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Editor’s Note
India’s ambition to emerge as a global defence manufacturing power cannot be realised through central policy and procurement reforms alone. Part I traced India’s journey from an import-dependent model to the emerging defence manufacturing ecosystem, while identifying states as a critical but often overlooked enabler. This second part argues that state governments are the missing link in building a competitive defence-industrial ecosystem.
Role of State: From Defence Industrial Corridors to Defence Industrial Ecosystems
The transformation of India’s defence industry is no longer merely a policy aspiration. It is beginning to show up in the numbers.
In FY 2025–26, India’s defence production reached a record Rs 1.78 lakh crore, registering a 15.6 per cent increase over the previous year’s Rs 1.54 lakh crore. Defence exports reached an unprecedented Rs 38,424 crore, a 62.66 per cent increase over FY 2024–25. The private sector contributed around 24 per cent of total defence production, its highest share so far, while Indian defence products were exported to more than 80 countries.
These figures mark a significant change from the India of a decade ago. Defence manufacturing is no longer confined to Defence Public Sector Undertakings and the Ordnance factories. Private companies, MSMEs, start-ups and research institutions are increasingly becoming part of the ecosystem.
Yet there is another number that should not be overlooked. SIPRI’s latest assessment places India as the world’s second-largest recipient of major arms during 2021–25, accounting for 8.2 per cent of global imports. Although India’s imports declined by 4 per cent compared with 2016–20, SIPRI notes that major planned acquisitions continue to indicate dependence on foreign suppliers.
There is therefore no contradiction between the two realities.
India is producing more defence equipment than ever before, while still importing critical platforms and technologies.
This is precisely why the next phase of defence-industrial reform must go beyond production targets. The challenge now is to develop technological depth, strengthen supply chains, integrate MSMEs and start-ups, attract investment and, most importantly, create an institutional mechanism through which national defence policy can be translated effectively into regional industrial capability.
The missing link is the state
Defence remains a Union subject. Decisions relating to military requirements, procurement, strategic technologies, exports and national security necessarily remain with the central government.
But defence manufacturing happens in the States.
A defence factory requires land. It requires roads, electricity, water, logistics, industrial infrastructure and skilled manpower. It requires local suppliers, engineering companies, universities and testing facilities. An entrepreneur setting up a defence start-up requires an ecosystem around the enterprise, not simply a government policy in Delhi.
This makes state governments indispensable partners in India’s defence-industrial transformation.
The two Defence Industrial Corridors, in Uttar Pradesh and Tamil Nadu, have already demonstrated the potential of this approach. By July 2026, the government reported that around Rs 10,000 crore had been invested in the two corridors, against proposed investments of about Rs 70,000 crore.
But India should now move beyond the concept of industrial corridors towards defence industrial ecosystems.
A corridor provides geographical concentration. An ecosystem connects manufacturers with suppliers, research institutions, start-ups, skilled manpower, finance, testing facilities and, ultimately, military demand.
That transition requires four institutional reforms.
- Create a permanent Centre-State defence industry coordination mechanism
The Department of Defence Production should establish a dedicated office in every state with a significant or emerging defence-industrial presence.
The purpose should not be to create another bureaucratic layer. It should be to establish a permanent institutional bridge between the Centre and the state.
Each office should have a representative of the Department of Defence Production, an Armed Forces representative and a finance representative, along with an appropriate representative from the state’s industry or investment agency.
This would bring together four perspectives that are currently often separated, national defence requirements, industrial policy, military user requirements and financial considerations.
Such an office could become the single coordination point for resolving issues relating to defence manufacturing investments, infrastructure, procurement linkages, industrial incentives, technology development and supply-chain integration.
The Armed Forces’ participation is particularly important. Defence industrial policy cannot be disconnected from operational requirements. If a state is developing an aerospace, drone, electronic warfare or naval manufacturing cluster, there should be a mechanism through which the military user can communicate future requirements and technological priorities to industry.
Similarly, the finance representative could help address the financial and procurement dimensions of major industrial proposals at an early stage.
The objective should be coordination, not control.
The Union government should retain responsibility for national defence policy, strategic technologies, procurement and security. States should continue to exercise their constitutional and administrative responsibilities relating to industrial development.
The missing element is the institutional interface between the two.
- Align state industrial policy with national defence-industrial policy
The second reform concerns industrial policy itself.
Most states already have policies relating to mega industries, heavy industries, aerospace, electronics, automobiles, engineering and other manufacturing sectors. But defence manufacturing has characteristics that distinguish it from conventional industrial activity.
A defence manufacturer can generate an ecosystem of hundreds of component suppliers, MSMEs, engineering companies, testing laboratories and technology firms. The economic benefit, therefore, extends far beyond the principal manufacturing facility.
State policies governing mega and heavy industries should consequently be aligned with India’s national defence-industrial objectives.
If a state provides incentives to a large defence manufacturer, those incentives should encourage local supplier development, MSME participation, technology development, skill creation and integration with the wider defence supply chain.
The objective should be to prevent isolated “anchor investments” and instead create clusters.
A fighter aircraft manufacturer, for example, should not operate as an island. It should generate an ecosystem of companies producing avionics, structures, components, software, composites, wiring, maintenance equipment and other sub-systems.
This is how industrial capability becomes sustainable.
- Cluster-Based Approach
India already possesses many of the ingredients required to develop regional defence-industrial clusters. The country has 16 Defence Public Sector Undertakings (DPSUs) with factories and facilities spread across different states, while DRDO operates around 41 laboratories and five Young Scientist Laboratories covering areas such as electronics, combat vehicles, armaments, advanced materials, aeronautics and other defence technologies. In addition, testing and certification infrastructure under organisations such as DGQA, DGAQA and the various DQA establishments, together with new facilities being developed under the Defence Testing Infrastructure Scheme (DTIS), provides another important layer of the defence ecosystem. DTIS was specifically conceived to improve access to modern testing infrastructure, particularly for MSMEs and start-ups.
These assets should be mapped state-wise to develop a genuinely cluster-based approach. The mapping should include DPSU factories, DRDO laboratories, testing and certification facilities, IITs, IIMs, IISc and other research and technical institutions. Such an exercise would identify existing concentrations of expertise and allow states to build defence clusters around capabilities that already exist rather than attempting to create them from scratch.
Uttarakhand provides an illustrative example. Dehradun has the DRDO’s Instruments Research and Development Establishment (IRDE), which has significant expertise in electro-optics and related technologies, alongside India Optel Limited, a DPSU operating in the same broad domain. The testing lab from DGQA, namely CQA(I), is also co-located in Dehradun. Therefore, the potential exists to connect these capabilities with IIT Roorkee and IIM Kashipur, creating an ecosystem for defence opto-electronics, research, start-ups and MSMEs. Significantly, a Defence MSME Conclave held in Dehradun in December 2024 specifically examined regional capabilities and MSME cluster development in Uttarakhand, with participation from IRDE, India Optel and the Department of Defence Production.
A similar exercise could be undertaken in other states based on their existing industrial and technological strengths. For example, Gujarat’s emerging semiconductor ecosystem could be examined for its potential integration with India’s defence electronics requirements, with relevant DPSUs, DRDO laboratories, academic institutions and testing facilities brought into the cluster. The objective should not be to designate defence hubs arbitrarily, but to identify existing capabilities and connect them into specialised regional ecosystems.
Such a cluster-based approach would allow India to move beyond the creation of individual defence manufacturing units towards integrated ecosystems in which large manufacturers, DPSUs, DRDO laboratories, testing agencies, universities, start-ups and MSMEs reinforce one another.
- Establish defence incubators through IITs and IIMs
The fourth reform should focus on innovation.
India’s defence start-up ecosystem has grown rapidly through initiatives such as iDEX. The government has also opened 25 per cent of the defence R&D budget to industry, start-ups and academia since 2022–23.
But innovation needs geographical ecosystems.
Every major defence-industrial state should establish a dedicated defence technology incubator linked to an IIT, IIM or another leading technical or management institution.
The IIT can provide laboratories, scientific expertise and technology development. The IIM can provide management, commercialisation and market expertise. The Armed Forces can identify operational problems and provide user feedback. Industry can provide manufacturing capability, while financial institutions and venture capital can provide funding.
Such incubators should take a start-up through the entire chain, from problem identification to technology development, prototype creation, testing, certification and eventual production.
This is particularly important for MSMEs.
India’s future defence industry cannot depend only on a few large companies. A technologically sophisticated defence sector requires thousands of specialised suppliers capable of producing components, software, materials and sub-systems to global standards.
From manufacturing growth to strategic capability
India has crossed an important threshold in defence production, but the next challenge is technological depth. The country must move from assembly to design, from licensed production to technology ownership, and from individual factories to deep domestic supply chains.
SIPRI’s latest data also shows why this remains necessary. India continues to be the world’s second-largest importer of major arms, indicating that rising domestic production has not yet eliminated dependence on foreign technologies.
The objective, therefore, should not be to eliminate imports, but to use foreign investment and partnerships to build greater indigenous capability.
This is where the states become critical. By providing infrastructure, skilled manpower, universities, incubators, MSME networks and an efficient regulatory environment, states can transform individual investments into defence-industrial ecosystems. The Centre, meanwhile, must provide strategic direction, military requirements, procurement policy and national security oversight.
India has moved from creating policy to increasing production. The next stage must be building ecosystems. The four proposed reforms- state-level DDP offices, alignment of state industrial policies with national defence objectives, a cluster-based approach, and defence incubators through leading academic institutions in each state- can provide the institutional architecture for this transition.
India has demonstrated that it can produce more. The next challenge is to build the industrial depth to design, manufacture, upgrade and export the technologies its armed forces will require. Defence industrialisation is therefore not merely an economic opportunity, but a question of strategic resilience.
Dr Lakshman Kumar and Prof. V.S. Rawat
(Dr Lakshman Kumar has extensively researched the Sino-Indian conflict, Cold War dynamics, and the Indo-Pacific region, and the co-author, Prof. V.S. Rawat, is a Professor of Practice for Defence & Security and Director, Defence Research & Innovation Foundation, at IIT Ropar. He is also Honorary Distinguished Fellow at the CENJOWS).
