December 2025 will likely be seen as the month India’s defence sector shifted from "intent" to "institutionalised action".

While the headline-grabbing approval of ₹79,000 crore in capital acquisition proposals by the defence acquisition council (DAC) on December 29 provided the immediate order-book visibility, the real structural change occurred quietly earlier in the month. The introduction and subsequent passing of the Health Security se National Security Cess Bill, 2025, has laid the fiscal foundation for what analysts are now calling a multi-decade "super-cycle" for Indian defence manufacturers.

The government is essentially creating a dedicated, non-lapsable funding stream to ensure adequate capital to its aggressive defence modernisation wishlist. It also suggests that the government is trying to systematically dismantle the risks of “payment delay” and “order cancellations” that have historically plagued the defence sector.

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Decoding the national security cess

For years, defence analysts have flagged "budgetary prioritisation" as a key risk. With personnel salaries and pensions consuming over 50% of the defence budget, capital expenditure (capex) for new weaponry often faced the axe during fiscal consolidation.

The Health Security se National Security Cess Bill, 2025, introduced on December 1, changed this calculus. By replacing the expiring GST compensation cess on “demerit goods” like tobacco and pan masala with permanent “capacity-based” levy (base rate of ₹1.01 crore, can reach up to ₹25.47 crore/month per machine), the government has created a fungible revenue stream exclusively earmarked for health and national security.

During the bill’s debate, finance minister Nirmala Sitharaman explicitly linked this revenue to the changing security apparatus, citing "Operation Sindoor" as a reminder that India cannot afford "UPA-era shortages" of critical ammunition.

“The army’s ammunition reserves were at a crisis level (in 2013). Against the official requirement of stocking 40 days of reserves, 125 out of 170 ammunition types fell below 20-day supply. Shockingly, half of all the ammunition types had stocks for less than 10 days of intensive warfare as of March 2013”, the finance minister said, quoting a 2015 report by the comptroller and auditor general (CAG) of India.

The new cess creates a "fiscal fortress" around defence spending. It insulates modernisation programmes from the vagaries of the general budget, ensuring that when the MoD signs a cheque for a long-term project like the P-75(I) submarine or Tejas Mk2, the funds are actually in the bank.

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The ₹79,000 crore deployment

If the cess provides the fuel, the DAC’s December 29 approval provides the direction. In this article, we will be looking at three reports, one each by Motilal Oswal (Dec 29), B&K Securities (Dec 8) and PhillipCapital (Dec 18), that have mapped "opportunity funnels" identified based on the cleared proposals.

Missile and air defence moat: BDL and BEL

The DAC’s nod for Astra Mk-II Beyond Visual Range Air-to-Air Missiles (BVRAAM) and Long Range Guided Rocket Ammunition for Pinaka is a huge validation for Bharat Dynamics Ltd (BDL) and Solar Industries.

According to Motilal Oswal, the FY26 YTD approvals have now reached nearly ₹3.3 lakh crore, nearly double the annual capital outlay, materially de-risking order inflows for the next 2-4 years.

The inclusion of the Integrated Drone Detection & Interdiction System Mk-II aligns with the SAKSHAM counter-UAS order recently bagged by Bharat Electronics (BEL). As per Motilal Oswal, SAKSHAM is designed to detect and neutralise hostile drones in real-time—a critical requirement for the "indigenous integrated air defence system" being deployed to protect Delhi-NCR.

BDL’s approval for "missile system production" reinforces its monopoly status. As noted by B&K Securities, moving from Astra Mk-I to Mk-II (stand-off range) transitions BDL from a "fabricator" to a high-value "systems integrator."

Naval & shipbuilding front: MDL, CSL, and GRSE

The DAC cleared the procurement of Bollard Pull Tugs and the leasing of High Altitude Long Range (HALE) RPAS.

According to PhillipCapital, such "auxiliary vessels" provide the high-frequency revenue volume that keeps yards like Cochin Shipyard (CSL) and Garden Reach (GRSE) efficient between mega-contracts.

The Motilal Oswal report said that the DAC approvals for allied marine support vessels open immediate opportunities. More importantly, the HALE RPAS (likely SeaGuardians) leasing is a stop-gap that buys time for indigenous platforms, ensuring that the navy's surveillance capabilities don't dip while domestic tech matures.

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Aerospace

For the Indian air force, the approval of Automatic Take-off Landing Recording Systems and Full Mission Simulators points to a less-discussed vertical for Hindustan Aeronautics Ltd (HAL): avionics and training.

As per B&K analysis, HAL’s "ROH & Spares" (Repair, Overhaul) segment delivers superior margins (25-35%) compared to manufacturing. Simulators fall into this high-margin service/support bucket.

The Motilal report also notes that HAL received the 5th F-404 engine from GE for the Tejas Mk-1A. This has cleared a major supply chain bottleneck, putting the delivery timeline back on track.

Extension of emergency procurement window

Motilal Oswal report has also mentioned the importance of the DAC extending the emergency procurement (EP) window for the army, navy, and air force until January 15, 2026.

Originally set to expire in November 2025, this extension allows vice chiefs to fast-track contracts up to ₹300 crore each without bureaucratic red tape. This mechanism, introduced post-Galwan, is being used to plug critical gaps in drone tech, loitering munitions, and personal protective gear.

This is an immediate trigger for private sector players like Zen Technologies (simulators/anti-drone), Solar Industries (munitions), and Tata Advanced Systems, who can deliver "off-the-shelf" solutions faster than the defence public sector undertakings (DPSUs).

What to expect in Budget 2026

The new cess and the DAC approvals hint at certain ‘big ticket’ announcements in the union budget 2026. According to analysts, the defence capex is projected to grow at 17-18% CAGR in the medium term. As the new cess is estimated to provide monthly inflows of over  ₹1.01 crore per high-speed machine, the government of India has the fiscal bandwidth to meet the services’ demand for a 20% higher allocation.