Union Budget 2026-27: Defence Sector Anticipates Major Allocation Surge
With the Union Budget for the financial year 2026-27 approaching, national attention is firmly fixed on the government's expenditure priorities and the financial resources allocated to crucial sectors that significantly impact both the economy and daily life. Finance Minister Nirmala Sitharaman is scheduled to present this pivotal budget in Parliament on Sunday, 1 February, setting the fiscal agenda for the coming year.
Defence Sector Poised for Strategic Focus
The defence sector is expected to receive heightened emphasis in Budget 2026-27, particularly against the backdrop of escalating geopolitical challenges. These include ongoing tensions between the United States and Venezuela, persistent conflicts in the Middle East, and various other global flashpoints that underscore the need for robust national security measures. This anticipated focus is already manifesting in financial markets, where defence stocks have experienced a substantial rally in the lead-up to the budget announcement.
In the previous budget for FY 2025-26, the government allocated ₹6,81,210.27 crore (approximately $81 billion) to the Ministry of Defence, marking a 9.5% increase from the preceding fiscal year. For the upcoming budget, market analysts and industry experts are projecting an even more substantial rise, with expectations of a 20% increase in defence sector allocation. This would represent a significant acceleration in funding compared to recent years.
Expert Insights on Defence Priorities
According to Paridhi Adani, Partner and Head of the Ahmedabad Office at Cyril Amarchand Mangaldas, Budget 2026 must maintain defence at the strategic core of national planning. She emphasizes the need for a strong push towards higher capital expenditure, accelerated indigenisation efforts, and technology-driven capability building. Adani notes that in response to rising geopolitical risks and recent operational experiences, the budget should prioritize capital acquisition, research and development spending, diversified sourcing strategies, and the strengthening of domestic manufacturing capabilities.
"The Defence Vision 2047 framework should facilitate greater participation from startups and innovative enterprises," Adani stated. She further highlighted that the industry is seeking clearer policy signals regarding localisation norms, advocating for a more pragmatic approach to indigenous content requirements, especially in areas where India still depends on imported subsystems.
Adani also stressed the importance of adapting to modern warfare dynamics. "Budget 2026 must reflect the changing character of contemporary conflict. Artificial intelligence-enabled systems, autonomous platforms including drones, cyber resilience measures, and data-driven decision-making processes can no longer remain peripheral to defence planning—they must be integrally embedded within procurement frameworks, testing protocols, and contracting models," she elaborated.
Beyond mere budget increases, defence companies are advocating for several systemic improvements, as outlined by Adani:
- Expedited contracting procedures
- Predictable and transparent export regimes
- Legal clarity concerning Intellectual Property rights
- Streamlined export approval mechanisms
- Comprehensive lifecycle support for defence equipment
Adani concluded by observing that the coherence between defence spending, international trade policies, and legal frameworks will ultimately determine whether India is perceived globally as a serious defence production hub or merely as a substantial market for foreign manufacturers.
Tax Reforms and Incentives Sought
Rohit Jain, Managing Partner at Singhania & Co, highlighted several fiscal measures that could bolster the defence sector. He suggested that Budget 2026 should rationalize the inverted duty structure under the Goods and Services Tax, which currently disadvantages domestic production relative to imports. An inverted duty structure occurs when the GST rate applied to inputs like raw materials or components exceeds the rate levied on finished products.
Jain further recommended providing tax clarity regarding Section 10(6C) of the Income-tax Act, 1961, for foreign original equipment manufacturers engaged in government-to-government partnerships. This provision exempts foreign companies from taxation on fees for technical services or royalties earned from agreements with the Indian government specifically for projects related to national security. Such clarity is deemed vital for facilitating global technology transfers.
"From a legal perspective, streamlining the Defence Acquisition Procedure and introducing tax incentives specifically for maintenance, repair, and overhaul operations would significantly promote sectoral growth," Jain added. He also proposed the reintroduction of weighted research and development tax credits, which would empower the private sector to bridge technological gaps and support India's transition from a defence buyer to a global innovation hub.
Investor Sentiment and Market Performance
Investor confidence in defence stocks has been notably bullish during the budget week, with several prominent companies witnessing gains of up to 26%. This rally reflects heightened market expectations that the defence sector will emerge as a primary beneficiary of Budget 2026-27. Key defence stocks that have advanced include Bharat Electronics, Hindustan Aeronautics, Garden Reach Shipbuilders, BEML, Data Patterns, Cochin Shipyard, Apollo Microsystems, and Bharat Dynamics.
Investors are pricing in the likelihood of a substantial increase in defence capital expenditure. According to reports, the key areas anticipated to receive enhanced allocations encompass:
- Missiles and ammunition systems
- Unmanned aerial vehicles and counter-UAV technologies
- Electronic warfare capabilities
- Air defence systems
- Network-centric warfare systems
- Technology-driven force-multiplier equipment
As the budget presentation date approaches, stakeholders across the defence ecosystem—from policymakers and industry leaders to investors and analysts—are closely monitoring developments, anticipating strategic allocations that will shape India's defence preparedness and industrial capabilities for years to come.
