MSMEs: The Missing Force Multiplier in India's Defence Manufacturing Revolution
India's ambition to emerge as a global defence manufacturing hub rests not only on large public sector undertakings or major private conglomerates but on a vast network of micro, small, and medium enterprises (MSMEs). These firms constitute the technological and manufacturing backbone of modern defence ecosystems worldwide. In India, the contours of such a system are beginning to emerge. Over the past decade, a series of policy reforms, ranging from procurement changes to innovation programmes, have attempted to widen the defence industrial base and bring MSMEs into the fold. Today, nearly 16,000 MSMEs are linked to defence production and supply chains, contributing to areas such as electronics, precision engineering, drones, materials, and software systems.
Why MSMEs Matter in Defence Manufacturing
Globally, defence industries are built on layered supply chains. The prime contractor may design and integrate a system, but thousands of smaller firms manufacture components, electronics, subsystems, and software. In the United States, for example, the aerospace and defence supply chain involves over 12,000 specialised suppliers. Germany's defence industrial strength rests on the famed Mittelstand—medium-sized engineering firms known for precision manufacturing. India must replicate this model if it seeks technological depth and manufacturing resilience.
MSMEs bring three strategic advantages. First, they expand manufacturing depth. Defence platforms, from fighter aircraft to missiles, contain thousands of components. Domestic MSMEs can manufacture these parts, reducing import dependence. Second, they foster innovation. Smaller firms are often faster and more flexible in adopting emerging technologies such as drones, artificial intelligence, and robotics. Third, they improve cost competitiveness. Global defence markets are intensely price-sensitive, and MSMEs can deliver components at lower costs compared with large industrial entities. In essence, MSMEs are not just suppliers; they are the industrial ecosystem that sustains defence production.
Policy Reforms: Opening the Sector
Recognising this reality, India has undertaken significant policy reforms over the past decade to integrate MSMEs into the defence sector. Procurement reforms include the Defence Acquisition Procedure (DAP) 2020, which prioritises indigenous procurement through categories such as Buy (Indian–IDDM) and Buy (Indian). These frameworks mandate high levels of domestic content, creating opportunities for local supply chains. Furthermore, 75% of the defence capital procurement budget is now earmarked for domestic industry, a major shift aimed at reducing import dependence.
Indigenisation push involves the government releasing multiple positive indigenisation lists banning the import of hundreds of defence items, from sensors and electronic warfare systems to ammunition components. For MSMEs, these lists effectively create guaranteed domestic markets. The SRIJAN portal complements this effort by identifying specific items currently imported and inviting domestic companies to develop them.
Innovation platforms like Innovation for Defence Excellence (iDEX) connect the armed forces with startups and MSMEs to develop innovative technologies. Hundreds of defence challenges have been issued under iDEX, ranging from drone swarms to electronic warfare systems. For many small companies, this represents the first real opportunity to engage directly with the defence establishment.
Defence industrial corridors are being developed in Uttar Pradesh and Tamil Nadu, designed to bring together manufacturers, suppliers, testing facilities, and research institutions. Cluster-based development has historically been the most effective way to build high-technology industrial ecosystems.
The Implementation Gap
Despite progressive policy frameworks, MSMEs still face significant challenges in translating opportunity into sustained participation. Procurement complexity remains high, with defence procurement being documentation-heavy, and small companies often struggle with compliance requirements designed for large contractors. Payment delays from prime contractors or government agencies can severely disrupt MSME cash flows. Limited access to testing facilities is another issue, as defence products require rigorous testing—ballistics, environmental stress testing, EMI/EMC certification, and more—which is expensive and scarce. Technology barriers also exist, as many defence technologies require advanced materials, specialised machinery, and deep R&D investment, resources that MSMEs often lack. The result is a structural paradox: policy invites MSMEs into the sector, but operational barriers still restrict their growth.
Budget Allocations: Are MSMEs Benefiting?
India's defence budget has risen to approximately Rs 6.8 lakh crore, with a substantial share earmarked for modernisation and domestic procurement. However, the distribution of these funds reveals an imbalance. Defence public sector undertakings still account for around 70% of production, while the private sector—including MSMEs—contributes roughly a quarter. In most cases, MSMEs participate only as subcontractors to larger system integrators. This model is not inherently flawed—global defence industries also rely on layered supply chains. However, India must ensure that MSMEs move up the value chain, participating not only in component manufacturing but also in subsystem design and innovation.
The Export Opportunity
India has set ambitious targets for defence exports, aiming to significantly expand its global market share. MSMEs will be central to achieving this goal. Global defence supply chains are increasingly fragmented, with prime contractors sourcing components from specialised suppliers across multiple countries. If Indian MSMEs meet global quality standards, they can integrate into these international supply chains. Sectors with strong export potential include:
- Unmanned aerial systems
- Loitering munitions
- Electronic warfare systems
- Cyber security solutions
- Advanced materials and composites
These are areas where small technology-driven firms can compete effectively.
Quality: The Decisive Factor
To succeed globally, MSMEs must focus relentlessly on quality. Defence manufacturing demands extremely high standards of reliability and precision. Components must meet certifications such as AS9100 aerospace standards, ISO quality management systems, and international defence compliance requirements. Achieving these standards requires investments in advanced machinery, quality control systems, and skilled manpower. Equally critical is the adoption of Industry 4.0 technologies—digital manufacturing, additive manufacturing, automation, and AI-based quality monitoring. Without these capabilities, MSMEs will struggle to compete in global markets.
Financing the Defence MSME Ecosystem
Access to finance remains a major constraint. Defence projects often involve long gestation periods, with significant upfront investment required before production begins. Traditional banking systems are often reluctant to finance such ventures. Targeted financing mechanisms are therefore essential, including:
- Defence innovation funds
- Venture capital for deep-tech manufacturing
- Government-backed credit guarantees
- Long-term procurement commitments
Such instruments can significantly reduce the risk for MSMEs entering the defence sector.
From Shahed to Shakti: What Iran's Drone Playbook Means for India
India's defence modernisation is at an inflection point. While capital-intensive platforms—fighter aircraft, submarines, and long-range missiles—continue to dominate procurement priorities, recent conflicts have exposed a decisive shift in warfare: the rise of low-cost, mass-produced drones and loitering munitions as strategic weapons. Iran has emerged as the most instructive case study. Despite decades of sanctions and technological isolation, it has built a formidable arsenal of drones and missiles that have challenged some of the world's most advanced militaries. The lesson is not about sophistication—it is about scale, cost asymmetry, and doctrinal clarity.
For India, facing a two-front threat and evolving grey-zone challenges, the implications are immediate and operationally relevant. Iran's model focuses on building affordable systems in large numbers and deploying them in integrated, saturating attacks. Instead of pursuing high-end precision platforms, Iran prioritised low-cost loitering munitions, mass production capability, and integration with missile forces and electronic warfare, along with decentralised and survivable manufacturing.
Why this matters for India is that its current defence posture remains skewed toward high-value, low-volume platforms. While these are indispensable, they are increasingly vulnerable to saturation tactics. The emerging threat matrix—particularly from Pakistan's adoption of low-cost drones and China's industrial-scale unmanned capabilities—demands a recalibration. India cannot afford to fight a high-cost war against low-cost systems.
Policy Imperatives: A Five-Point Action Plan
To address these challenges, India must adopt a comprehensive action plan. First, shift from platform-centric to volume-centric thinking. India must complement high-end platforms with mass-produced, low-cost systems, define target inventories in thousands, and treat drones as ammunition-class assets. Second, create a dedicated drone and loitering munition production mission. A national-level mission should focus on scaling manufacturing, standardising designs, and ensuring rapid induction.
Third, empower MSMEs as prime integrators. The drone sector has shown that MSMEs can deliver complete systems. Policy must now enable direct procurement from MSMEs, provide assured orders, and support scaling through financing and infrastructure. Fourth, build component sovereignty. India must prioritise domestic production of electro-optical sensors, navigation systems, microelectronics, and propulsion units. Without this, indigenisation remains superficial.
Fifth, integrate drones into doctrine and war planning. Drones must move from tactical tools to central elements of war doctrine, including swarm warfare integration, joint operations with artillery and air power, and dedicated drone warfare units. Additionally, industrial survivability is a missing layer. Iran's model includes dispersed and hardened manufacturing, ensuring continuity under attack. India's defence industry remains geographically concentrated and vulnerable. Future planning must incorporate distributed production networks, redundant supply chains, and hardened infrastructure for critical facilities.
Success Stories: MSMEs in Action
Several success stories highlight the potential of MSMEs in India's defence sector. Case 1: Solar Industries and Z Motion developed Nagastra-1, India's first indigenous loitering munition, with precision strike capability and high indigenous content. This demonstrates that MSME-led ecosystems can deliver combat-ready systems, not just components.
Case 2: NewSpace Research & Technologies represents the new generation of deep-tech MSMEs, with its Sheshnaag-150 swarm loitering munition capable of deep strikes beyond 1,000 km. This shows that India's MSMEs are beginning to define next-generation warfare doctrines such as swarm operations.
Case 3: Johnnette Technologies exemplifies how MSMEs can integrate into operational supply chains, delivering multiple batches of loitering munitions to the Indian Army under emergency procurement. This highlights that speed and agility are competitive advantages for small firms.
These cases collectively reveal three structural shifts: MSMEs are moving up the value chain from supplying components to designing complete weapon systems; speed and agility are competitive advantages; and innovation is decentralising, with cutting-edge capabilities developed outside large institutions.
Conclusion: From Participants to Prime Movers
India's defence manufacturing story is entering a decisive phase. The rise of indigenous drones and loitering munitions shows that MSMEs can deliver not just parts, but platforms—and not just platforms, but operational capability. However, the ecosystem remains uneven. A handful of success stories cannot substitute for a broad-based industrial transformation. If India can scale these examples—turning dozens into hundreds and hundreds into thousands—it will not just build a defence industry. It will build a globally competitive, innovation-driven manufacturing ecosystem. In modern warfare, the decisive edge increasingly lies in agility, autonomy, and affordability. India's MSMEs, as the drone revolution shows, are uniquely positioned to deliver all three.
About the Author: Major General Rajan Kochhar Retd is a senior Indian Army veteran with nearly 37 years of command and strategic logistics experience. He is a strategic and defence analyst, author, academic, logistics and defence management expert, and TEDx speaker, recognised with multiple national and global honours.
