India’s Defence Export Surge, Part 1: What’s Fuelling Growth

For decades since Independence, the Indian government and armed forces relied heavily on imported defence equipment. But over the last ten years, there’s been a steady shift happening: India is building its own domestic manufacturing ecosystem, but not just to serve the nation: the government is now moving beyond making India self-reliant, towards making India a competitive exporter of defence products.

Data from the Ministry of Defence show that defence exports have risen to record levels, with private companies now contributing a significant share. Rather than being driven solely by large public-sector defence companies, the industry’s growth reflects a broader ecosystem of specialised manufacturers, many of whom lie in the smallcap segment. (Smallcaps are all companies listed no. 250 and below on the Indian stock market.)

What’s fuelling this growth? And which smallcap specialists are leading the way? In part 1, we will examine the structural factors behind India’s defence export boom, followed by a closer look at the listed companies helping drive this transformation in part 2.

A snapshot of the export numbers

The pace of India’s defence exports has been staggering: in just over a decade, exports have increased more than 30x, while the customer base has expanded to over 100 countries. Here’s a snapshot. In FY2013-14, India’s defence exports totalled just ₹686 crore. By FY2024-25, that number skyrocketed to ₹23,622 crore, with more than 100 countries served. Private companies accounted for roughly ₹15,233 crore of that total. (Over the same period, indigenous defence production also hit a record ₹1,27,434 crore in FY 2023-24, a 174% surge from ₹46,429 crore in 2014-15.)

What’s driving this growth?

Prior to the reforms initiated under the current regime, India’s defence sector had to deal with significant bottlenecks: procurement was slow, import dependence was high, leading to critical capability gaps and exposure to global disruptions. Private sector participation was also limited due to restrictive policies and the dominance of defence PSUs.

The current surge in exports isn’t the outcome of a single reform, rather, it’s a combination of years of policy changes that were designed to expand domestic manufacturing, reduce imports, encourage private investment and make Indian defence companies globally competitive.

Domestic manufacturing: A key pillar of India’s defence strategy has been reducing the country’s dependence on imported military equipment while encouraging indigenous design, development and production. The government’s Positive Indigenisation Lists, has identified hundreds of defence equipment and components that can only be procured from domestic manufacturers after specified timelines. This predictable order pipeline has helped companies build manufacturing scale, improve operational efficiencies and develop technical expertise.

Policy reforms: Policy reforms have also played a significant role. The DAP or Defence Acquisition Procedure introduced procurement categories that give preference to equipment designed, developed and manufactured in India. This has encouraged greater participation from private companies and created more opportunities for domestic firms to compete for defence contracts. Along with this, the DPEPP (Defence Production and Export Promotion Policy) aims to build a globally-level defence manufacturing ecosystem. The policy focuses on improving technology development, strengthening industry competitiveness, promoting exports and simplifying the business environment for defence manufacturers.

Innovation: India has also sought to cultivate a new generation of defence technology companies through the iDEX (Innovations for Defence Excellence) initiative. Launched to connect startups, MSMEs, researchers and innovators with the armed forces, iDEX supports the development of indigenous technologies across a range of emerging fields, including drones, artificial intelligence, robotics, surveillance systems and autonomous platforms.

Simplifying export norms: The government has streamlined the defence export approval process by simplifying licensing procedures. The number of export authorisations have increased and there is now improved coordination between relevant agencies. These measures have reduced administrative hurdles for manufacturers seeking to enter overseas markets.

Where the opportunities lie

As military technologies become more sophisticated, demand is shifting towards companies with expertise in advanced engineering, electronics and precision manufacturing. This creates opportunities across several high-value segments of the defence industry.

Defence electronics: Electronics have become the backbone of modern defence systems. Whether in fighter aircraft, naval vessels, armoured vehicles or missile systems, advanced electronics enable communication, surveillance, navigation, targeting and electronic warfare capabilities.

Aerospace components: Rather than manufacturing entire aircraft, many Indian companies specialise in producing critical aerospace components for global original equipment manufacturers (OEMs). These include aircraft structures, precision-machined parts, forgings, engine components and other high-specification assemblies used in both military and civilian aerospace programmes

Drones and autonomous systems: Unmanned systems have fundamentally changed the nature of modern warfare. Conflicts in recent years have demonstrated the growing importance of drones for intelligence gathering, reconnaissance, surveillance and precision strikes, while also highlighting the need for effective counter-drone technologies.

Combat training: Modern armed forces increasingly rely on simulation technologies to improve operational readiness while reducing training costs and minimising equipment wear. In this regard, companies are developing advanced training simulators, virtual combat environments, mission planning software and integrated training systems that allow military personnel to rehearse complex scenarios in realistic settings.

Precision engineering: Behind every advanced defence platform lies a network of highly specialised manufacturers producing mission-critical components that require exceptional levels of accuracy and reliability. precision engineering firms manufacture products such as missile components, rocket assemblies, cryogenic equipment and other high-tolerance machined parts used across aerospace, missile and defence programmes.

Ammunition and explosives: The global demand for ammunition has seen a sharp rise in recent years as geopolitical tensions and prolonged conflicts have prompted many countries to replenish depleted stockpiles and strengthen their defence preparedness

Space, electro-optics and surveillance: Space-based technologies and advanced surveillance systems are becoming increasingly important for national security, intelligence gathering and battlefield awareness.

India’s defence export success story is the result of policy reform, growing private-sector participation and a stronger domestic manufacturing base. While large PSUs remain important, the industry is increasingly being supported by a network of specialised private firms and MSMEs. As defence production becomes more specialised, many of the biggest opportunities are emerging in niche areas such as electronics, aerospace components, drones and precision engineering. In Part 2, we’ll examine the listed smallcap companies that are helping power India’s defence export boom, and why they could be well-positioned for future growth.

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