India’s Push for Atmanirbharta in Defence: A Game-Changer for Indigenous Innovation
In the defense industry, India’s drive for Atmanirbharta (self-reliance) has sparked a surge of optimism among homegrown industries. Many people, including established private companies, cutting-edge start-ups, and even Micro, Small, and Medium-Sized Enterprises (MSMEs), are keen to capitalize on the indigenization trend. The policy ecology has undoubtedly opened up a lot of options thanks to programs like Innovations for Defence Excellence (iDEX), positive indigenization lists, and higher limits on foreign direct investment (FDI). Nonetheless, a warning is required since, despite its strategic importance, the Indian defense industry is small and uncertain.
Despite its growth, India’s domestic defence market is mostly influenced by the country’s yearly defense budget, particularly the portion allotted to capital acquisition. For example, India set aside Rs 6.22 lakh crore (US$ 74.8 billion) for defense in FY 2024–2025, with Rs 1.72 lakh crore (about US$ 20.7 billion) going toward capital acquisitions. All of this does not, however, immediately translate into opportunities for domestic talent. Additionally, most procurement pipelines are already dominated by well-established public and private sector companies, making it difficult for newcomers to enter.
Startups and MSMEs Face Intense Competition in a Small, Uncertain Market
In actuality, there are a lot of start-ups and MSMEs competing for a piece of the domestic defense market, which is a rather modest pie today. Aspiring defense entrepreneurs cannot, in this situation, base their company plans exclusively on declared government subsidies or programs. Over-reliance on such projects can result in financial distress, particularly for smaller businesses with little working capital, in the absence of continuous order flow or predictable demand.
Defense procurement is subject to lengthy, strict, and frequently unexpected cycles, in contrast to consumer or Fast-Moving Consumer Goods (FMCG) markets. The government is the only significant customer in the Indian defense industry, and choices about procurement are usually capital-intensive and sporadic. Such follow-on orders are neither common nor assured, even though several tranches of the same equipment may be purchased over time. India’s main defense platforms have traditionally been imported to a great extent, allowing for time and sourcing flexibility.
The Long and Unpredictable Nature of Defense Procurement Cycles
However, when the emphasis shifts to domestic manufacturing, particularly for start-ups and MSMEs, it’s crucial to recognize that these smaller businesses may not be financially capable of handling the lengthy delays and unpredictable timing associated with defense contracts. For such businesses, depending only on defense contracts might be dangerous in the absence of consistent and predictable demand. For example, unless there are improvements or replacements, there may not be another significant purchase in that category for a long time after a large order for aircraft or combat vehicles is placed and finished. Because of this, the business climate in defense procurement is inherently unstable.
It’s critical to understand that, even though follow-on orders for defense platforms do happen, they are never assured, especially in the Indian environment. Bigger businesses are better able to wait through procurement delays or adjust to changing deadlines because they have more diversified portfolios and larger financial reserves. Smaller businesses frequently lack this buffer and rely on consistent cash flow to stay afloat, particularly start-ups and MSMEs.
For instance, India ordered Su-30MKI fighter jets from Russia in 1996, 2007, and 2012, in several installments over 20 years. However, only companies with scale and longevity can handle such erratic schedules. Similar to this, submarine purchases have been spaced out over a long period of time; deliveries of the Scorpène-class (Kalvari class) began ten years after the deal was signed.
Lessons from India’s Past: Procurement Delays and Market Instability
On the other hand, a domestic start-up that wants to produce components or subsystems finds it difficult to adapt to such time gaps. Therefore, it is unsustainable to align business models too closely with policy pronouncements and scheme-based incentives without taking into account the capital-intensive and irregular nature of defense procurement. For sustainability, it is therefore essential to diversify offers, budget for lengthy cash cycles, and not rely solely on domestic defense orders.
Indian MSMEs and start-ups may therefore be treading on thin ice if they base their whole business strategy on Indian defense orders. Long-term improvements and sustainability can be achieved through niche specialization, R&D expenditures, export promotion initiatives, and the development of goods and services for both military and civilian needs.
India’s Emerging Defense-Tech Ecosystem Shows Promise
Indeed, India’s leading private defense companies have expanded beyond the defense industry. They can withstand the shocks of irregular orders from the Indian defence market because of their early solid foundations in dual-use and civilian industries, such as shipping, power, aircraft, and autos. Well-established private businesses also possess ample capital, some of which they can direct towards internal research and development in both the applied and fundamental technology areas. The defense sector is not their main lifeline; rather, it is an extra vertical in which they can increase their footprint.
On the other hand, new start-ups and MSMEs that only enter the aerospace and defense sectors run the risk of becoming overly dependent on a market that cannot sustain demand. These businesses are frequently motivated by nationalistic fervor or by regulatory incentives. Ninety percent of start-ups worldwide are known to fail. Additionally, the bulk of Indian MSMEs fall into the micro category, with yearly sales under Rs 5 crores. In this regard, small-scale units’ business models may also be hampered by the restricted amount of funding available for research and development. Therefore, creating goods or providing services exclusively for the Indian defence sector could not be viable in the long run.
Prolonged research, product development, and procurement times, stringent testing and certification cycles, and substantial capital expenditures are all part of the defence manufacturing process. It becomes impossible to maintain operations between defense contracts without parallel money streams. Consequently, these smaller divisions could experience burnout, be acquired by bigger companies, or be shut down completely. Diversification into civilian markets and the pursuit of dual-use goods and services represent a practical option.
Both military and civilian uses are common for technologies in fields like robotics, drones, secure communications, electronics, etc. For instance, a start-up that makes tactical drones might also serve the disaster relief, logistics, or agricultural industries. In a similar vein, businesses developing defense-grade cybersecurity solutions may find profitable customers in the telecom, banking, or infrastructure industries. This method is also validated by global trends.
Some of the most prosperous Western defence-tech firms started as MSMEs or start-ups. They concurrently developed products for both military and civilian applications, which enabled them to progressively gain traction in the defense markets. Among the notable names are HENSOLDT of Germany (an MSME that became one of Europe’s top providers of defense sensor technology), Inzpire of the UK (a technical services start-up that is currently one of the fastest growing British defense companies), and Palantir Technologies of the US (a start-up that moved from data analytics to battlefield intelligence).
A new wave of defense-tech start-ups is also starting to appear in India. Promising examples include companies like Digantara, which is creating space situational awareness capabilities, ideaForge, which is well-known for its unmanned aerial vehicles, and NewSpace Research and Technologies, which is creating AI-based unmanned systems. Their capacity to obtain private investment and defense orders indicates that the Indian innovation ecosystem is starting to establish itself in the industry, even though it is too soon to judge their long-term viability. However, maintaining this growth will need these companies’ capacity to scale, diversify, and adjust to the reality of defense procurement cycles in addition to government initiatives.
Dual-use innovation is in line with India’s larger strategic objectives and will guarantee the private sector’s viability. A strong civilian industrial base boosts exports, generates jobs, and increases national resilience—goals that are ideal for defense self-reliance. Naturally, not all businesses are equally able to balance both environments. There may be a few successful MSMEs and specialist start-ups, but these are the exception rather than the rule.
Sustainable Atmanirbharta in Defense Requires Strategic Diversification
India views independence as a need rather than a choice; hence, the path forward must be built with realism. In defense, self-reliance extends beyond manufacturing in India and includes creating sustainable businesses. Therefore, startups and MSMEs need to have a long-term perspective; diversify, identify alternative markets, develop rapidly with an emphasis on exports, and innovate to meet the defense and civilian needs of both the Indian and international markets. Only then can India’s Atmanirbharata goal ultimately lead to an industrial environment that is genuinely robust and self-sufficient.
This article is inspired by insights from the original publication titled “Why India’s Defence Start-ups and MSMEs Must Think Civilian Too”, published by the Manohar Parrikar Institute for Defence Studies and Analyses (IDSA) on 27 May 2025.