The Indian defence industry is poised for a period of accelerated expansion, potentially reaching double-digit growth, spurred by the significant capital expenditure push outlined in Budget 2026. The Union Budget, presented in the aftermath of Operation Sindoor, has allocated a historic ₹7.85 lakh crore to the Ministry of Defence (MoD) for the financial year 2026-27. This represents a substantial 15.19% increase over the Budgetary Estimates of FY 2025-26, signaling the government's strong commitment to modernizing the armed forces and bolstering national security.
Of the total defence budget, a substantial portion, ₹2,19,306.47 crore, is earmarked for capital expenditure for the Defence Forces, marking a 21.84% increase compared to the Budget Estimates of FY 2025-26. Within this capital outlay, ₹1.85 lakh crore is specifically allocated for Capital Acquisition, which is about 24% higher than the Capital Acquisition budget for FY 2025-26. This increased spending will likely drive demand for advanced military hardware, software, and infrastructure, benefiting both domestic and international defence companies.
A key feature of the Budget 2026 is the emphasis on indigenization. The MoD has earmarked ₹1.39 lakh crore, or 75% of the Capital Acquisition budget, for procurement from domestic industries in FY 2026-27. This policy aims to encourage local manufacturing, reduce dependence on foreign suppliers, and enhance India's strategic autonomy. By providing domestic players with greater opportunities, the government hopes to stimulate investment, create jobs, and foster a vibrant defence industrial ecosystem.
Analysts anticipate that the increased defence spending will focus on key areas such as missiles and ammunition, unmanned aerial vehicles (UAVs) and counter-UAV systems, electronic warfare, air defence, and network-centric systems. Modern conflicts increasingly rely on cyber capabilities, space assets, unmanned systems, and data-driven warfare. The Budget also includes a standout structural reform in the form of a new customs duty exemption on raw materials for aircraft parts, including civil aircraft. This strategic move is designed to position India as a global Maintenance, Repair, and Overhaul (MRO) hub, incentivizing domestic servicing of both military and commercial fleets.
While the increased capital outlay is a welcome step, some experts caution that enduring structural constraints may limit its transformational impact. The dominance of revenue expenditure, which includes personnel costs and pensions, continues to restrict fiscal space for future capability creation. However, these costs are essential for maintaining a young, professional, and physically capable force.
The global defense market is estimated at USD 2.75 trillion in 2026 and is projected to reach USD 4.26 trillion by 2035, exhibiting a compound annual growth rate of 5% between 2026 and 2035. The Indian defense industry is adapting to evolving security priorities, rapid technological advancements, and increasing budget considerations. The industry's growth is further supported by over 66,700 patent filings, demonstrating ongoing research and development in areas like aerospace, weapons systems, cybersecurity, electronics, and advanced materials.