Outlook 2025: India to spend $130 bn on military in next 5 yrs; will defence stocks reload?

India spent about $47 billion on defence in 2013, which nearly doubled in the next ten years to $84 billion in 2023, growing at a compound annual growth rate (CAGR) of 5.8%, according to a recent report by domestic brokerage Nuvama Institutional Equities. In the backdrop of the ongoing unrest in Europe, wars in the Middle-East and now a ‘failed coup’ in East Asia, India’s defense spending is projected to accelerate to a CAGR of 8% to $130 billion over the next five years, with localisation being major focus area to reduce dependence on disrupted global supply chains.

“Given unrest in Europe, wars in the Middle East and now a ‘failed coup’ in East Asia, uncertainty lingers—much like the moves on a chessboard. In India, we envisage $130bn in defence spending in next five years, believing peace shall only prevail via strong defence,” Nuvama said in its report.

The brokerage believes that India is progressing well on the global defence spending index as government’s strategic initiatives reshaped its positioning from being a sub-systems/components supplier to a one-stop-shop offering complete turnkey solutions on the global defence map. Even so, India continues to depend on foreign partners for key defence imports with Russia accounting for 50%-plus over the past decade, followed by France, Israel and South Korea.

“We stay optimistic on India Defence space with key catalysts at play: i) Huge localisation push to reduce dependence on disrupted global supply chains. ii) Continued modernisation efforts with larger programs coming ahead of expected timelines,” the report noted.

The agency observed that heightened geopolitical uncertainty (Europe, Middle East, East Asia) disrupting global supply chains, leading to India ascribing even greater importance to localisation in years to come. “This shall unveil a golden pipeline for the private defence industry to step up,” it said.

The GoI’s vision for the ‘Make in India’ initiative in defence has been boosted by the Defence Acquisition Council (aka Defence Procurement Procedure (DPP)) along with capital acquisition proposals worth over $1 billion in order to meet the modernisation and operational needs of the armed forces.

Nuvama’s top bets from defence space for 2025

The brokerage house remains bullish on India's defence sector for 2025, with Bharat Electronics Limited (BEL) and Data Patterns (India) emerging as its top picks. In the calendar year, BEL shares have given solid returns of 60%, while the Data Patterns stock surged 37%, despite a sharp correction in overall defence space during this period.

The brokerage is betting high on the defence electronics segment, saying that 2025 is going to be a pivotal year for India given orders for some larger programs (QRSAM, P-75I, LCA Mark1A, Pinaka, etc) are likely.

Citing recent stock price corrections across the defence pack, the agency believes that there is a chance to make a lunge given a mounting growth story over and above the already known government of India’s (GoI) ambitious targets of ₹50,000 crore in defence exports and ₹3 lakh crore in defence production by 2030.

Nuvama reckons that the industry will grow steadily with a skew towards Air Force and Navy. “Supply chains, meanwhile, remain the key variable amid global uncertainty unfolding in Bangladesh, Syria and now Korea, on top of Russia-Ukraine and Middle East. With the Trump administration coming into power soon, India-US defence co-operation is expected to improve,” it adds.

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