India’s push for self-reliance in defence manufacturing, driven by the Atmanirbhar Bharat initiative and a record defence budget exceeding ₹6.2 lakh crore in FY 2025-26, has created unprecedented opportunities for domestic MSMEs to enter and thrive in this strategically vital sector.

MSMEs can leverage their agility, innovation, and niche technical capabilities to play a pivotal role in meeting the growing demand for indigenous defence solutions, while also securing long-term business growth and contributing to national security.

Key Reasons For MSMEs To Enter The Defence Sector

High-Value Contracts: About 70% of the Ministry of Defence’s capital acquisition budget is now reserved for domestic industry, ensuring a steady flow of large contracts for capable MSMEs.

Sustained Demand: With India focusing on modernising its armed forces, the need for advanced equipment and systems will continue to rise, promising consistent demand for years to come.

Innovation And Flexibility: MSMEs are often more adaptable and innovative than larger firms, making them ideal for niche, high-precision manufacturing and rapid technological adoption.

Global Opportunities: Defence offset policies require foreign OEMs to partner with Indian firms, opening doors for MSMEs to engage in joint ventures and access international markets.

Government Support: Dedicated policies, funding schemes, and procurement reservations are in place to facilitate MSME entry and growth in defence manufacturing.

Defence Sector Opportunities For MSMEs in 2025

MSMEs can participate across a spectrum of defence manufacturing activities:

Component Manufacturing: Supplying vital parts for missiles, aircraft, ships, and military vehicles.
Aerospace and UAV Systems: Producing drones, surveillance systems, avionics, and related electronics.
Maintenance, Repair, and Overhaul (MRO): Providing MRO services for military aircraft and vehicles.
Defence Exports: Tapping into India’s $5 billion defence export target with export-oriented products.
Cybersecurity And AI: Developing digital warfare systems, intelligence platforms, and cybersecurity solutions.

Types of MSMEs Best Positioned For Defence Diversification

Not all MSMEs are equally suited for defence manufacturing, but those with the following backgrounds have a natural advantage:

Engineering and fabrication units
Electronics and IoT firms
AI/ML and software startups
Automotive component manufacturers
Chemical manufacturers (for coatings, lubricants, explosives)

Regional Hotspots For Defence MSMEs

Certain regions offer strong infrastructure and policy support for defence MSMEs:

UP Defence Industrial Corridor Aligarh, Kanpur, Jhansi – strong investments
Tamil Nadu Defence Corridor Chennai, Salem, Coimbatore – aerospace & defence hubs
Hyderabad Missile, aerospace production, DRDO labs
Pune-Nashik-Aurangabad Belt Automotive, engineering MSMEs
Bangalore Defence Tech, AI, UAVs, proximity to ISRO, HAL

Government Schemes Supporting MSMEs In Defence

Defence Production And Export Promotion Policy (DPEPP) 2020: Integrates MSMEs into supply chains and promotes exports.

Technology Development Fund (TDF): Grants up to ₹10 crore per project for indigenous technology development.

iDEX (Innovation for Defence Excellence): Provides funding, mentorship, and access to armed forces for product testing.

Public Procurement Policy For MSEs: Reserves 25% of defence PSU procurement for registered MSMEs.

Make-II Initiative: Supports prototype development by MSMEs with guaranteed procurement upon successful trials.

How MSMEs Can Start Their Defence Journey

Assess Capabilities: Identify internal strengths in design, manufacturing, or technology.
Register: Enlist on defence portals like Srijan, iDEX, and GeM.
Certify: Obtain quality approvals such as AS9100, ISO 9001, or CEMILAC clearance.
Network: Attend industry expos and engage with DPSUs and armed forces procurement teams.
Collaborate: Partner with larger OEMs or defence PSUs for joint development and offset projects.
Stay Informed: Monitor Ministry of Defence and state policy updates for new opportunities.

Conclusion

2025 is a pivotal year for Indian MSMEs to diversify into the defence sector. With robust government support, rising domestic and export demand, and a clear policy focus on indigenisation, MSMEs have both the opportunity and the responsibility to become the backbone of India’s defence manufacturing ecosystem. While regulatory and certification challenges exist, the long-term financial and strategic benefits are substantial. By embracing innovation, building partnerships, and aligning with national priorities, MSMEs can secure sustainable growth and strengthen India’s security and global standing.

“MSMEs should view defence not just as a sector but as a platform to uplift their technological competence and global visibility.” — Ankit Mehta, Co-Founder of ideaForge.

Agencies