INDUSTRIAL AND FISCAL SPILLOVER EFFECTS OF DEFENCE MANUFACTURING UNDER MAKE IN INDIA: AN INTEGRATED ASSESSMENT

Abstract

This dissertation presents an integrated assessment of the industrial and fiscal spillover effects of defence manufacturing under India's Make in India initiative, covering the period 2004–25. The study is organised around two core objectives that together examine how India's ongoing transition from import-dependence to indigenous defence production has affected both its broader industrial ecosystem and its fiscal position. Objective 1 tracks India's defence indigenisation journey through trend analysis and econometric modelling. Part A documents the dramatic growth in domestic defence production (from ₹17,435 crore in 2004–05 to ₹1,50,590 crore in 2024–25), the partial but incomplete substitution of imports (SIPRI TIV data shows continued dependence for high-technology platforms), and the emergence of a defence export capability (growing to ₹23,622 crore in 2024–25). Part B presents an OLS regression model — ln(MFG GVA) = 1.094 + 0.354·ln(Defence Production) + 0.629·ln(GFCF) + ε — that demonstrates a statistically significant positive spillover from indigenous defence production to manufacturing GVA (R² = 0.991, p < 0.05). A qualitative spillover matrix identifies six channels through which defence manufacturing generates civilian economic benefits: DRDO technology transfers (670 LATOTs signed), HAL’s dual-use aviation infrastructure, BEL’s non-defence commercial revenues (₹2,640 crore, 13.3% of revenue), iDEX startups, MSME vendor ecosystem (~16,000 MSMEs), and Defence Corridor industrial clusters (52,658 jobs committed). Objective 2 examines the fiscal sustainability of defence indigenisation through a three-component framework. Ratio analysis reveals a structural decline in the overall defence fiscal burden (from 10.4% to 7.6% of government expenditure) but documents the internal restructuring that constrains this progress: pension liabilities have risen from 14.5% to 22.7% of the defence budget; the capital-to-revenue ratio has more than halved; and DRDO’s proportionate budget share has remained flat at 3–6%. Regression analysis (R² = 0.417, F p-value = 0.024) confirms that India Page 5 remains in the transition-cost phase of indigenisation, with pension crowding-out the dominant structural pressure (coefficient = −0.080, p = 0.086) and no single policy variable independently determining fiscal outcomes. The integrated analysis reveals a paradox at the heart of India’s defence transformation: industrial spillovers from defence manufacturing are real and growing, but fiscal constraints — rising pension liabilities, stagnant R&D investment, and declining capital-to-revenue ratios — threaten the sustainability of the indigenisation process itself. The study identifies specific policy interventions required to break this constraint and accelerate India’s transition to a fiscally sustainable, industrially generative defence manufacturing base.