Defence Expenditure in India’s Union Budget 2025-26 and Expectations for Budget 2026

As India looks ahead to its next Union Budget, defence spending continues to command attention—not just as a line item, but as a strategic priority. The Union Budget for 2025–26 made this clear, with a sizeable allocation to defence that reflected the government’s sustained focus on national security, military modernisation and self-reliance. That focus is unlikely to fade. In fact, expectations around the 2026 budget point towards an even sharper emphasis on defence-led capital expenditure, shaped by changing geopolitical realities and the need to strengthen domestic capabilities.

Defence in Budget 2025–26: A Snapshot

In the Union Budget 2025–26, the Ministry of Defence was allocated ₹6.81 lakh crore, a year-on-year increase of about 9.5%. This made defence the single largest allocation among all ministries, reinforcing its importance in the government’s overall spending priorities. At roughly 13.4% of the total Union budget, defence once again stood out as a key pillar of national expenditure.

This allocation supports a wide range of needs. It covers salaries and pensions, routine maintenance, research and development, and—most importantly—capital spending aimed at modernisation. The capital outlay, which funds new equipment, infrastructure upgrades and advanced technologies, remained central to the government’s defence strategy.

That said, the picture is not without its complexities. Despite the headline increase, India’s defence spending as a share of GDP continues to hover around 1.9%, which is lower than that of several global peers. While experts acknowledge the strength of the absolute allocation, many argue that a higher GDP share may be necessary to sustain long-term capability building and modernisation.

Modernisation, Self-Reliance and Strategic Focus

One of the most consistent themes in recent budgets has been the push for ‘Atmanirbharta’, or self-reliance, in defence manufacturing. This aligns closely with the broader Make in India agenda and has begun to show tangible results. Defence production has touched record levels, with both public and private sector players playing a larger role. Exports, too, have gained momentum, signalling growing confidence in India’s defence manufacturing ecosystem.

Yet, challenges persist. India has historically been among the world’s largest arms importers. While import dependence has reduced significantly over the past decade, sustaining this shift will require continued investment in indigenous R&D, a deeper domestic supply chain, and steady progress in technology development and transfer.

The focus is also expanding beyond traditional hardware. Areas such as cyber security, space-based capabilities, drones and advanced electronics are increasingly seen as critical to future defence preparedness. As discussions around Budget 2026 gather pace, there is a growing consensus that faster and more targeted investment in these emerging domains will be essential to keep India’s defence infrastructure resilient and future-ready.

Capex-Led Growth in Budget 2026

As the 2026–27 fiscal year approaches, expectations are building that the government will once again lean heavily on capital expenditure to drive growth. Market participants and financial institutions estimate that overall capex could grow by more than 10%, with defence likely to be a key beneficiary. Beyond its strategic importance, defence spending is increasingly viewed as an economic lever—one that supports manufacturing, innovation and employment.

Motilal Oswal Financial Services, in its budget preview, has pointed to defence and allied sectors as potential capex “winners” in the coming budget. This outlook fits into a broader narrative where infrastructure, manufacturing and technology are being positioned as engines of sustainable growth.

The government’s clear preference for capex over revenue-heavy spending marks a deliberate shift. By investing in long-term assets rather than recurring expenses, it aims to generate stronger economic multipliers and encourage greater private sector participation. In defence, this has translated into more opportunities for contracts, joint ventures and technology partnerships.

Investor Sentiment and Sectoral Implications

Unsurprisingly, the run-up to the budget has also shaped investor sentiment. Mutual funds focused on PSU, infrastructure, manufacturing and defence themes have drawn increased attention as investors try to gauge where government spending will be directed and which sectors stand to benefit.

Companies operating in heavy engineering, aerospace, electronics and public sector defence enterprises often see a direct impact from higher government allocations. Increased defence orders can ripple through the ecosystem—boosting production, supporting innovation and improving export potential—making the sector an attractive proposition from a long-term investment standpoint.

Balancing Fiscal Discipline and Strategic Needs

One of the central challenges ahead of Budget 2026 will be striking the right balance between fiscal discipline and expanding defence commitments. While the government remains focused on maintaining macroeconomic stability and managing deficits, the evolving security environment—marked by regional tensions and global uncertainty—leaves little room for complacency on defence preparedness.

Neighbouring countries have also stepped up their military spending in recent years, reinforcing the view that sustained investment in defence is not just a domestic priority, but a strategic necessity within the broader regional context.

Looking Ahead

As Budget 2026 takes shape, voices across government, industry, policy circles and financial markets are calling for continuity with intent. The emphasis is on building on recent gains—scaling up capital investment, accelerating technological innovation, deepening self-reliance and strengthening India’s position in the global defence supply chain.

Ultimately, defence spending is about more than budgetary numbers. It reflects a larger vision of resilience, economic strength and strategic autonomy. With consistent policy support and a clear focus on long-term capability building, the defence sector is poised to play an increasingly important role in India’s journey towards technological leadership and strategic influence on the global stage.

Market this week

Source: BSE and NSE

• Indian equity benchmarks, Sensex and Nifty, ended the shortened trading week on a flat note, with markets navigating sharp intraday swings amid heightened volatility.
• Sentiment remained cautious as investors grappled with multiple global headwinds, including ongoing trade-related uncertainties, geopolitical developments, and mixed cues from international markets.
• Persistent selling pressure from Foreign Institutional Investors continued to weigh on equities, with FIIs remaining net sellers during the week.
• In contrast, Domestic Institutional Investors stepped in to provide stability, offering consistent support through net buying and helping limit downside in the broader market. 
• Sectoral performance was mixed, reflecting divergent investor preferences across themes and valuations. Rate-sensitive and consumption-linked sectors saw pressure, with consumer durables, real estate, pharma and healthcare indices registering notable weekly declines.
• The IT sector emerged as another outperformer, gaining on improved sentiment around global technology spending and currency-related tailwinds
• Overall, markets remained range-bound, with domestic institutional flows cushioning global uncertainty, while investors stayed selective and risk-aware heading into the next trading week.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

Realty stocks rebound:

Real estate shares moved higher on January 16, snapping a prolonged losing streak for the sector. The Nifty Realty index turned positive after seven consecutive sessions of decline, supported by selective buying in large developers. Prestige Estates led the gains following strong quarterly pre-sales growth, while stocks such as Macrotech Developers, Oberoi Realty and Godrej Properties also edged higher, helping the index close marginally in the green.

Defence stocks see profit-taking:

Defence sector stocks witnessed selling pressure during the session as easing geopolitical concerns triggered profit booking. Shares of companies such as Bharat Electronics and Mazagon Dock Shipbuilders declined, pulling the Nifty Defence index lower and reversing the previous session’s gains. Market participants attributed the weakness to short-term profit-taking after a recent news-driven rally.

IT stocks rally on earnings optimism:

Information technology stocks outperformed the broader market, buoyed by strong investor sentiment following Infosys’ Q3 earnings. The Nifty IT index emerged as the top sectoral gainer, recording its sharpest rise in weeks. Infosys led the rally despite a marginal year-on-year decline in profit, as results were viewed positively after adjusting for one-time costs, lifting sentiment across the IT pack.