Thread by @zerodhamarkets

India's defence exports hit a record ₹21,000 crore in FY2024—nearly triple what they were in FY2021. Defence stocks are soaring, but this boom didn't come overnight. It's the result of decades of procurement reforms.

Here's the evolution of how India buys its weapons.🧵👇

Defence equipment isn't like consumer goods. You can't just walk into a store and buy a tank. In India, there's essentially one buyer for heavy-duty defence equipment—the government through the Ministry of Defence. No government orders means no defence industry.

This is why understanding defence procurement is crucial. It's the engine that drives the entire sector. Everything from bullets to battleships goes through a government-run procedure, and this process has evolved dramatically over time.

Phase 1 (Post-independence to 1960s): India inherited British-era ordnance factories but had limited capabilities. We manufactured small arms and ammunition domestically, but all complex equipment—fighter aircraft, warships, heavy artillery—was imported.

Recognising this vulnerability, the government set up defence PSUs like Hindustan Aeronautics Ltd, Bharat Electronics Ltd, and Mazagon Dock Shipbuilders to build a domestic industrial base. But the foundation was still quite limited.

Phase 2 (1970s-1990s): During the License Raj era, defence manufacturing was effectively a government monopoly. Private companies were prohibited from building major defence platforms, creating a system with no competition and little innovation.

India relied heavily on the Soviet Union for advanced weaponry, especially after the US and Britain imposed arms embargoes during the 1965 war. Indian factories produced basic equipment, while advanced systems—MiG fighters, submarines—came from abroad through imports or license production.

The result? Through the late 20th century, India remained one of the world's largest arms importers while our domestic industry stayed limited in scope and dominated by the public sector.

Phase 3 (Early 2000s): In 2001, India opened defence manufacturing to private companies for the first time, allowing limited FDI up to 26%. But there was a catch—just because private firms were allowed didn't mean they'd get orders.

Corruption scandals, notably the 2001 "Tehelka" sting operation that caught officials taking bribes in fake arms deals, highlighted the need for transparency. This pressure led to India's first comprehensive procurement rulebook: the Defence Procurement Procedure (DPP) 2002.

Since 2002, procurement policy has evolved steadily. DPP 2006 introduced "offsets"—foreign companies selling weapons above certain values must invest a portion back into India's defence industry. DPP 2008 & 2011 encouraged private sector involvement and established a preference for indigenous products.

DPP 2016 was a watershed moment, introducing "Buy (Indian-IDDM)"—Indigenously Designed, Developed and Manufactured—as the highest priority category. This gave a major boost to Indian private innovators and startups, prioritising homegrown products over imports.

DAP 2020 renamed and overhauled the entire framework. It established a clear procurement hierarchy: Buy (Indian-IDDM) at the top, followed by Buy (Indian), Buy & Make (Indian), Buy & Make (Global), and finally Buy (Global) as the last resort.

Today's defence landscape is far more diverse. Private players like Larsen & Toubro, Tata Advanced Systems, Mahindra Defence, Bharat Forge, and Adani Defence are building everything from fighter plane parts to artillery guns and naval ships.

While we're still the world's second-largest arms importer (after Ukraine), our defence exports are rising. Indian-made equipment like the BrahMos missile and Tejas fighter are finding foreign buyers—a source of both national pride and business opportunity.

However, the old guard remains dominant. Defence PSUs and ordnance factories still account for roughly 80% of India's defence production by value, while private companies make up about 20%.

The defence forces aren't entirely happy with PSU dominance, so the government is actively shifting workload to the private sector through import bans, higher FDI limits, and procurement policies favouring local industry.

This historical evolution explains today's defence boom. In the coming parts, we'll dive into the numbers driving investor excitement.

We cover this and one more interesting story in today's Daily Brief in detail. You can watch the episode on YouTube, read on Substack, or listen on Spotify, Apple Podcasts, or wherever you get your podcasts. All links here: thedailybrief.zerodha.com/p/behind-india…