India has one of the most powerful armies in the world, ranking 3rd in the global armies’ power list. India’s recent budget for defence expenditure stood at Rs 4,78,196 crore, which is a massive 13.73 % of the total central government expenditure for the 2021-22 fiscal, indicating a 1.4% hike over the previous year. Fuelled by growing budgets, the defence manufacturing sector in the country is looking up. The private sector is feeling quite ‘bullish’ with many ordinance manufacturing start-ups cropping up across India. In fact, this is the right time to invest in defence equipment manufacturing start-ups in the country.
The regulatory authority
Manufacturing in India’s defence sector is regulated via industrial licensing under the Industries Development and Regulation Act, 1951 and Arms Act 1959/Arm Rules 2016. In the period preceding 2001, manufacturing in defence sector was limited to public sector entities only. From 2001 onwards, the Government started allowing 100% participation by Indian private sector in defence manufacturing through proper licensing formalities.
New Industrial Licence applications are duly received by the Ministry of Defence and scrutinized by a Standing Committee on Private Sector Participation in Defence Production. Appropriate comments/recommendations are subsequently sent to licensing authorities. It’s mandatory for the new licensees to follow the Security Manual issued by the Department based on the product/category for which an industrial license is granted to an enterprise. Pursuing the agenda of ensuring ease of doing business, the Ministry of Defence recently formed a committee to analyze and liberalise the licensing process further. It also includes reviewing the list of items requiring industrial license from defence items.
Who can commission a defence equipment production start-up?
- Established entrepreneurs: Established entrepreneurs who want to diversify into defence start-up or defence business.
- Defence start-up enthusiasts: Aspiring entrepreneurs with keen interest in defence business backed by technical wherewithal.
- Defence professionals: Ex-service personnel with keen interest and deep knowledge in defence equipment production.
- Defence equipment researchers: R&D professionals specializing in defence weapons and enhancement of defence equipment.
- OEMs: Entrepreneurs with exposure to OE manufacturing can also diversify into defence equipment production.
- Defence engineers: Engineers with hands-on experience in weapons manufacturing can pitch for start-up initiatives.
- Defence aerospace: Entrepreneurs keen to build niche business pertaining exclusively to aerospace in defence.
- Defence contractors: Existing defence contractors can leverage their experience to start a defence business in India.
- Defence investors: Angel investors, venture capitalists and other investors with a finger on the market pulse can ride the present wave to build a profitable defence equipment production start-up in India.
Ideal defence sectors to kick-start a production enterprise
Aircrafts And Aero engines
The power components of aircraft propulsion systems offer a great business avenue due to rising demand and defence budgets. Most aircraft engines are powered by piston engines or gas turbines or rockets (To a smaller extent). Recent years have witnessed the evolution of electric motor-powered small UAVs. This entire sector offers a huge potential.
A typical naval fleet is a large formation of warships and the largest formation in any navy usually led by one leader. A fleet at sea is the direct equivalent of army on land. This sector is also witnessing steady growth.
Heavy and manufacturing vehicles
Heavy vehicles industry in India has experienced steady growth over the last decade. The sector is known for constantly upgrading manufacturing technology and production processes. Tata motors and Ashok Leyland are the present market leaders in defence vehicle manufacturing. This sector offers a huge potential due to the limited number of existing players and growing demand.
Arms and Rifles
These weapons are mostly carried and used by individuals. The demand for these weapons is on the rise both in the defence sector and private sector dominated by security firms and individual users.
The 41 Indian Ordnance Factories under control of Ordnance Factories Board produce most of the defence equipment including small arms, ammunition, combat vehicles, artillery, and tanks. This is yet another area whose potential can be exploited by the private sector players.
Some major defence deals taking shape in the contemporary scenario
- Bharat Forge strategic alliance with Profile for commissioning a manufacturing plant in Gujarat.
- Reliance, Dassault Aviation joint venture as part of fighter jet deal.
- Mahindra joint venture with Airbus to make helicopters.
- Hinduja group alliance with Larsen & Turbo for manufacturing diverse defence products.
- Tata Power SED collaboration with Airbus to commission 56 aircrafts.
Legal requirements needed to start a defence manufacturing business in India
- Commissioning a Private Limited Company with GST compliance.
- Obtaining a trademark for future tie-ups with foreign brands.
- Duly obtaining ISO certification.
- Factory or manufacturing licences for firms dealing in manufacturing.
- MSME licence preferably under Start-up India scheme.
- Legal contract drafting by a certified professional body/individual.
Fundamentals of commissioning a defence start-up in India
- Have in place a comprehensive business plan and SWOT analysis.
- Showcase a case study/solution for Indian Army, Navy or Indian Air Force as a statement of capabilities.
- Create a network of seasoned professionals with exposure to defence armoury operations.
- Analyze global defence markets including the top three manufacturing players Israel, USA and Russia respectively to reimagine latest prototypes.
- Create a comprehensive plan specific to B2B business needs.
- Enter into a strategic tie up with the Government of India as part the Make in India defence programme.
- Consider joint ventures with MNCs/foreign firms as Indian FDI limits have been recently raised.
- Focus on export promotion for defence deals through India as an SBU.
Indian Agencies with whom defence start-ups can enter into an alliance with:
- Ministry of Defence, Government of India
- Department of Defence Production, Ministry of Defence
- Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India
- Department of Commerce, Ministry of Commerce & Industry, Government of India
- Defence and Strategic Industries Association of India
Some of the top public and private defence manufacturing entities in India
- Hindustan Aeronautics Ltd. – Total Sales: Rs 21,438 Cr, Market Cap: 27,891 Cr.
- Bharat Electronics Ltd. – Total Sales: Rs 12,968 Cr, Market Cap: 26,084 Cr.
- Bharat Dynamics Ltd. – Total Sales: Rs 3,095 Cr, Market Cap: 5,771 Cr.
- Astra Microwave Products Ltd. – Total Sales: Rs 535 Cr, Market Cap: 1,057 Cr.
- Apollo Micro Systems Ltd. – Total Sales: Rs 263 Cr, Market Cap: 243.35 Cr.
- Reliance Naval & Engineering Ltd. – Total Sales: Rs 180 Cr, Market Cap: 269.22 Cr.
- Sika Interplant systems Ltd. – Total Sales: Rs 62.77 Cr, Market Cap: 95.32 Cr.