Defence stocks, currently trading well below their 52-week highs, have been under considerable selling pressure. However, with the Union Budget 2025-26 on the horizon, the sector could see a potential rebound, spurred by strategic government initiatives and allocations.

The Defence Sector: At a Crossroads

In the last fiscal year, India’s defence budget rose by 4.79% to ₹6.22 lakh crore. While significant, experts argue that this increment fell short of addressing the modernization demands necessary to tackle evolving security challenges.

For the upcoming fiscal year, the government is expected to maintain defence allocations between 1.9% and 2% of GDP. This translates to a potential ₹1 lakh crore allocation specifically for operational preparedness, excluding the funds designated for the Border Roads Organisation (BRO).

“Make in India” and the Rising Appeal of Defence Stocks

The government’s “Make in India” initiative has played a pivotal role in driving investments in domestic arms manufacturing. Companies like Hindustan Aeronautics Limited (HAL) and Bharat Dynamics Limited (BDL) have witnessed increased interest from retail investors, anticipating robust growth in this sector.

To further capitalize on this momentum, the upcoming budget is likely to introduce measures encouraging:

• Private sector participation

• Public-private partnerships (PPPs)

These initiatives aim to drive innovation, operational efficiency, and cost-effectiveness in defence production.

Streamlined Procurement Processes

One of the key focus areas in the budget is expected to be the enhancement of defence procurement processes. The Defence Acquisition Council recently approved proposals worth USD 17 billion for military assets, highlighting the need for faster and more efficient procurement systems.

Modernization and Strategic Investments

India’s push toward modernization is likely to gain momentum with significant allocations for advanced military systems, including:

• Fighter jets

• Missile systems

• Naval assets such as the Indigenous Aircraft Carrier INS Vikrant

These investments are expected to bolster India’s air and naval superiority, addressing the nation’s strategic defence needs amid growing regional and global complexities.

Emerging Defence Technologies

The government’s focus extends to emerging domains such as cyber and space, with increased emphasis on adopting cutting-edge technologies. The budget may allocate funds to accelerate research and development in:

• Artificial Intelligence (AI)

• Machine Learning (ML)

• Hypersonics

• Robotics

Such advancements are essential for enhancing India’s defence capabilities and maintaining a competitive edge in modern warfare.

Closing Thoughts

While defence stocks currently face bearish sentiment, the upcoming Union Budget could serve as a game-changing event, providing the sector with much-needed momentum. Investors should stay tuned for policy announcements that could impact stock performance.

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