Defence startups could be the new buzzword, the budget clearly points at that

• Modi government is slowly changing the structure of the defence industry.
• The defence ministry started iDEX (innovation for defence excellence) to set up incubators (incubators provide basic infrastructure for startups to operate) and is allocating crores of rupees to these incubators to fund startups.
  
• The Modi government has adopted a two-pronged strategy to push for India’s industrialization with the first being import substitution and the second being export.

For decades, India has been one of the largest users of defence equipment given enemies on the Western and Eastern borders. However, despite such large uses of defence equipment, the country has not been able to build an indigenous defence manufacturing industry, because the sector has been dominated by public sector units. And, just like all other sectors that were dominated by PSUs, there was very little innovation in the Indian defence industry. 

While the American defence industry gave rise to Silicon Valley (most of the modern information technology tools, from chips to the internet, trace their origins to funding by American armed forces), the Indian defence industry continued to be a liability on the public exchequer.

But the Modi government is slowly changing the structure of the defence industry. From giving space to more large private companies such as Tata and Adani to pushing for reforms in Ordnance Factory Board (it has been split into various PSUs and will compete with private players to get contracts rather than having a monopoly on certain items), and now a focus on defence technology startups.

The defence ministry started iDEX (innovation for defence excellence) to set up incubators (incubators provide basic infrastructure for startups to operate) and is allocating crores of rupees to these incubators to fund startups. 14 incubators have been established under the iDEX scheme, and crores of rupees are flowing to defence startups through them. 

Moreover, the defence ministry has big plans to purchase equipment from the startups. The Finance Minister, in the budget FY 23, announced that 68 % of the capital expenditure for defence startups will go to Indian companies. In the last few years, the government’s procurement of defence-related goods and services from micro and small enterprises (MSEs) climbed marginally by 2.2 per cent to Rs 9,293 crore in FY21 from Rs 9,090 crore in FY20, after declining from Rs 12,112 crore in FY19. And as these startups come up with better products, the purchase will go up.

So far, almost all of the defence Research and Development (R&D) funds went to PSUs and other departments under the defence ministry. However, the finance ministry announced that from this year onwards, 25 per cent of defence R&D will go to industry, startups and academia, thus widening the pool of money available to private players.

Defence minister Rajnath Singh, who is an ardent believer of Make in India, wants Indian companies to solve the problems for Indian armed forces as well as export to other developing countries.

Congratulating Finance Minister Nirmala Sitharaman on the presenting of an ‘excellent’ Union Budget for 2022-23, Rajnath Singh said, “It is a Budget which would give a fillip to ‘Make in India’, boost demand and build capacities for a stronger, prosperous and confident India. The Budget outlines the Government’s focus on Aatamnirbharata and Prime Minister Shri Narendra Modi’s vision for development and pro-people reforms. It is a growth-oriented Budget focused on harnessing the energies of New India.”

The Modi government has adopted a two-pronged strategy to push for India’s industrialization with the first being import substitution and the second being export. The post-world War II experience shows that the countries in Latin America, Southeast Asia, and South Asia which pursued only import substitution could not succeed because their technology was decades behind the western world, thus resulting in sub-standard goods. 

But the East Asian countries, which pursued export-driven industrialization through state of art technology import to manufacture and export finished goods utilizing labour arbitrage, industrialized successfully within four to five decades. Thus, the Modi government is not only focusing on import substitution but also export. The emerging areas in defence technology like drones, missiles will soon be exported from India to other developing countries. India is already Brahmos missiles to the Philippines and the defence export touched 1 billion dollars in the last year. 

With the two-pronged strategy being pursued by the Modi government, the country is expected to become an industrialized nation and economic powerhouse in the next three decades.