India’s Defense Sector in 2026: Why Budget Priorities Matter

India’s Defense Sector in 2026: Why Budget Priorities Matter

As India prepares for Union Budget 2026, one sector stands out clearly on Dalal Street and in policy circles: defense. While the government continues its fiscal consolidation journey, aiming to keep the fiscal deficit below 4.5 percent, defense spending is expected to remain an exception rather than the rule.

The consensus view among analysts, policymakers, and industry leaders is that the defense sector remains structurally overweight. This optimism is driven by two powerful themes shaping India’s long-term strategy: indigenisation under Make in India and rapid modernisation powered by deep technology, artificial intelligence, and next-generation warfare capabilities.

For investors, Budget 2026 could once again set the tone for multi-year order flows, export opportunities, and technology-led growth across listed defense companies.

Why the Defense Sector Remains an Overweight Call

India’s defense strategy has shifted decisively over the past decade. The focus is no longer limited to acquiring platforms but building a self-reliant ecosystem that designs, manufactures, and exports advanced defense systems.

This structural shift has translated into strong order books for domestic manufacturers, rising private sector participation, and increasing investor confidence. Budget 2026 is expected to reinforce this direction rather than dilute it.

Despite tight fiscal conditions, defense spending is viewed as strategic rather than discretionary, making it less vulnerable to budgetary cuts.

Capital Allocation and Growth Expectations in Budget 2026

Capital Outlay Likely to Outpace Revenue Spending

Street estimates suggest a 10 to 15 percent year-on-year increase in overall defense capital outlay in Budget 2026. More importantly, capital acquisition spending is expected to grow faster than revenue expenditure, signalling continued emphasis on modernization.

Brokerage houses such as Motilal Oswal and PL Capital are factoring in nearly 15 percent growth in defense capex, primarily to fund large-ticket programs such as submarines, fighter aircraft, missile systems, and advanced naval platforms.

This capex-heavy approach is positive for companies involved in manufacturing, systems integration, and long-cycle execution.

R&D and Innovation Get a Bigger Push

A notable feature of recent budgets has been the rising allocation for defense research and innovation. Budget 2026 is expected to further increase funding for DRDO and initiatives like iDEX, which support collaboration between startups, private firms, and the armed forces.

This is particularly relevant as warfare increasingly shifts toward AI-enabled surveillance, cyber defense, and autonomous systems.

Strategic Themes to Watch Closely

Indigenisation 2.0 Gains Momentum

The next phase of indigenisation is expected to go beyond platforms and focus on subsystems and components. Expanded Positive Indigenisation Lists may encourage domestic sourcing of radars, sensors, engines, avionics, and electronic warfare systems.

This shift benefits companies with strong design capabilities and long-standing relationships with the armed forces.

Export Incentives and Global Ambitions

India’s defense export target of ₹50,000 crore by 2028-29 remains ambitious but achievable. Budget 2026 could introduce targeted incentives such as production-linked benefits or easier export credit lines to help Indian manufacturers compete globally.

Successful exports of systems like Pinaka rocket launchers and BrahMos missiles have already demonstrated India’s growing credibility in the global defense market.

Deep Tech, AI, and Future Warfare

Unlike earlier budgets that focused heavily on ships and tanks, the upcoming budget is expected to allocate specific funding for drones, anti-drone systems, AI-driven surveillance, and cyber warfare.

This reflects evolving threat perceptions and positions India alongside global defense leaders embracing next-generation combat technologies.

Sub-Sector Impact and Investor Watchlist

Naval Shipbuilding

High allocations are expected for submarine programs such as P-75I and next-generation corvettes. Public sector shipyards with strong execution records and healthy order books remain key beneficiaries.

Defense Electronics

Upgrades for platforms like Tejas Mk1A and SU-30 fleets will drive demand for avionics, radars, and electronic warfare systems. Companies with deep R&D capabilities stand to gain the most.

Missiles and Ammunition

Replenishment of ammunition stockpiles and rising export orders support steady revenue visibility for missile manufacturers and explosives players.

Drones and UAVs

Dedicated funding for swarm drones and loitering munitions highlights the growing importance of unmanned systems. This opens opportunities for new-age defense technology firms alongside established players diversifying into UAVs.