A capex boom drives defence

The government's indigenisation policy aimed at developing a robust domestic defence ecosystem, has underpinned growth for the sector.

4 min read

Updated On: Sep 10 2026 | 5:25 AM IST

Ram Prasad Sahu

Even on a year-to-date basis, the Nifty India Defence Index has topped the returns table, enriching investors with over a 25 per cent return (Reuters)

For an index created just four years ago, the Nifty India Defence Index outguns all other indices on the returns front by a distance. While investors in this index would have witnessed their money jump over 460 per cent since April 2022, the same investment in the benchmark Nifty50 would have crawled by 42 per cent. In fact, the next best sectoral index, the Nifty PSU Bank index, has delivered less than half the return of the defence index at 200 per cent. While these returns are historic, even on a year-to-date basis, the index has topped the returns table, enriching investors with over a 25 per cent return. The party seems set to continue given the large procurement proposals from the government, rising order books, improved execution and an export market that is proving to be a growth multiplier.

What has underpinned growth for the sector has been the government’s indigenisation policy aimed at developing a robust domestic defence ecosystem. The multiple trade and non-trade barriers included indigenisation lists, defence acquisition procedure (DAP) 2020, two defence industrial corridors and a streamlined export clearance framework. The government policy, according to Deepak Krishnan and Naman Jain of Kotak Institutional Equities, has been a key growth enabler. It is the outcome of these policies that approvals of Acceptance of Necessity or AoN (capital acquisition proposals) surged by over 10 times from ₹90,000 crore in the financial year 2020-2021 (FY21) to a record ₹9.3 trillion (cumulative active AoN value) in FY26, they add.

The structural modernisation cycle could not have come any sooner given the rising geopolitical conflicts, ageing military assets and technology-driven warfare. And the modernisation is no longer confined to sporadic procurements or one-off upgrades. It has, according to analysts led by Kavish Parekh of B&K Securities, evolved into a structural capex cycle where the focus has shifted to capability creation rather than just product acquisition. It is the outcome of this policy that the country’s defence production has already crossed $17.6 billion (₹1.5 trillion), and the government is targeting to double the same to $36 billion (₹3 trillion) by 2029.

The budgetary support for large platforms like aircraft, helicopters, missile systems, radars and electronics is also not lacking. In addition to a record allocation of ₹7.85 trillion in the Union Budget for FY27, up 15 per cent year-on-year (Y-o-Y), there is an emphasis on capital expenditure with ₹2.19 trillion set aside for modernisation and capability enhancement. The capital outlay now accounts for 27.9 per cent of the overall defence budget, the highest share since FY15. Even as the budget for capital acquisition has grown, the domestic focus remains, as three-quarters of FY27 acquisitions is earmarked for domestic procurement.

Market radar: July 23, 2026 to August 22, 2026

One of the major beneficiaries of the surge in capital expenditure has been the defence public sector undertakings (DPSUs). Historically, defence production, which hit an all-time high level of ₹1.78 trillion in FY26, has been dominated by DPSUs. While they accounted for 80 per cent in FY21, their share in total production in FY26 of ₹1.36 trillion was 76 per cent.

Over the FY21-26 period, production by DPSUs has registered an annual growth rate of 15 per cent.

However, the private sector is gradually registering its presence across segments. Private sector contribution to the defence space has grown from 20 per cent in FY21 to 24 per cent now. Private defence production was ₹42,000 crore in FY26, up 19 per cent Y-o-Y and has grown 20 per cent annually over FY21-26. Analysts led by Harshit Kapadia of Elara Securities estimate defence production growth of 15-20 per cent over FY27-30 based on order book and delivery schedule.

For the public as well as the private sector, the capital acquisition proposals are expected to improve order books and offer revenue visibility over the medium term. Given that Defence Acquisition Council approvals were at an all-time high in FY26 and continued in Q1FY27 with ₹52,000 crore of AoNs approved last month, ICICI Securities expects the order awarding momentum to pick up in FY27/28, especially in aerospace, missiles, electronic warfare and drone defence/offence. These AoN approvals, coupled with those granted over the last two years, are expected to increase the overall addressable market for domestic players and enhance order inflow visibility.

Along with this, the fast-track procurement procedure, according to Motilal Oswal Research, facilitates procurements exceeding ₹1.3 trillion across drones, electronic warfare systems, and software-defined radios (SDRs), with decisions to be made in 6-12 months.

In addition to domestic production, what should boost the sector are the rapidly growing exports. Indian defence exports have grown by over 50 times over the past decade, from ₹700 crore in FY24 to ₹38,400 crore in FY26.

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