Finance Minister Nirmala Sitharaman earmarks a record ₹7.85 lakh crore budgetary allocation for the defence sector for FY 2026-27. This increase comes in the backdrop of the ‘historic success of Operation Sindoor’
IN a decisive push to strengthen national security in the aftermath of Operation Sindoor and focus on indigenous defence production, the Union Budget allocated a record ₹7.85 lakh crore for defence services, marking the highest-ever outlay for the sector for FY 2026-27.
The allocation accounts for 2% of the estimated GDP for the next financial year 2026-27, and reflects a 15.19% increase over the budget estimates for the current year. Defence spending now constitutes 14.67% of the Union government’s total expenditure, the highest among all ministries.
According to the Defence Ministry, the enhanced allocation is aimed not only at accelerating the modernisation of the armed forces and meeting routine operational requirements, but also at addressing additional financial needs arising from emergency procurement of arms and ammunition undertaken after Operation Sindoor, under both capital and revenue heads.
Capital expenditure has been raised sharply to ₹2.19 lakh crore, compared to ₹1.8 lakh crore in 2025-26, underlining the government’s resolve to upgrade military capabilities to global standards, with a strategic emphasis on self-reliance.
Expressing the defence sector’s expectations in a pre-budget statement, Venkatesh Sai, Founder & Technical Director, defence drone tech company Zuppa, had said, “From a technology standpoint, the Union Budget 2026 can be transformative for India’s cyber-physical and drone ecosystem by recognising secure computing, real-time AI, and indigenous hardware as national priorities. As drones increasingly operate in sensitive, mission-critical environments, policy support must extend beyond assembly to deep-tech innovation—covering secure motherboards, real-time control computing, AI-driven autonomy, and cyber-resilient architectures. Incentives for design-first engineering, aerospace-grade manufacturing standards, and indigenous IP creation will allow Indian companies to build globally competitive systems from the ground up.”
Sai Pattabiram, Founder & MD of Zuppa focused on the expectations of the drone industry and cybersecurity platforms. He had said, “The Indian drone industry is emerging from a critical phase of disruption—one that has fundamentally reshaped its dominant business model. With a sharper focus on indigenous component manufacturing, cybersecurity, and a growing recognition of drones as dual-use strategic assets, the sector is now at an inflexion point. As we approach the Union Budget, we are hopeful of decisive policy support through Design-Linked Incentives, targeted PLI schemes, and export-focused incentives coupled with the lowering of barriers to export within the SCOMET regulations that can help Indian drone manufacturers scale with confidence.”
In real terms, most of these expectations related to the UAVs or the drone industry and smart weapons have been met by the budget.
Raj Kumar Pandey, CEO & Executive Director, ADSL, JCBL, commenting on the budget said, “The Union Budget 2026 marks a decisive step towards strengthening India’s defence and aerospace ecosystem, with a record allocation of ₹7.84 lakh crore, reflecting a 15% increase. This enhanced outlay accelerates modernisation across land, air, and naval forces while reinforcing the government’s focus on advanced technologies and indigenous manufacturing. Policy support through duty exemptions and targeted investments positions India to scale capabilities, attract global partnerships, and emerge as a competitive force in the global defence and aerospace landscape.”
The Defence Ministry has already concluded contracts worth ₹2.1 lakh crore during the current year up to December, with Acceptance of Necessity (AoN) approvals exceeding ₹3.5 lakh crore. Upcoming projects include next-generation fighter aircraft, ships and submarines, UAVs, drones, smart weapons, and specialist vehicles.
A major thrust has been placed on indigenisation, with ₹1.39 lakh crore, or 75% of the capital acquisition budget, earmarked for procurement from domestic industries, boosting self-reliance, investment and job creation, the ministry added.
Of the ministry’s total allocation, 27.95% has been earmarked for capital expenditure, 20.17% for operational sustenance and preparedness, 26.40% for pay and allowances, 21.84% for defence pensions, and 3.64% for civil organisations.
Ankit Mehta – CEO of ideaForge Technology Pvt Ltd said, “We congratulate the finance minister for presenting a pragmatic budget that continues to prioritise defence capital outlay, while strengthening India’s domestic manufacturing ecosystem, electronics base, and semiconductor capabilities. Proposed measures such as the India Semiconductor Mission 2.0, the expanded Electronics Components Manufacturing Scheme, and support for advanced technology R&D signal a strong focus on building strategic supply chains and indigenous high-tech capability.”
Defence Minister Rajnath Singh thanked Prime Minister Narendra Modi for the historic allocation, saying that the budget strengthens the balance between security, development, and self-reliance. He said the post-Operation Sindoor budget reinforces the government’s resolve to bolster national security, enhance military capabilities and ensure the welfare of ex-servicemen, while advancing the vision of an Aatmanirbhar and Viksit Bharat.
Key Announcements
1. Manufacturing and Tech Indigenisation
Aviation Parts: The government has proposed to exempt basic customs duty on components and engines required for the manufacture of civilian and training aircraft.
MRO Support: Basic customs duty is exempted on raw materials imported for the manufacture of aircraft parts to be used in Maintenance, Repair, or Overhaul (MRO) requirements by Public Sector Units in the defence sector.
Capital Goods: A new scheme for the Enhancement of Construction and Infrastructure Equipment (CIE) was introduced, which includes support for tunnel-boring equipment essential for building high-altitude strategic roads and infrastructure.
2. Strategic Technology & Materials
Nuclear Projects: Customs duty exemptions for imports required for Nuclear Power Projects have been extended until 2035 and expanded to cover all nuclear plants, which has strategic implications for energy security.
Critical Minerals: To boost high-tech defence manufacturing, basic customs duty is exempted for capital goods required for processing critical minerals in India.
Rare Earth Magnets: Dedicated Rare Earth Corridors will be established in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to promote mining and processing, which are vital for advanced defence electronics.
3. Welfare and Pensions
Disability Pension: A specific tax exemption is provided for disability pensions granted to members of the Armed Forces and paramilitary personnel. This exemption covers both the service element and the disability element for those invalided out of service due to disability attributable to or aggravated by military service.
In his post-budget statement, Sai Pattabiram said, “The increased defence allocation in Union Budget 2026 is an important and timely step for India’s indigenous drone industry. After Operation Sindoor, it has become clear that drones are no longer optional equipment but essential tools for surveillance, border security, and precision operations. This budget gives local manufacturers the confidence to invest in new technology, local production, and skilled employment. The focus on domestic procurement and localisation will strengthen the entire ecosystem from electronics and propulsion to AI-based payloads and components supplied by MSMEs.”
Baba Kalyani, CMD, Bharat Forge Ltd, expressed his and the industry’s euphoria on the budget. “The Union Budget reflects the hallmark of Prime Minister Modi’s stable, strong and visionary leadership, anchored in policy continuity, fiscal discipline and a clear focus on building long-term national capabilities.
“I congratulate the Hon’ble Finance Minister on her ninth successive Budget, which strikes a careful balance between macroeconomic stability and sustained investment-led growth. The articulation of a multi-pronged growth framework and the three kartavyas reinforces the commitment to building a competitive, inclusive, and future-ready economy.
“At a time of heightened geopolitical and supply-chain uncertainty, these measures are bound to strengthen India’s economic resilience and global positioning, sending a strong signal to both Global and Indian investors,” Kalyani said.
Commenting on the government’s focus on modernising and strengthening the armed forces, Ankur Kanaglekar, Vice-President – India, Thales said, “The latest budget seeks to reinforce the nation’s commitment to modernising and strengthening the armed forces. The announcements around the exemption of basic customs duty on components and parts for the manufacture of civilian, training, and other aircraft and on the raw materials imported for manufacturing parts to be used in maintenance, repair, and overhaul by defence sector units further signal India’s long-term strategic intent for strengthening civil aerospace and defence industrial capabilities.
Meanwhile, in a pre-budget interaction, the two bodies representing private space companies had urged the government to undertake fiscal, regulatory, and structural reforms aligned with the Space Policy 2023 and IN-SPACe’s decadal vision.
In his post-budget statement, Anil Prakash, Director General, SIA-India said, “Industry expectations going into this Budget included targeted incentives for space manufacturing, GST rationalisation for space-grade inputs, clearer HSN classifications for space components, and a more predictable scaling of the space budget in line with India’s ambitions. These did not find a place this year, so there is no direct fiscal boost for the space sector.”
“The Union Budget reflects a strong push toward technology-led growth, manufacturing scale-up, and supply-chain resilience — all important for India’s emerging space economy. While there is no direct space-specific fiscal boost, several horizontal measures in electronics, semiconductors, MSME financing, customs modernisation, AI, and R&D act as meaningful enablers for the sector.” said Dr Subba Rao Pavuluri, President, SIA-India.
In fact, the budget never satisfies one and all; juggling expectations with real deliverables is a daunting task. However, this time the finance minister might have been guided by Operation Sindoor and its aftermath, and technological edge achieved by adversaries like China on the military front and India’s Aatmanirbharta mission on one hand and the imperative need to increase the number of cutting-edge military platforms on an urgent basis.
The defence ministry leads with the highest of allocations among the ministries, with a 14.68 per cent share of the total budget—much more than the 13.45 per cent share of the total budget last year.
The 2026-27 allocation is 15.27 per cent more than last year’s total defence budget allocation of Rs 6.81 lakh crore. This year-on-year rate of increase is more than the 9.53 per cent year-on-year hike in last year’s budget.
It also signifies that the defence spending will maintain its increasing trend over the coming years, too. This, in turn, will speed up the drive and ensure greater military preparedness and modernisation.
In this aspect the government seems to have well understood the fact that capital-heavy defence expenditure ultimately supports and invigorate the domestic manufacturing ecosystem, which in turn fulfills its technological sovereignty aspirations, leading to strategic autonomy, as per the government’s various missions and initiatives.
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Asad Mirza is a New Delhi-based senior commentator on national, international, defence and strategic affairs. The views expressed here are the author’s own and Clarion India does not necessarily share or subscribe to them.
