In 1775, the East India Company set up a Board of Ordnance in Fort William, Kolkata. In 1787, a gunpowder factory was established at Ishapore (Ichhapur), followed by a Gun Carriage Agency at Cossipore (Kashipur), which began production in 1802. By 1947 there were 18 such ordnance factories, and by the time they were corporatised in 2021, there were 41.
Remarkably, the economic structure of the system barely changed after independence, and weapons production remained entirely State-run and State-owned. The factories came under the ministry of defence in 1948, and a department of defence production was set up in 1962. The Industries (Development and Regulation) Act, 1951 brought arms and ammunition under industrial licensing. Even the 1991 reforms kept all types of defence equipment reserved for the public sector. Only in May 2001 were Indian private firms let in.
A defence market has one buyer: the armed forces. When that buyer faces a single State-owned seller, neither side has much incentive to economise. In the absence of competition, the ordnance factories had no incentive to cut costs or invest in efficiency. It was estimated that Indian-built aircraft such as the MiG-21 and the Gnat cost 150-190 percent of what it would have cost to import them.
Therefore, dependence on imports followed from the public sector’s inability to supply what the armed forces needed at a competitive price. India was the world’s largest arms importer in 2018-22 and the second-largest in 2021-25. The price of this dependence was paid in crises. In every urgent purchase during the Kargil war, recalled the then Army chief General V P Malik, suppliers “exploited us as much as they could”. One country, asked for a few guns, “supplied refurbished old weapons” from another—“we were given 1970-vintage ammunition”.
Over the past decade, the government has chipped away at this from two directions: making the incumbents behave like companies, and letting in challengers. The first was the corporatisation of the Ordnance Factory Board. Committees headed by T K A Nair, Vijay Kelkar and Raman Puri had all recommended it. Yet only on October 1, 2021 did the management, control, operations and maintenance of the 41 factories pass to seven wholly-government-owned companies.
As companies, they now enjoy more operational freedom and flexibility. The units had run up losses over three years preceding corporatisation. In their first six months as companies, six of the seven reported profits. Exports by the new companies went from ₹82 crore in 2022-23 to ₹1,977 crore in 2023-24.
The second was making it easier to do business. An industrial licence for defence items used to be valid for seven years. Since 2015, the validity is for 15, extendable to 18. Arms Act licences are now valid for the company’s lifetime, provided it sets up its plant and meets other conditions within seven years. No licence is required for manufacture of any parts or accessories in the defence sector, unless the items are specifically listed.
Although defence is still one of four industries under compulsory licensing, the number of defence licences has more than tripled from 258 in 2015 to 834 by March 2026. The ceiling on foreign direct investment, set at 26 percent in 2001, now allows 74 percent through the automatic route and up to 100 percent with government approval.
The latest steps go further. On August 25, the MoD approved the transfer of technology of conventional missile systems developed by the Defence Research and Development Organisation to Indian industry. Seventeen firms, public and private, have been identified through an open expression of interest.
Missiles are not an isolated case. Private firms can now participate in the development of the fifth-generation advanced medium combat aircraft. The government is now moving from a traditional sub-contracting model to genuine co-development and risk-sharing.
The effect of the reforms is palpable. Defence production rose from ₹46,429 crore in 2014-15 to ₹84,643 crore in 2020-21 and ₹1.78 lakh crore in 2025-26, with the private sector’s share at an all-time high of 24 percent. Nearly 65 percent of defence equipment is now made at home, against import dependence of 65-70 percent earlier. Exports have risen from ₹686 crore in 2013-14 to ₹38,424 crore in 2025-26. The private sector, with a quarter of output, accounted for 45 percent of defence exports in 2025-26. Export markets are where Indian firms face open competition, and private firms punch above their weight.
It is often seen that competition improves the incumbents’ performance. In banking, public-sector banks closed the performance gap with private rivals within a decade of new entry being allowed in the early 1990s. Defence differs because there is a single domestic buyer. Even then, having a second competing manufacturer disciplines the incumbent’s costs and prices.
There is much yet to be done. The public sector still accounts for about three-quarters of production. Only three Indian defence public sector undertakings figure in the list of the world’s 100 largest arms producers: Hindustan Aeronautics (44th), Bharat Electronics (58th) and Mazagon Dock Shipbuilders (91st). Also, India’s import dependence for critical technologies like aircraft engines still remains large.
In addressing these challenges, the path ahead has to be a mix of public and private participation, with even greater corporatisation and competition. The public sector has delivered in nuclear weapons, missiles and shipbuilding, and the case for a large public sector in certain strategic areas remains strong. In other areas, private participation must be encouraged. The aim must be to achieve greater competition and to avoid concentration.
America’s prime contractors for aerospace and defence systems have shrunk since the 1990s from 51 to five, a concentration the US now considers a risk. What matters more than ownership is the discipline of competition and the efficiency of corporatisation.
India needs many corporatised defence producers, public and private, competing at home and abroad. A multitude of smaller enterprises, startups and other smaller players engaged in development and manufacture of sub-systems and components would go a long way in ensuring India’s strategic independence in defence production.
Sanjeev Sanyal | Member, Economic Advisory Council to the PM
(Views are personal)
