Why India’s defence industry could grow 68% in 3 years: Inside Rs 3 lakh crore opportunity

According to a report by CareEdge Ratings, the industry is expected to grow at a compound annual growth rate (CAGR) of around 19% through FY29 while maintaining healthy Profit Before Interest, Lease Rentals, Depreciation and Taxation (PBILDT) margins of 20-22%.

The projected expansion comes as India seeks to reduce its dependence on imported military equipment while simultaneously positioning itself as a global defence manufacturing and export hub.

Government spending remains the biggest growth driver

A key factor behind the expected expansion is the government’s rising allocation towards defence. The Ministry of Defence was allocated Rs 7.85 lakh crore during the Union Budget for FY27, which is around 15% higher than the FY26 budget estimate. The higher allocation is expected to support military modernisation, domestic procurement, infrastructure and indigenous defence production, the report said.

The government’s procurement policies are also increasingly favouring Indian manufacturers. Positive indigenisation lists, higher emphasis on domestic sourcing, measures to promote defence exports and increased spending on research and development are creating a larger addressable market for domestic companies.

“India’s defence sector is witnessing a structural transformation driven by rising indigenisation, higher capital outlay, and increasing private sector participation,” Pritesh Rathi, Associate Director at CareEdge Ratings, said.

“With defence production targeted to reach Rs 3 lakh crore by FY29 and a strong focus on domestic procurement, the sector is expected to maintain healthy growth momentum over the medium term,” he added.

From import dependence to domestic manufacturing

India’s defence growth story is also being driven by a gradual shift away from imported equipment.

CareEdge Ratings said increased domestic manufacturing has substantially reduced India’s dependence on imports. However, the country continues to rely on foreign suppliers for advanced platforms and high-technology military systems.

Russia remains India’s largest defence supplier, although its share of India’s arms imports has fallen significantly. It is reported that Russia accounted for around 40% of India’s arms imports during 2021-25, compared with nearly 70% during 2011-15. At the same time, India has diversified its procurement towards countries such as France and Israel, helping reduce dependence on a single supplier while providing access to advanced defence technologies.

Despite the push for self-reliance, India remained the world’s second-largest arms importer during 2021-25, accounting for around 8.2% of global arms imports, according to the report.

Imports declined around 4% from the 2016-20 period, indicating some improvement in domestic capabilities. However, procurement of advanced fighter aircraft, submarines and other high-end defence platforms means foreign suppliers will continue to play a role in India’s defence ecosystem.

Defence exports emerge as a new growth engine

The biggest structural change, however, may be taking place on the export front. India’s defence exports reached a record Rs 38,424 crore in FY26, registering a 62.66% increase over FY25, CareEdge Ratings reported.

The growth is no longer being driven solely by state-owned defence companies. Defence Public Sector Undertakings (DPSUs) accounted for 54.84% of exports in FY26, while private-sector companies contributed 45.16%.

The number of defence exporters also increased to 145 in FY26 from 128 a year earlier, showing Indian manufacturers’ participation in this sector.

India now exports defence equipment to more than 80 countries. Myanmar, Philippines and Armenia were the three largest markets for Indian defence exports during 2021-25.

“India’s defence exports have also scaled new highs, reaching Rs 38,424 crore in FY26, supported by growing global acceptance of indigenous defence products and increasing integration into international supply chains,” Pulkit Agarwal, Director at CareEdge Ratings, said.

Why are private companies important?

The growth of India’s defence industry is also changing the role played by private companies. Policy reforms, including the liberalisation of foreign direct investment in defence, have opened more space for private-sector participation and partnerships. FDI of up to 74% is permitted under the automatic route, while higher limits are possible through government approval in specified cases.

For Indian private companies, the opportunity extends beyond supplying equipment to the armed forces. Companies are increasingly looking to participate in global defence supply chains, develop specialised components and systems, and partner with international manufacturers.

This is particularly important as global defence spending rises amid geopolitical tensions and changing patterns of modern warfare.

DPSUs remain central to the expansion

While private-sector participation is increasing, state-owned defence companies are expected to remain central to India’s defence manufacturing ambitions.

CareEdge Ratings’ analysis of old DPSUs, new DPSUs and other public-sector companies and joint ventures, which collectively account for around 85-90% of their aggregate defence production, points to a steady growth trajectory in total operating income.

Profitability is also expected to remain strong, with PBILDT margins projected at around 22% in FY27.

DPSUs are expected to play a crucial role in building domestic manufacturing capacity, reducing import dependence and supporting India’s growing export ambitions.

Can India become a major global defence exporter?

The government has set an ambitious target of taking defence exports to Rs 50,000 crore by FY29. Under the Viksit Bharat vision, the long-term ambition is to take defence exports to Rs 2.8 lakh crore by 2047.

Achieving these targets will depend on more than simply increasing production. Indian manufacturers will need to improve technological capabilities, expand manufacturing capacity, strengthen research and development and establish themselves as reliable suppliers in global defence supply chains.

For now, the combination of higher government spending, domestic procurement mandates, rising exports, private-sector participation and geopolitical demand is creating a favourable environment for the industry.

The result could be a defence sector that is not only larger in size but structurally different, with India gradually moving from being one of the world’s biggest defence importers towards becoming a major manufacturer and exporter.