India’s defence capex allocation in the upcoming Budget 2026-27 on Feb. 1, 2026, will be a key monitorable for defence stocks. According to global brokerage Jefferies, the defence budget should rise more than 10% year-on-year on top of the double-digit growth in FY26. To be clear, the country’s defence capital spend decreased 13% YoY in November 2025, however, it has been up 57% YoY in April-November 2025 compared to the expected budgeted growth of 13% for FY26. 

According to Jefferies, nearly Rs1.8 trillion was allocated for India’s defence capex in the FY26 budget estimate (BE). Around 62% of this was achieved between April-November 2025 compared to 41-54% in April-November 2021-24, aided by emergency procurements after the the India-Pakistan conflict (Operation Sindoor) in May 2025. The Defence Secretary recently indicated a potential 20% hike in the FY27 defence budget to maintain operational readiness and self-reliance amid persistent global tensions.

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Jefferies pegs India’s defence capex to rise 10% in FY27

Notably, US President Trump has called for a 50% hike to the US defence budget to $1.5 trillion in 2027. ”Ministry of Defence (MoD) has also discussed a possible 17-18% CAGR ahead in capital spend with a view to raise overall defence spend to 2.5% of GDP compared to less than 2% currently,” said Jefferies. Over the last five years, India’s defence expenditure has followed an upward trajectory.

Finance Minister Nirmala Sitharaman will unveil the upcoming Budget 2026-27 on Sunday, Feb. 1, 2026 in the Parliament. India Inc expects higher capex allocation for sectors such as defence, railways, infrastructure, among others. As the Indian markets gear up for higher earnings momentum heading into the last leg of FY26, several domestic defence players are relying on increased defence spending, especially after the Defence Secretary indicated a potential 20% hike in FY27 budget to maintain operational readiness.

The Jefferies report also suggests that the increased spending could benefit a host of defence companies primed for significant tailwinds, including the likes of Hindustan Aeronautics (HAL), Bharat Electronics and Data Patterns. The brokerage firm, which has identified HAL as its top pick, expects all these companies to sustain a double-digit EPS CAGR over the medium term.

The Union Budget 2025-26 earmarked ₹6.81 lakh crore — or 13.4% of total Central government expenditure — for the Ministry of Defence (MoD). Of the MoD’s total budget, ₹4.92 lakh crore, or 72%, is meant for the Defence Services (primarily the Army, Navy, Air Force and the Defence Research and Development Organisation).

About ₹1.61 lakh crore — amounting to 24% of the MoD’s total outlays — is provisioned to meet the pensionary expenses of the defence services; and the balance ₹28,683 crore, or 4%, to cater for the ‘civil organisations’ of the MoD, which include, inter alia, the Border Roads Organisation and the Indian Coast Guard.

Coming in the backdrop of a volatile regional and global security environment, the MoD’s budget and its distribution among various heads, evokes several pertinent questions, including about its adequacy to meet the needs of the defence forces and its impact on indigenisation that the Modi government pursues through its flagship ‘Make in India’ initiative.

On the question of adequacy, the MoD’s budget falls short of expectations. Although the MoD’s budget has been hiked by a decent 9.53%, much of the hike will be neutralised by the prevailing inflation (about 5%) and a weakening domestic currency vis-à-vis the U.S. dollar.

Little freedom

To further compound the problems of high inflation and a depreciating rupee, the MoD budget has little freedom to improve the firepower of the defence forces. Historically the defence budget has been dominated by the manpower cost. The salary and pension in the MoD’s latest budget accounts for 53%, leaving the balance to thinly spread on a host of other critical items of expenditure which are vital for modernisation and operational preparedness of the armed forces.

The capital expenditure of the defence services, much of which is spent on capital acquisitions and is vital for defence modernisation, has been pegged at ₹1.8 lakh crore — an increase of 4.7%. Notably this marginal increase has come after over 7% reduction in the previous capital budget.

The under-utilisation of previous budget and marginal increase in the capital expenditure will slow down the modernisation and indigenisation process going forward. Nonetheless, the MoD plans to sign several mega contracts, including for long endurance drones, deck-based fighters and next-generation submarines in the coming fiscal year, while sticking to the same indigenisation plan as articulated in the previous budget. To promote Make in India in defence, the MoD has earmarked 75% of its new capital procurement budget of ₹1.49 crore for procurement from the domestic industry, with 25% the domestic share being reserved for the Indian private sector.

While a big share for the domestic industry is a welcome step, to put both the modernisation and indigenisation on a fast track, the MoD requires a much bigger kitty than it has got in the successive union budgets. As a percentage of the Gross Domestic Product (GDP), the MoD’s latest budget amounts to a just 1.9% — a share too low for a country that faces two nuclear rivals. The government urgently needs to step up its spending on defence to at least 2.5% of GDP in the near- to medium-term and to 3% thereafter for a credible defence.

(The author is Associate Professor at the Special Centre for National Security Studies, Jawaharlal Nehru University, New Delhi.)

Dr. Suhel Ajaz Khan. File
| Photo Credit: X handle of Dr. Suhel Ajaz Khan

Saudi Arabia is on top of the list of India’s close friends and allies and so is keen to share a number of defence technologies that have been localised in recent years, Indian envoy in Riyadh Dr. Suhel Ajaz Khan said recently addressing a defence industry seminar. The remarks show how defence-industrial cooperation is now a major focus area between the two countries as they deepen defence cooperation and now exploring joint ventures and collaborations.

Highlighting the congruencies between Saudi’s Vision 2030 under which it is targeting to localise 50% of its defence spending, and India’s Make in India initiative, the envoy highlighted that there are lot of investment opportunities in the defence sector in India. Early this year, Saudi Arabia signed a $250 mn contract for ammunition from Munitions India Limited, a Defence Public Sector Undertaking.

“Defence cooperation between the two countries are always based on very high level of mutual trust and confidence. And I am happy to note that our two countries do enjoy that level of trust and confidence and that’s what we are interested to share a large number of defence products and technologies with our friendly country, Saudi Arabia,” Dr. Khan told the seminar end-November, as an Indian delegation visited Riyadh.

Saudi defence companies displayed a strong interest in fostering partnerships in critical sectors such as shipbuilding, electronics, and emerging technologies such as Artificial Intelligence and cybersecurity, officials said on the discussions during the seminar.

Focus on indigenisation

As we know, India and Saudi Arabia traditionally have always been the largest importers of defence hardware, Dr. Khan noted, stating that now both countries are trying to localise defence production to the extent possible. “In the last few years, we have made a lot of progress. But this progress has been extremely time consuming, resource consuming and painstakingly slow. But right now, we are at a level where we have a large number of inventory where we have localised production. And these technologies, we can share only with our very close friends and allies. Saudi Arabia, I can assure you, is on top of the list,” he stated.

India, Saudi relations have seen a huge upswing in the last decade with defence and security emerging as one of the key pillars. There have been a series of high-level visits in the last two years maintaining the momentum.

Further, the envoy said India had opened up its defence sector for investments which presents lot of investment opportunities for Saudi companies. He advocated the path of ‘invest, trade, localise’ and gave the example of a basmati rice brand that a Saudi firm has invested in, then was imported to Saudi and eventually set up shop there. This ‘invest, trade, localise’, also fits into the Saudi Vision 2030 “where you are trying to localise your defence industry like all of us should do but we can be partner in that,” Dr. Khan stated.

Under Vision 2030, Saudi Arabia is aiming to transition from a defence consumer to a defence producer, with a target to localise 50% of its spending.

Areas of mutual interest

Major Indian public sector as well as private defence companies were present at the seminar and post the discussions, Indian companies have been invited to take forward conversations on specific projects including joint ventures in naval and aerospace technologies, officials in the know added.

Minister of State for Defence Ajay Bhatt visited Riyadh in February for the World Defence Show (WDS) 2024 during which his discussions centred around “exploring avenues for collaboration in areas of mutual interest, including increasing the scope of joint training exercises, technology transfer and exchange of expertise”, the Defence Ministry had stated.

In January this year, the two countries held the inaugural edition of the Army exercise ‘Sada Tanseeq’ at Mahajan ranges in Rajasthan and Saudi Arabia was one of the 18 Observer countries at the second phase of Indian Air Force’s largest air exercise Tarang Shakti in August. The two Navies have a bilateral exercise ‘Al Mohed Al Hindi’ that commenced in 2022.

Saudi Arabia is reported to have procured the 155mm Advanced Towed Artillery Gun System (ATAGS) from Bharat Forge. Saudi Arabia has in the past evaluated two types of artillery guns manufactured from Bharat Forge.