Rise in arms output to ₹3 trn in three years not inconceivable

If this pace of growth can be sustained, the FY29 target could in fact be within reach. And there are reasons to believe it may be.

Domestic procurement accounts for the bulk of manufacturing in the sector. In turn, procurement — both domestic and foreign — by the services is funded through the modernisation component of the overall defence allocation in the Union Budget. Notably, the acceleration in defence production follows a FY21 decision by the Ministry of Defence (MoD) to earmark a substantial share of the modernisation budget for domestic capital procurement.

A record was set in FY24, when 75 per cent was earmarked for domestic industry. The 75 per cent figure is a normative target which Defence Secretary Rajesh Kumar Singh said in November 2025 would be maintained, if not exceeded, in the coming years. The Budget Estimate allocation under this head recorded its sharpest year-on-year growth in a decade in FY27 at 24.40 per cent, breaking from the single-digit growth recorded between FY24 and FY26. While this could be seen as a temporary bump in the wake of Operation Sindoor in May 2025, Singh said, a day after the Union Budget 2026 was presented, that the MoD would like to see the defence budget’s capital expenditure component — which includes the modernisation outlay — grow faster than the economy, at a CAGR of between 15 per cent and 20 per cent.

Apart from the government’s overall fiscal capacity, this is also a function of actual utilisation of the modernisation outlay, and there, too, signs point to sustained growth in the allocation. Specifically, FY25 was the first time in about five years that the modernisation budget was fully utilised, and that trend is set to continue.

Another positive indicator is the rise in the share of domestic sources in total military procurement from about 64 per cent in FY21 to over 88 per cent in FY25 — the highest level in about a decade.

Another component of total output — exports — recorded almost 63 per cent year-on-year growth in FY26, about 50 percentage points above the FY25 rate, restoring the high growth seen in every year since FY17 except the Covid-impacted FY20 and FY21, which recorded contractions.

Besides being a positive indicator for the government’s FY29 output target,

it also bodes well for the other target to be achieved over the same period — annual arms exports of ₹50,000 crore. This requires only a 30 per cent increase from current levels and a CAGR of 9.2 per cent, compared with the 35 per cent recorded between FY24 and FY26. The export target will be easier to achieve than the total output target.

However, India’s FY26 defence production stood at about 73 per cent of France’s latest available output ($25.49 billion), 38 per cent of the United Kingdom’s ($48.92 billion), and less than six per cent of the United States’ estimate ($334 billion). This underscores the gulf that will remain even if the FY29 output target is achieved.