India’s defence story: Real boom or bubble waiting to burst?

The defence sector has been getting serious attention for some time now, from domestic investors, global funds and even retail punters.

And if you think about it, it all adds up.

After all, how often do you find a sector with order books swelling at record pace, earnings visibility bright as day and government policy tailwinds blowing strong?

The stars do seem to be aligning. From Hindustan Aeronautics’ record order book to Bharat Electronics’ steady execution pipeline and the growing swagger of private players like Data Patterns and Bharat Forge, the market suddenly can’t get enough of defence stocks. The government’s aggressive push for self-reliance under ‘Atmanirbhar Bharat’ has only added fuel to this fire. It has ensured that large contracts stay within the country and critical technology know-how gets built here over time.

Even foreign partners, like GE Aviation, Airbus and Dassault, are stepping in with joint ventures and tech-transfer deals. Most are lured by India’s growing manufacturing ambition and sheer scale of demand. Defence corridors, production-linked incentives, indigenisation lists, everything that could make India a manufacturing hub for the world’s defence needs is being rolled out.

All this sounds like a multi-decade story in the making.
But what do we call this? A defence boom, or a bubble?
As always with any investment opportunity, the devil hides in the details
So let’s break this down.

The Big Drivers: ‘Atmanirbhar’ and Beyond

India’s defence budget is expanding fast. Over the next decade, total spend is expected to cross US$ 200 billion, aided by an economy on course to touch US$ 10 trillion. The capital outlay for FY26 alone stands at Rs 1.8 trillion, up 13% from the previous year’s revised estimate.

But the government’s real ambition lies in reshaping the industry structure itself.

Plans are afoot to triple domestic defence production to Rs 3 trillion by FY30, while boosting exports fivefold to Rs 500 billion. These are not empty targets for conference slides, production has already trebled since FY15 and exports have shot up 30 times in the same period.

A host of policy reforms are greasing this engine: ‘Make in India’ mandates, liberalised FDI up to 74%, defence corridors in Tamil Nadu and Uttar Pradesh, iDEX funding for start-ups and the Defence Ministry’s Positive Indigenisation List, now with 509 items banned from imports through 2032.

And unlike in the past, the private sector is no longer a bystander. Data Patterns, Bharat Forge and MTAR are aiming for system integration and even full platform production. PSU giants like HAL and BEL, meanwhile, are evolving into sophisticated systems integrators rather than mere assembly outfits.

Exports: Promise but Also Pitfalls

India’s ambition to transform from a top arms importer to a credible exporter is real, but the climb is steep.

Exports have hit Rs 210 bn (~$2.5 billion), a tenfold jump over a decade. But this is still less than 1% of global arms exports. By comparison, the US and China dominate these flows. India’s Tejas jets, BrahMos missiles and artillery systems have sparked interest in Southeast Asia, Africa and the Middle East.

But global buyers want more than just platforms, they want certainty. Timely delivery, reliable after-sales support and proven supply chain strength. India’s patchy execution record raises questions.

New partnerships offer hope: the HAL-GE F414 engine deal, the Airbus C295 transport aircraft assembly with Tata and proposed European collaborations could lift India’s credibility. But only if India proves it can meet deadlines and quality benchmarks.

Without this, the export story risks becoming another unfulfilled promise.

So… Boom or Bubble? Let’s Dig Deeper

On paper, the sector looks like a dream.

The defence capital outlay, essentially the modernization budget, has grown at 8.9% CAGR over FY17–25. What’s more significant is the change in spending pattern: domestic procurement’s share has shot up from 49% to 75%. This means nearly Rs 16 trillion worth of defence orders is meant for Indian firms, PSUs, private players and MSMEs alike.

Why the sudden urgency?

Geopolitics.

The May 2025 border flare-up made this clear. India’s swift punitive strikes on 12 Pakistani airbases, the deployment of BrahMos missiles and the S-400 air defence system showed India’s resolve. But the neighbour to the north, China, is arming rapidly and helping Pakistan build capability. India has no choice but to modernise.

The Order Pipeline Looks Fantastic, But Only On Paper

The Defence Acquisition Council has cleared orders worth Rs 8.5 trillion between FY23–25, equal to what was approved over the previous decade.

The upcoming opportunity list includes:

• Six P75I submarines.
• Three Kalvari-class submarines.
• Seven P-17B frigates and next-generation corvettes.
• 180+ LCA Mk-1A jets and Light Combat Helicopters.
• QRSAM missile systems and electronic warfare combat suites.
  
  This could flood the order books of HAL, BEL, Mazagon Dock, Cochin Shipyard and Data Patterns for years.But that’s only if everything proceeds to plan.

The Old Weak Spots Haven’t Disappeared

Despite the buzz, old problems remain.

Between FY16–25, actual budget allocations averaged 20% lower than the armed forces’ demands. Only in the last two years have allocations matched projected needs.

Defence also trails other infra-heavy sectors. Roads and railways saw capex grow 90%+ in recent years. Defence capex grew 68%, still decent, but slower, thanks to complex multi-ministry clearances and heavy import dependence.

Execution risk is the biggest worry. Major programmes, the Tejas Mk-II, AMCA stealth fighter, submarines, are years behind schedule. Reasons are familiar: technology bottlenecks, trial failures, complex manufacturing.

‘Atmanirbharta’ is the government slogan, but jet engines, radars, missile seekers and stealth tech are still sourced abroad. HAL’s GE engine deal is progress, but real local capability is years away.

Private vs PSU: The Market’s Clear Verdict

Markets aren’t fooled. They’ve priced this divide in.

Private players like Data Patterns, MTAR and Bharat Forge enjoy premium valuations because of expected faster growth, 25–40% CAGR driven by agility and tech focus.

Public sector giants like HAL, BEL and BDL will likely grow at 15–18% CAGR, weighed down by government processes. Yet they offer visibility and scale, HAL’s Rs 4.4 trillion order book and BEL’s stable execution in missiles and radars make them safer bets.

So for investors, this sector demands balance: PSU stocks for stability, select private names for growth.

So… Boom or Bubble?

The answer: this is a real boom, but a fragile one.

The opportunity is large, the government serious, the order pipeline real. But execution delays, tech gaps, budget uncertainty and credibility issues for exports remain dangerous weak spots.

India’s defence sector is at an inflection point. If these risks are fixed, this could be a rare multi-decade success story. If not, it could disappoint, like so many sunrise sectors before.

For investors: be excited, but also careful.

Stick with giants like HAL and BEL for safety. Bet selectively on private firms like Data Patterns or MTAR for growth. And above all, watch execution.

Because in India, even defence stocks, like its missiles, sometimes misfire.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information. 

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Manvi Aggarwal has been tracking the stock markets for nearly two decades. She spent about eight years as a financial analyst at a value-style fund, managing money for international investors. That’s where she honed her expertise in deep-dive research, looking beyond the obvious to spot value where others didn’t. Now, she brings that same sharp eye to uncovering overlooked and misunderstood investment opportunities in Indian equities. As a columnist for LiveMint and Equitymaster, she breaks down complex financial trends into actionable insights for investors.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article. The website managers, its employee(s) and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein.  The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors.  Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.