India’s defence preparedness in 2026 is materially stronger than it was five years ago, though the nature of this improvement remains incremental rather than transformational. Defence spending has expanded significantly, rising from roughly ₹4.7 lakh crore in FY21 to approximately ₹7.85 lakh crore in FY26–27 (including pensions).
The non-pension component stands at around ₹6.13 lakh crore, reflecting a sustained prioritisation of military capability. Capital outlay, in particular, has witnessed accelerated growth, reaching ₹2.19 lakh crore—an increase of nearly 22 percent year-on-year—and now accounting for close to 28 percent of total allocation.
More importantly, nearly three-quarters of this capital expenditure is directed toward domestic industry, signalling a decisive structural shift toward indigenisation.
This policy reorientation has already yielded measurable outcomes. Indigenous defence production has reached a record ₹1.54 lakh crore, supported by procurement reforms, negative import lists, and a stronger emphasis on domestic manufacturing ecosystems. Operational capabilities have also improved, particularly in high-altitude logistics, border infrastructure development, and air defence systems.
The induction of platforms such as Rafale aircraft and S-400 systems, alongside approvals for unmanned strike aircraft and transport platforms, reflects a gradual but consistent movement toward modernisation.
Yet, critical gaps persist. India continues to lag in integrated theatre commands, deep technological sovereignty in areas such as aero-engines and semiconductors, and sustained ammunition stockpiling. These limitations underscore a broader structural reality: India’s defence transformation is real, but uneven.
The strategic environment ensures that defence expenditure remains structurally elevated rather than cyclical. India faces a multi-vector threat landscape dominated by China’s expanding military capabilities. With a defence budget exceeding $225 billion and deeply integrated logistics infrastructure—particularly in the Tibetan plateau—China retains a clear advantage in scale and systems integration.
Pakistan continues to pose a secondary but active threat through hybrid warfare and tactical escalation risks. Meanwhile, instability in West Asia has implications for India’s energy security and diaspora, necessitating continued naval readiness. The Indo-Pacific theatre further expands India’s strategic responsibilities, requiring sustained investment in maritime capabilities and domain awareness.
This convergence of threats has fundamentally altered the nature of defence spending. It is no longer discretionary but a sovereign necessity. Even in the context of fiscal pressures, with deficits hovering around 5 to 5.5 percent of GDP, defence expenditure is unlikely to face meaningful compression. Instead, it is increasingly being aligned with domestic economic objectives, creating a feedback loop where national security spending also drives industrial growth.
Atmanirbhar Bharat in defence manufacturing reflects this convergence of policy intent and strategic necessity. The push toward self-reliance is not merely ideological but operationally driven by repeated border tensions and supply chain vulnerabilities.
Policy frameworks such as the Defence Acquisition Procedure (DAP) 2020 and its evolving iterations emphasise Indigenous Design, Development and Manufacture (IDDM), intellectual property ownership, and exportability. The corporatisation of ordnance factories into seven new defence public sector undertakings has further restructured the production landscape.
Despite these advances, indigenisation remains partial, estimated at around 65 to 70 percent. Critical dependencies persist in high-end technologies, particularly aero-engines, advanced materials, and semiconductors. The gap between assembly capability and core technological sovereignty continues to define the limits of India’s defence industrial base.
Within this evolving ecosystem, the allocation of ₹2.19 lakh crore in capital expenditure opens multiple strategic avenues. The largest share is directed toward aircraft and aero-engine development, including next-generation fighter programmes such as AMCA and the scaling of Tejas Mk-1A production.
Investments in radars, electronic warfare systems, and precision munitions are expanding rapidly, driven by the demands of network-centric warfare. Naval modernisation continues through submarine and warship programmes, while unmanned systems—ranging from drones to autonomous platforms—are emerging as a central pillar of future capability.
A critical distinction is emerging between platform manufacturing and subsystem production. Large platforms such as aircraft and warships offer high-value contracts but are capital-intensive, slow-moving, and dependent on long procurement cycles. In contrast, subsystems—particularly in defence electronics, propulsion, avionics, and precision engineering—offer scalability, repeatability, and higher value addition. These segments are increasingly becoming the focal point of both policy support and private sector participation.
Exports have also expanded significantly, reaching ₹38,424 crore in FY25–26, with strong contributions from both public and private sectors. The government’s target of ₹50,000 crore by FY29 reflects growing confidence in India’s ability to integrate into global defence supply chains.
Defence public sector undertakings continue to anchor the ecosystem, accounting for nearly 80 percent of production. Entities such as HAL, BEL, BDL, and the major shipyards retain dominance in strategic programmes. However, their role is evolving. They are increasingly expected to transition from protected incumbents to competitive system integrators, collaborating with private firms through partnerships, joint ventures, and innovation platforms such as iDEX.
The private sector, meanwhile, has emerged as a critical driver of agility and innovation. Companies such as Tata Advanced Systems, Larsen & Toubro, Bharat Forge, Adani Defence, and Mahindra Defence are expanding their footprint across aerospace, naval systems, electronics, and unmanned platforms. Their strength lies in subsystems, exports, and global supply chain integration rather than full platform manufacturing.
Not all segments of defence manufacturing are equally attractive. Defence electronics, aerospace subsystems, missile systems, and unmanned platforms represent the highest strategic value, given their role in enabling network-centric warfare and their export potential. Lifecycle services—maintenance, repair, overhaul, and upgrades—are emerging as a stable and high-margin revenue stream, often exceeding the value of initial procurement over time.
India is now entering a sustained multi-year defence capital expenditure cycle, driven by modernisation requirements, geopolitical tensions, and industrial policy incentives. However, unlike infrastructure cycles, defence spending is characterised by technological complexity, procurement delays, and long execution timelines. The key variable is not order placement but delivery.
The perception of overwhelming Chinese military superiority, while partly accurate, requires nuance. China’s advantages in scale and infrastructure are significant, but India retains strengths in combat experience, high-altitude warfare, and deterrence capability. The core gap lies not in individual platforms but in systems integration and logistics.
Logistics, in fact, remains one of India’s most underappreciated vulnerabilities. China’s advantage is rooted in deep infrastructure integration, including roads, railways, and pre-positioned supplies. India has made progress, particularly through investments in border infrastructure, but last-mile connectivity and supply chain integration continue to present execution risks.
The growing importance of dual-use infrastructure—spanning roads, telecom, and space assets—further underscores the blurring boundary between civilian and military domains.
Procurement reforms under DAP 2020 have introduced structural improvements, but delays remain endemic. Instability in qualitative requirements, lengthy trial processes, complex negotiations with foreign vendors, and bureaucratic layering continue to extend procurement timelines. These delays have downstream effects on both capability induction and industry cash flows.
Ammunition and spares procurement presents a distinct set of challenges. High-volume production requirements, fragmented supply chains, and dependence on imported inputs complicate inventory management. While reforms have improved stocking levels and opened the sector to private participation, achieving a resilient and scalable supply chain remains a work in progress.
The nature of warfare itself is undergoing a transformation. The shift toward software-defined, network-centric operations is redefining military advantage. Drones, cyber warfare, electronic warfare, and artificial intelligence are increasingly decisive. In this emerging battlespace, data, connectivity, and real-time decision-making are more critical than traditional hardware dominance.
India’s innovation ecosystem is gradually adapting to this shift. While DRDO continues to play a central role, startups and private firms are increasingly active in emerging domains. However, constraints in testing infrastructure, certification processes, and scale continue to limit their impact.
From a capital markets perspective, defence remains an attractive but execution-sensitive sector. Strong order books and policy support have driven premium valuations, but revenue realisation depends heavily on timely execution. Risks include procurement delays, working capital intensity, and dependence on government contracts.
Over a 10 to 15-year horizon, the most compelling opportunities lie in defence electronics, aerospace subsystems, lifecycle services, and dual-use infrastructure. Platform manufacturing will remain strategically important but less scalable and more execution-intensive. Industry consolidation is likely, particularly among smaller suppliers and startups.
India’s defence transformation is directionally irreversible, geopolitically anchored, and increasingly enabled by the private sector. The combination of sustained capital expenditure, domestic procurement priorities, export growth, and policy reform creates a structural opportunity. However, the central challenge remains unchanged: bridging the gap between ambition and execution, between policy intent and industrial capability.
In that gap lies both the risk and the promise of India’s defence future.
(The author is a Major General (Retd.); Views expressed are personal)
