In the past few days, unmanned aerial vehicle (UAV) manufacturers in India have been sent into a flurry, as a letter sent in June 2024 by the Defence Ministry to certain such manufacturers surfaced in the news. In the letter, select drone manufacturers, such as Dhakhsha Unmanned Systems and Garuda Aerospace Pvt Ltd, were warned against using Chinese components in their drone manufacturing process.
And even though both manufacturers made it clear that there was no involvement of “bad faith” in their procurement process, and that all their drones were “Made in India,” it still led the MoD to suspend a 200-strong order of drones from Dhaksha, citing the need to pursue an investigation. The incident has hence sent a critical message to domestic manufacturers – that India’s national security interests supersede their profitability goals or business relations.
The broader context of India’s aversion to importing Chinese components in drone manufacturing lies in the tumultuous relationship between the two countries created by the tensions between the People’s Liberation Army and the Indian armed forces along the Line of Actual Control since 2020, as well as India’s countermeasures vis-à-vis reducing trade and technological dependence on China.
As part of this sentiment to “de-risk” and “Make in India,” India placed a ban on the imports of military-grade drone components from its neighbouring countries, due to concerns surrounding “security vulnerabilities.” When the decision was reported in August 2023, it was widely understood the target neighbour here is China.
As vital as the decision may have been in scrutinising the vulnerabilities of the domestic drone ecosystem vis-à-vis dependence on China, the fact of the matter is that over 70 percent of the materials crucial to India’s drone manufacturing assembly lines have been produced in China. At least, this is what the founder of the Bangalore-based drone R&D company NewSpace Research and Technologies had to complain about. He further made the case in the aftermath of the ban announcement, that even if he were to procure from a producer in Poland, they would still have sub-components coming from China.
This is not surprising, considering that Chinese drone and drone component manufacturers dominate supply chains not just in India, but also globally – controlling 80 percent of the said market. Like India, even the American market has been dependent on Chinese drone component providers, and has also placed import restrictions on Chinese military-grade drones – but not without first putting domestic production capabilities and funding in place.
The ban on military drone components speaks to a larger symptom in the Indian policy apparatus’s approach to trading with China in strategic electronics, which is the need for the continued securitisation of supply chains passing through China, and the substitution of imports by means of incessant indigenisation.
In this regard, two common arguments are often echoed by various sectors of the Indian economy and defence ecosystem. First, is that the Indian strategic electronics sector’s production capabilities need to be bolstered so it can meet the government’s demand for advanced strategic electronics like military drone components. Second, is that the sector should also be able to meet this demand at much lower costs compared to those being charged by foreign vendors.
The geoeconomic unsustainability of this approach, however, is made clear by the sentiments expressed by drone manufacturers in India, who understand that the Indian market is heavily dependent on cost-effective and quality-controlled strategic electronic imports from China. Moreover, to sustain domestic production capabilities India must resist the temptation to simultaneously aim for the twin policy goals of cost reduction and indigenisation.
India’s ambition to indigenise its strategic electronics sector is a laudable goal but requires careful navigation of economic realities. Policy efforts face the daunting task of nurturing ecosystems focused on the design, manufacture, and assembly of numerous components, each with its own highly fragmented and specialised supply chain.
Take semiconductor chips, for example. Countries like China, Taiwan and the US currently hold a significant advantage in the manufacturing and assembly of chips, sub-assemblies, and other essential components for strategic electronics. This dominance is the result of decades of focused efforts and investments in infrastructure, research, and development. Meanwhile, India has just begun to lay the groundwork for its domestic semiconductor industry, with its first commercial fabrication and assembly facilities only recently having broken ground.
In this regard, the Indian government should understand that indigenisation as a policy goal must take precedence over cost reductions. This means that the policy focus must be on providing targeted support to the strategic electronics sector through funding, procurement guarantees, infrastructure development, and incentives for research and development. This approach would help domestic firms build their capabilities and gradually move up the value chain without relying on import substitution or heavy protectionism. As the industry matures and achieves economies of scale, it will become more competitive in the global market. Obviously, this policy pathway will require the allocation of quite a bit of money.
It is also important to understand that the conventional wisdom that applies to the reduction of costs as a result of economies of scale does not apply instantly to strategic electronics, because, unlike consumer electronics, the demand for the former, the market composition is limited to armed forces and governments, and the overall volume procured are relatively minuscule as well. This is also evident from the fact that even though the global consumer electronics market is valued at USD 1.2 trillion in 2024, the defence/ strategic electronics market stands at just USD 166.7 billion.
Hence, to incentivise the domestic production of these components, the Indian government must be prepared to pay prices equal to or higher than what it would have paid for foreign-made electronics in the short term. This approach will provide the necessary economic incentive for domestic players to invest in building raw material subcontractor ecosystems and other essential infrastructure. Only once India’s strategic electronics sector achieves a degree of maturity should the government pursue policies to reduce procurement costs.
Post that, to attain similar economies of scale as China or Taiwan, it must target the export market, integrate with international standards such as NATO standards on airworthiness for military drones, and develop robust subcontractor ecosystems for materials, services, and components. This is a decades-long endeavour requiring targeted policy focus to build out capabilities in different segments of the value chains for almost as many disparate industries. Complete self-reliance in a sector like electronics and semiconductors is unrealistic, given how countries have specialised in different parts of the value chain for decades. Reversing this trend will require time and sustained effort.
India’s journey towards indigenising its strategic electronics sector will be gradual and marked by incremental progress and calculated investments. The government must be prepared to bear the higher costs associated with nurturing this nascent industry in the short term, understanding that cost competitiveness will improve as the sector matures and achieves economies of scale.
By focusing on developing capabilities across the supply chain, integrating with international standards, and fostering a supportive ecosystem, India can lay the foundation for a thriving indigenous strategic electronics industry in the long run. However, policymakers must approach this challenge with a clear-eyed understanding of the economic realities and resist the urge to prioritise cost reduction at the expense of building a robust and sustainable sector.
(Anushka Saxena is a Staff Research Analyst with the Indo-Pacific Studies Programme at the Takshashila Institution, Bengaluru. Satya S Sahu is a Research Analyst with the High-Tech Geopolitics Programme at Takshashila. This piece has benefitted from conversations with Shree Kumar, a Bengaluru-based technology policy researcher.)
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