India's FY27 Defense Budget: A Structural Shift Toward Modernization
By Yellapu Santosh, research analyst, Anand Rathi Institutional Equities
We emerge with a positive outlook on the scale and composition of India's FY27 defense budget, particularly the 17.6% year-on-year increase in capital outlay to approximately Rs2.19 trillion. This significant rise occurs despite the overall defense budget growing at a far more modest rate of around 7%. This divergence represents a material regime shift, one that strongly reinforces the Ministry of Defense's stated ambition of accelerating force modernization while structurally deepening domestic procurement.
Not a One-Off Spike: Embedding Higher Capital Intensity
Importantly, this is not an isolated spike. The FY27 capital allocation builds on a second consecutive year of robust growth, comparing FY26 revised estimates versus FY25 actuals. This pattern signals that higher capital intensity is becoming embedded within the budget architecture rather than being episodic. In practical terms, the expanding capital pool now appears sufficiently large not only to service committed liabilities but also to meaningfully widen the space for new schemes. This creates conditions for a sustained, multi-year award cycle, moving away from the historical stop-start approval pattern.
Easing the Committed-Liability Constraint: From Serial to Parallel Contracting
The most critical structural implication of this capital uplift is the reduction in the committed-liability crowd-out effect. While aircraft, shipbuilding, and strategic platforms will continue to absorb a large absolute share of capital allocation, the incremental headroom is now sufficient to allow the MoD to approve and contract multiple new programmes concurrently across services.
This marks a fundamental change in awarding cadence:
- From serial contracting, where new approvals were delayed until legacy payments tapered off.
- To parallel contracting, where new schemes can be absorbed alongside ongoing obligations.
This shift materially improves execution visibility across the entire defense industrial ecosystem.
Indian Air Force: Enhanced Execution Despite Lower Allocation
Despite a 12% decline in Indian Air Force procurement allocation to Rs637.3 billion, based on revised FY26 numbers, the broader capital-outlay expansion meaningfully improves the execution environment for air force-linked programmes. The key change is not higher IAF earmarking, but reduced competition for capital from committed liabilities across services. This enhances the MoD's ability to push select IAF programmes from planning into contracting.
Within this framework, the available budget headroom, once legacy obligations are serviced, allows progress beyond routine sustainment and upgrades. This supports:
- Contracting traction on additional fighter squadrons and associated maintenance, spares, and support ecosystems.
- Engine and avionics upgrade programmes for in-service fleets.
- Rotary-wing inductions with rising indigenous content.
Crucially, even with a lower headline allocation, this capital configuration improves the likelihood that marquee programmes, including the 6 mid-air refuelling tankers and 114 Rafale acquisition, would see transition from intent to contractual milestones over the FY27-28 window. This is driven by improved capital fungibility rather than increased IAF-specific funding.
Indian Navy: More Balanced Sequencing Despite Lower Allocation
Despite an approximately 19% decline in Indian Navy procurement allocation to Rs254.5 billion, on revised FY26 numbers, the broader expansion in the defense capital pool enables better sequencing between shipbuilding commitments and capability upgrades. While shipyards remain bound by multi-year, milestone-linked payment schedules for existing hull contracts, reduced pressure from committed liabilities elsewhere allows incremental capital to be selectively redeployed.
Within this constraint, the Navy is better positioned to progress:
- Submarine-related contracting, including continued movement on P-75I.
- Advanced sensors, sonar, combat management systems, and weapon integrations.
- Limited new-build approvals alongside mid-life upgrades of in-service platforms.
The net effect is a more balanced naval capital pipeline, with incremental headroom for capability enhancement and selective new programmes, rather than capital being almost entirely absorbed by legacy hull payments.
Other Equipment: Clear Near-Term Beneficiary
Other Equipment within the capital budget has emerged as the immediate beneficiary of the expanded capital pool, reflected in a substantial 62% increase in allocation. As warfare doctrines continue to evolve, the programmes housed under this category are increasingly modular, scalable, and faster to execute, making them ideally suited to absorb incremental budget headroom.
These segments are best positioned to convert higher allocations into near-term executable contracts, particularly across:
- Missiles, rockets, and artillery ammunition.
- Loitering munitions and counter-drone systems.
- Network-centric warfare capabilities and tactical ISR.
This allocation shift materially strengthens near-term industrial demand and enhances revenue visibility for domestic manufacturers, reinforcing the execution-led growth outlook for India's defence ecosystem.
Budget Composition Nuances: Equipment-Led Allocation Shift
While headline capital growth is robust, the internal mix is equally revealing. On revised FY26 numbers, procurement allocation for the Indian Navy and Air Force declined approximately 19% and 12%, respectively, to around Rs254.5 billion and Rs637.3 billion. In contrast, the Other Equipment category, covering missiles, ammunition, drones/UAVs, and defence systems, rose sharply by about 62% to approximately Rs822.2 billion. This underscores a deliberate pivot toward missiles, munitions, drones, and electronic systems, rather than platform-centric spending alone.
Customs Duty Rationalisation: Targeted but Narrow
The reduction in basic customs duty on raw materials and components used for aircraft manufacturing and MRO, from 2.5% to nil, is directionally positive, but notably restricted to DPSUs. While this limits immediate private-sector benefit, it still supports cost competitiveness across select aerospace programmes and civil-MRO initiatives.
Defence Stocks: Company-Level Implications
We maintain a positive stance on Solar Industries, given the potential opportunity ahead of them along with their competitive positioning.
We turn cautious on the shipyards, including Garden Reach Shipbuilders & Engineers, Cochin Shipyard, and Mazagon Dock Shipbuilders, given limited near-term incremental awarding despite budget support.
We remain neutral on Bharat Electronics, as its diversified portfolio already embeds strong execution visibility.
We do not expect major fresh manufacturing awards for Hindustan Aeronautics; however, its civil MRO push and customs-duty rationalisation are structurally positive.
Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India.
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