India is transitioning into a defence manufacturing powerhouse. But is the growth fully priced in?

INDIA’S DEFENCE SECTOR is undergoing a transformative evolution, marked by a strategic shift from being a major importer to becoming a global defence manufacturing powerhouse. This transition is driven by robust capital allocation, a surge in defence exports, and the launch of key indigenous programmes. Capital allocation: Fuelling modernisation, indigenous growth The government has significantly ramped up capital allocation to the defence sector, reflecting its commitment to self-reliance and modernisation. The defence budget for FY26 stands at ₹6.81 lakh crore, with a notable 13% increase in capital outlay. This allocation supports the acquisition of advanced weaponry, naval vessels, aircraft, and border infrastructure, while also funding research and development initiatives. Over the next five years, India is expected to spend approximately $150 billion in defence modernisation. This includes a domestic defence production target of ₹3 lakh crore by FY29, up from ₹1.3 lakh crore in FY24. The capital allocation strategy is aligned with the goal of increasing the domestic procurement share, which has risen from 54% to 75% in recent years. This shift underscores the government’s intent to reduce dependency on foreign imports and bolster indigenous manufacturing. These investments are geared towards supporting key programmes, including the Light Combat Aircraft (LCA) Mark1A, Advanced Medium Combat Aircraft (AMCA), and Quick Reaction Surface-to-Air Missile (QRSAM) systems. Rise in defence exports: Growing global footprint India’s defence exports have witnessed exponential growth, driven by strategic partnerships, policy reforms, and enhanced manufacturing capabilities. In FY24, exports reached ₹21,700 crore. The FY29 target is set at ₹50,000 crore, a CAGR of 46%, highlighting the sector’s growing global competitiveness. The rise in exports is aided by transfer of technology (ToT) agreements and tie-ups with countries, including the U.S., Israel, Russia, and France. The defence manufacturing ecosystem is increasingly being recognised for its high-tech capabilities. Firms like BEL and Solar Industries are expanding their global footprint, with growing orders from the Middle East and North America. The Centre’s policy push, including export incentives and streamlined procedures, has further catalysed this growth. Private sector: Increasing contribution The private sector has emerged as a dynamic force in India’s defence ecosystem. Private defence production in India has witnessed robust growth in the last decade driven by policy reforms, increased capital access, and strategic partnerships with global defence majors. Private companies are not only supplying components but are now integral to all high-value programmes. Government policy has played a catalytic role in this transformation. Initiatives such as the Defence Procurement Procedure (DPP), positive indigenisation lists, defence corridors in Uttar Pradesh and Tamil Nadu, and FDI liberalisation have created a favourable ecosystem for private investment and innovation. Key programmes: Building a modern arsenal India’s defence modernisation is anchored in a series of ambitious programmes aimed at upgrading its air, land, and naval capabilities. These programmes are not only critical for national security, but also serve as catalysts for industrial growth and technological innovation. Some of the large programmes include: Air force modernisation LCA Mark1A & Mark-II: These indigenous fighter jets are designed to replace ageing fleets like the Jaguar, MiG-21 and MiG-29. AMCA: A fifth-generation stealth fighter jet programme that represents a significant leap in indigenous aerospace capabilities. Astra Mk-I & Mk-II: Advanced air-to-air missile systems that enhance the combat effectiveness of Indian fighter jets. Naval expansion P-75I Submarine Programme: A key initiative to bolster India’s underwater warfare capabilities through indigenous construction of advanced submarines. P-17-class frigates, P-18 class destroyers & IAC-2 aircraft carrier: Modernisation of surface combatants and expansion of carrier-based operations are vital for maintaining maritime dominance. Missile, air defence QRSAM (Quick Reaction Surface-to-Air Missile): Designed for rapid deployment and high mobility, this system strengthens India’s air defence network. Akash & BrahMos: Continued upgrades and export potential of these missile systems are enhancing India’s strategic deterrence. These programmes are supported by a robust pipeline of projects valued at more than ₹8 lakh crore. Industry dynamics The defence sector’s growth is underpinned by favourable policy reforms, including the Defence Acquisition Procedure (DAP), production-linked incentive (PLI) schemes, and increased FDI limits. With strong diplomatic ties and a growing reputation for reliable manufacturing, India is emerging as a preferred partner for defence cooperation. Expansion is not just limited to traditional arms and equipment, but includes cutting-edge tech like unmanned systems, electronic warfare, and cyber defence. Challenges and opportunities While the outlook is promising, the industry faces challenges such as supply chain constraints, technology gaps, and the need for skilled manpower. Addressing these requires continued investment in defence production infrastructure, and long-term, high-tech education, and innovation. On the flip side, the opportunities are immense. The projected $130-billion defence opportunity over the next five years offers a fertile ground for startups, MSMEs and large firms. India’s defence industry stands at a pivotal juncture, poised for unprecedented growth. This has made the sector attractive for investors. Defence sector stocks have done well over last few years. Median 1-year forward P/E of the Top 5 firms by market cap in the sector rose to 50.5 from 30.9 over the past two years, against 22 for the Nifty. Investors need to be careful while investing in the sector because of steep valuations. (Shah is MD, Kotak Asset Management Co. Ltd. Dhananjay T., VP, Kotak Asset Management Co. Ltd, contributed to the article. Views are personal.) Fortune India is now on WhatsApp! Get the latest updates from the world of business and economy delivered straight to your phone. Subscribe now.

India is transitioning into a defence manufacturing powerhouse. But is the growth fully priced in?

Sign in to read full story