during the last 3 years ending FY24, a trend expected to improve in the medium term on the back of their healthy order book. Profit Before Interest, Lease, Depreciation, and Tax (PBILDT) is anticipated to remain at about 20% during FY25, underscoring these entities healthy profitability. It is anticipated that in the future these DPSUs will play a pivotal role in reducing defence imports and bolstering exports, thereby positioning India prominently in the global defence landscape.

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