As the Union Budget draws closer, all eyes are on the government’s spending priorities and the amount set aside for key sectors that directly affect the economy and everyday life. Finance Minister Nirmala Sitharaman is all set to present the Union Budget for the financial year 2026-27 in Parliament on Sunday, 1 February.
The defence sector is likely to receive heightened focus, especially amid rising geopolitical issues, including the US-Venezuela tensions, the Middle East conflict and other global flashpoints. This trend is already visible in the markets, with defence stocks rallying sharply ahead of the Budget.
In the previous Budget for FY 2025-26, the government allocated ₹6,81,210.27 crore ($81 billion) to the Ministry of Defence (MoD), representing a 9.5% increase from the year-ago period.
In the upcoming Budget, Market experts anticipate a 20% increase in defence sector allocation. Here’s what else the industry experts expect:
Budget 2026 must focus on faster indigenisation, says expert
Budget 2026 is expected to keep defence firmly at the strategic core, with a strong push towards higher capital expenditure, faster indigenisation, and technology-led capability building, said Paridhi Adani, Partner and Head of Ahmedabad Office at Cyril Amarchand Mangaldas.
She said that, against rising geopolitical risks and recent operational learnings, the focus is likely to remain on capital acquisition, R&D spending, diversified sourcing, and strengthening domestic manufacturing, including greater participation of startups under the Defence Vision 2047 framework.
According to Adani, the industry is also seeking policy signals on localisation norms, particularly a more pragmatic approach to indigenous content requirements in areas where India continues to rely on imported subsystems.
“Budget 2026 must reflect the changing character of warfare. AI-enabled systems, autonomous platforms including drones, cyber resilience, and data-driven decision-making can no longer sit at the margins of defence planning—they must be embedded in procurement, testing, and contracting models,” Adani added.
She pointed out that defence companies are not just looking for higher budget allocations. Here’s what they seek, according to her.
— Predictable export regimes
— Legal clarity on Intellectual Property (IP)
Ultimately, coherence between defence spending, trade policy, and legal architecture will determine whether India is viewed as a serious production hub or only a large market on a global scale, she observed.
Tax incentives and changes in GST structure sought
Rohit Jain, Managing Partner at Singhania & Co, said that it would be good if Budget 2026 rationalizes the inverted duty structure under GST, which currently penalises domestic production over imports.
An Inverted duty structure arises when the GST rate on inputs, such as raw materials or components, is much higher than the GST rate on the finished products.
He further added that the government should provide tax clarity on Section 10(6C) for foreign OEMs in G2G partnerships, as it is vital for securing global technology transfers.
Section 10(6C) of Income-tax Act, 1961, exempts foreign companies from tax on fees for technical services or royalty earned from agreement with the Indian government, specifically for projects connected with the security of India.
“Legally, streamlining the Defence Acquisition Procedure (DAP) and offering MRO-specific tax incentives will also promote the sector growth,” he said.
He further added that reintroducing weighted R&D tax credits would empower the private sector to bridge the technology gap, ensuring India transitions from a buyer to a global defence innovation hub.
Investors bullish on defence stocks
Major defence stocks had a sharp rally during the Budget week, with several gaining as much as 26%, riding the wave of heightened expectations that the defence sector could emerge as a key beneficiary of Budget 2026.
Defence stocks such as Bharat Electronics, Hindustan Aeronautics, Garden Reach Shipbuilders, BEML, Data Patterns, Cochin Shipyard, Apollo Microsystems and Bharat Dynamics moved higher as investors priced in the possibility of a sizeable jump in defence capital expenditure.
The key areas expected to receive higher allocations include missiles and ammunition, unmanned aerial vehicles and counter-UAV systems, electronic warfare, air defence, network-centric systems and technology-driven force-multiplier equipment, Mint reported.
