Defence Budget 2026: Capital Outlay Set for Major Boost with Domestic Procurement Focus
The upcoming Indian defence budget cycle for 2026 is expected to mark a significant inflection point, with the core message being that capital outlay will likely grow faster than the overall defence budget. This incremental funding would be strategically channeled toward domestic procurement and modernization-heavy programs, signaling a major shift in India's defence spending priorities.
Steep Increase in Capital Acquisition Budget
Recent statements from the Defence Secretary at a FICCI forum have highlighted that the Ministry of Defence is asking for approximately a 20% increase in capital acquisition budget for FY27. This represents what officials describe as the steepest single-year jump in recent memory, with explicit prioritization given to domestic procurement over imports. The Ministry has demonstrated its commitment to this approach by ensuring that the majority of domestic procurement is driven by Defence Public Sector Undertakings (DPSUs) and private players rather than depending on foreign imports.
Budget Mechanics and Committed Liabilities
As parliamentary scrutiny has revealed, budget mechanics increasingly matter as much as the topline numbers. The concept of "Committed Liabilities" – payments due in a year for contracts signed earlier – takes first charge on capital allocation. Meanwhile, "New Schemes" represent fresh projects likely to be approved and contracted during the year. Both categories are funded from the same Capital Acquisition (Modernisation) head, creating a dynamic where high committed liabilities can potentially "crowd out" new contracting even in a growing budget environment.
However, if the Ministry of Defence meaningfully raises the capital pool, the system can effectively service committed liabilities while simultaneously accelerating new orders. Analysis of projects cleared by the Defense Acquisition Council over the last 2-4 years reinforces the view that capital outlay will be on an increasing trend, often serving as a key swing factor at the Revised Estimates stage and remaining the principal lever for modernization outcomes.
Allocation Priorities and Beneficiaries
Following historical patterns, the Indian Air Force is expected to receive the highest allocation, followed by the Indian Navy. This allocation strategy reflects the ongoing modernization needs across different branches of the armed forces and their respective operational requirements.
Awarding Pipeline for Next 12-24 Months
If the "capital-heavy + domestic-first" posture holds firm, the awarding pipeline should be broad-based across multiple platforms, munitions, and network-centric capabilities. The biggest contracting momentum is anticipated in several key areas:
- Aircraft and helicopter fleets including sustainment-linked packages around fighter induction and upgrades
- Missiles, rockets, and ammunition with scale orders for various precision systems
- C4ISR, electronic warfare, and space-enabled ISR capabilities
- Drones and counter-drone systems
These segments represent areas where India has both urgent operational requirements and a growing domestic industrial base capable of meeting those needs.
Aviation and Missile Procurement Themes
On the aviation front, likely contracting themes include sustainment-linked packages around fighter induction and upgrades, particularly LCA-related procurement encompassing fighters, spares, and support systems. Aircraft and engine upgrade work will also feature prominently, along with rotary-wing inductions for the Indian Army, Air Force, and Navy – areas where indigenous content is steadily rising. Given operational urgencies, the awarding of the 114 Rafale order could potentially form part of the 'New Schemes' in FY27.
The missile and munitions sector should continue to benefit from budget thrust favoring scale orders for guided rockets, long-range rockets, air defence missiles, precision munitions, loitering munitions, and artillery ammunition. These systems deliver immediate combat power, have relatively faster contracting cycles than major platforms, and align perfectly with the indigenization narrative that has become central to India's defence procurement strategy.
Naval and Network-Centric Warfare Investments
From the naval perspective, while large shipbuilding programs are multi-year and heavily dominated by committed liabilities, capital uplift can still translate into steady awards for critical projects like the P-75(I) Submarine order, platform upgrades, sensors, weapons fits, and select new-build approvals.
A particularly important "budget-to-orders" bridge in this cycle would be investments in ISR (Intelligence, Surveillance, and Reconnaissance) and network-centric warfare capabilities. With contested borders, maritime chokepoints, and the need for rapid kill-chains, India is likely to keep prioritizing C4ISR projects covering satellite communications, surveillance satellites, ISTAR/AEW&C enabling systems, tactical communications, electronic warfare, and secure data links. These systems serve as force multipliers and align well with India's growing domestic electronics and systems champions.
Structural Framework and Multi-Year Outlook
The committed-liabilities framework supports this positive outlook. While big-ticket platform contracts for aircraft and ships create multi-year payment obligations, the Ministry of Defence will typically seek a portfolio of "new schemes" that are modular, scalable, and can be ramped up based on annual budgetary headroom. This structural approach precisely describes how many ISR, electronic warfare, and drone programs are organized and funded.
In essence, the implied signal of a higher capital allocation combined with explicit emphasis on domestic procurement makes it more plausible that multiple mid-to-large awards can be run in parallel rather than being serially queued behind legacy commitments.
Overall Budget Outlook and Sector Implications
The upcoming Indian defence budget outlook would likely see a "capital step-up" with at least a 15% increase. The structural reality of committed liabilities would support a multi-year award cycle where the largest, fastest beneficiaries may likely emerge in missiles and munitions, defence electronics (C4ISR/EW), drones and counter-UAS systems, and select aviation/helicopter procurement and upgrade packages. Shipbuilding is expected to remain steady but constrained by long-duration payment schedules inherent to naval construction projects.
Defence Stocks in Focus
Solar Industries India Ltd has emerged as one of the most visible private defence manufacturers, with products like loitering munitions (including the Nagastra system) and advanced explosive systems gaining significant traction. The company's defence order book exceeds Rs 175 billion, with repeat orders for UAVs, grenades, and specialized ammunition. Solar Industries has also secured international defence export contracts worth approximately Rs 14 billion, highlighting both domestic and global demand for its products. A higher capital budget and expansion of ammunition, loitering munitions, and counter-drone procurement would significantly strengthen Solar's growth runway.
Bharat Electronics Limited (BEL) stands to benefit from sustained systems and electronics integration spending, with a strong order pipeline in radar systems, tactical communications, counter-drone systems, and C4ISR capabilities. Recent DAC packages have seen key approvals for BEL's radars and communication systems. The company is expanding its capabilities through new system integration facilities designed to capture complex defence electronics work – a strategic fit amid rising network-centric warfare spending.
Hindustan Aeronautics Limited (HAL) remains central to aviation and aerospace modernization, driven by fighter sustainment, upgrade packages, and helicopter inductions. While platform projects typically have long lead times, DAC approvals feed multi-year pipelines that can be accelerated with higher capital allocations. This could reinforce allocations for engine upgrades and sustainment for legacy fleets alongside LCA and fighter support packages.
Mazagon Dock Shipbuilders Limited (MDL) continues to play a crucial role in naval construction, particularly with the Navy's focus on submarines (including Project-75(I)) and other surface platforms where long-lead commitments dominate. Project-75(I), aimed at procuring diesel-electric submarines, underscores MDL's central position in India's warship and submarine build pipeline. A higher capital outlay would support staged awards for submarine and amphibious vessel projects while ensuring steady allocations flow through extended execution horizons.
