A World Reordering Itself. The post-Cold War rules-based global order is under unmistakable strain. From Europe’s eastern frontiers to the Indo-Pacific’s contested waters, the assumption that security could be outsourced or insured through alliances is rapidly giving way to a more hardheaded calculus: nations must be able to defend themselves, with their own systems, on their own terms.
India grasped this shift early. What began as a quiet reorientation under the ‘Aatmanirbhar Bharat’ banner has evolved into a full-spectrum strategic transformation — from modernising platforms to reforming jointness across services and, most recently, asserting ownership over its defence technology stack. Operation Sindoor, India’s recent precision-strike operation, served as a live demonstration of this calibrated, technology-enabled deterrence posture. For investors and strategic observers alike, the message was clear: this is not the India of two decades ago.
Then vs. Now: A Sector Transformed
Cast your mind back fifteen years. India’s defence sector was characterised by chronic import dependence, sluggish procurement cycles, and a near-monopoly held by state-owned enterprises. Critical platforms — fighter jets, submarines, advanced missile systems — were sourced overwhelmingly from abroad, with Russia alone supplying nearly 72% of India’s arms imports between 2010 and 2014. Indigenous manufacturing was plagued by delays, cost overruns, and limited innovation. The private sector was largely a bystander.
The contrast with today is stark. India now designs and manufactures its own fighters, satellites, radars, and counter-drone systems. Domestic production now accounts for approximately 65% of defence equipment — a dramatic reversal from the 65–70% import dependency of the recent past. The ecosystem has opened up dramatically, drawing in private companies, deep-tech startups, academic institutions, and global defence majors seeking local partners. The shift in Russia’s share of Indian arms imports — from 72% in 2010–2014 to 36% in 2020–2024 — reflects not just diversification but the growing confidence of Indian industry to fill the gap.
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India is positioning itself as a deterrent-based, proactive, technology-enabled force — a shift that has profound implications for its defence industry and the capital that flows into it.
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Budget, Policy, and the Reform Momentum
Government intent alone does not build defence industries — budgets do. India’s defence allocation for FY 2026–27 reached an all-time high of US$88 billion, representing a 15.2% increase year-on-year. Critically, this was not merely headline growth. Capital expenditure — the spending that funds new platforms, technologies, and procurement — rose by 21.8%, while R&D allocations climbed 8.5%, reflecting a deliberate push beyond maintenance and into next-generation capability.
Equally important is the context: India’s defence spending as a share of GDP remains near a 75-year low. History suggests that this ratio tends to rise sharply in the aftermath of regional conflicts. India has experienced four such inflection points — after 1962, 1988, 2000, and 2020 — each time resulting in elevated and sustained spending. With unresolved tensions on both its western and northern borders, the structural case for rising defence budgets remains compelling.
Policy reforms have been equally consequential. The introduction of TReDS-2025 (Trade Receivables Discounting System for defence), the progressive liberalisation of Foreign Direct Investment norms, and the push for defence industrial corridors in Uttar Pradesh and Tamil Nadu have collectively lowered barriers for private participation and improved the financial plumbing that keeps defence companies liquid.
The Indigenisation Imperative
If the defence budget captures the scale of India’s ambition, indigenisation captures its direction. For decades, import dependency was not merely an economic inefficiency — it was a strategic vulnerability. Global supply chain disruptions and geopolitical realignments exposed the fragility of sourcing critical defence systems from a handful of foreign suppliers. The response has been systematic and deliberate.
The government has notified successive ‘positive indigenisation lists’ that effectively bar imports of specific equipment categories, compelling the armed forces to source domestically. Concurrently, defence public sector undertakings (DPSUs) have been mandated to increase the indigenisation content of their platforms, and procurement procedures have been reformed to incentivise Indian-designed products over licensed manufacture.
The opportunity for domestic companies is concentrated not just at the platform level — where major OEMs operate — but increasingly in the deeper supply chain: components, sub-systems, processed materials, and software. This is where private-sector players, unburdened by legacy structures, are finding their edge and where the most attractive growth profiles are emerging.
Indigenisation is no longer just a policy directive — it is a commercial opportunity that is reshaping how domestic and global investors think about the sector.
The Rise of India as a Defence Exporter
Perhaps the most striking data point in India’s defence story is the trajectory of its exports. From a modest ₹686 crore in FY 2013–14, defence exports have surged to a record ₹38,424 crore in FY 2025–26 — a 56- fold increase in just over a decade. India now exports defence equipment to more than 100 countries, with the United States, France, and Armenia among its top buyers in the most recent fiscal year.
India’s Defence Export Growth (₹ Crore)
Financial Year | Defence Exports |
FY 2021–22 | ₹12,814 crore |
FY 2022–23 | ₹15,918 crore |
FY 2023–24 | ₹21,083 crore |
FY 2024–25 | ₹23,622 crore |
FY 2025–26 | ₹38,424 crore (Record High) |
Source: Ministry of Defence, Government of India
The government has set a target of ₹50,000 crore in exports by FY 2028–29, with an ambitious long-range goal of ₹2,80,000 crore by 2047 under the Viksit Bharat vision. DPSUs have been directed to derive 25% of revenues from exports — a mandate that fundamentally changes the commercial model of entities that were once exclusively domestic-facing.
India’s export ambitions are also geopolitically grounded. As a trusted partner for nations in the Indian Ocean Region and the Global South, India occupies a unique position: offering high-quality, battle-tested platforms at competitive prices, without the political conditionalities that often accompany Western military transfers.
Private Sector and the Technology Vanguard
The liberalisation of India’s defence sector has unleashed a wave of private-sector participation that is now beginning to reshape the competitive landscape. Where public-sector undertakings once held an effective monopoly on defence contracts, private firms — ranging from established industrial conglomerates to nimble deep-tech startups — are now winning significant orders and developing differentiated capabilities.
The rationale for favouring private-sector players over their public-sector counterparts is increasingly supported by data. Analysts project a 32% earnings CAGR for private defence companies over FY25– FY28E, compared to 13% for public-sector entities over the same period. This differential reflects both the faster pace of capability development in the private sector and the composition of emerging defence budgets, which are disproportionately tilted toward newer technologies — AI-enabled systems, electronic warfare platforms, unmanned aerial vehicles — where private firms are better positioned.
The maturation of Ministry of Defence payment cycles has also improved the commercial proposition. Better payment reliability has reduced working capital stress for defence companies, strengthened balance sheets, and allowed management teams to invest in product development with greater confidence.
Investment Themes: Where the Opportunity Lies
For investors navigating India’s defence landscape, the key is to look beyond the headline budget numbers and identify where durable, compounding value is being created.
Three structural themes stand out. First, the domestic addressable market (TAM) for Indian defence companies is expected to expand more than sixfold from current levels to approximately ₹10 trillion (US$122 billion) over the next two decades, driven by sustained budget growth and the progressive shift toward domestic procurement.
Second, indigenisation at the component and sub-system level — the bottom of the technology pyramid — presents opportunities for companies that may not be building fighter jets but are supplying the critical electronics, materials, and software that make platforms function. This is a less glamorous but often more defensible segment of the market.
Third, the export growth story is not yet fully priced into equity valuations. As Indian platforms gain credibility in global markets, the revenue base of domestic defence companies could diversify in ways that reduce their dependence on the domestic procurement cycle — a structural improvement in earnings quality.
Investors are broadly faced with two distinct archetypes: established players with large order books, strong cash positions, and predictable but moderate growth; and emerging private-sector challengers that are currently in investment mode but carry higher growth potential, stronger margins, and genuine technological moats. The right allocation likely includes both.
Global Tailwinds: The EU’s Readiness 2030 and Beyond India’s defence export ambitions are being materially accelerated by a shift in global defence spending. In March 2025, the European Union unveiled its Readiness 2030 plan — formerly known as ReArm Europe — committing over €800 billion through 2030 across seven capability domains: air and missile defence, artillery, ammunition and missiles, drones and counter-drone systems, infrastructure, AI and quantum computing, and strategic enablers.
For Indian defence exporters, this represents a significant and largely underappreciated opportunity. Europe’s focus on ammunition replenishment and drone technology aligns well with areas where Indian industry has been investing. As European governments scramble to rebuild stockpiles and diversify their supply chains, India — with its competitive cost structure, improving quality credentials, and no political baggage — is well-placed to win a meaningful share of this demand.
Beyond Europe, regional conflicts and the attendant replenishment demand in aerospace and ammunition segments are creating additional tailwinds. India’s defence companies have the opportunity to develop products for, and increasingly penetrate, global supply chains in ways that were simply not possible a decade ago.
Conclusion: A Strategic Asset Class in the Making
India’s defence sector is no longer a policy story waiting to become a commercial reality. It is a commercial reality being shaped by policy, technology, and geopolitics in equal measure. The transformation from import dependence to export competitiveness has taken decades to build — and is now entering its most consequential phase.
The confluence of sustained budget growth, deep policy reform, a maturing private sector, and favourable global tailwinds has created the conditions for a prolonged and broad-based expansion of the domestic defence industry. The total addressable market is expanding. The competitive landscape is improving. And the earnings profile of leading companies is beginning to reflect the structural change underway.
For investors with a medium-to-long-term horizon — particularly those with mandates that span geopolitics, industrial transformation, and emerging market growth — India’s defence sector deserves a considered, well-researched allocation. The window of opportunity, while still open, will not remain so indefinitely. India is not just securing its defence future; it is building an industry that may well define its economic story for the next quarter-century.
