India’s defence capital expenditure skyrocketed 328 per cent YoY in May 2025, becoming the single largest contributor to the Centre’s 39 per cent surge in total capital spending for the month. Excluding defence, capex rose just 3 per cent—highlighting the sector’s pivotal role in driving public investment momentum.
In terms of YTD, capex is up 54 per cent YoY, much higher than the full-year budgeted growth of 7 per cent. Even excluding telecom and the Department of Economic Affairs, capex is still up 38 per cent versus a 6 per cent budget target, and up 32 per cent if defence is excluded. Spending in key areas like roads and railways is already outpacing the growth projected for FY26.
Defence capex takes centre stage
The surge in defence capex, Jefferies said, followed the government’s intensified focus on national security and self-reliance on defence manufacturing, especially after the Centre carried out the May 2025 ‘Operation Sindoor’. Ever since, the government has been actively promoting domestically developed defence systems like BrahMos missiles and Sukhoi jets to enhance export opportunities. Jefferies said, “We believe govt intent on capex spend will be monitored closely for industrial stocks.”
Jefferies had earlier highlighted that this capex momentum is part of a broader strategic push with India’s defence budget expected to grow at a CAGR of around 14 per cent through FY30, which would be driven by the government’s indigenisation focus.
DEA allocation underutilised
According to data shared by Jefferies, The Department of Economic Affairs (DEA) has a budget of Rs 466 billion for FY26, but there are no clear details on how this will be used. In FY25, Rs 662 billion was originally allocated to the DEA, but this was cut to Rs 127 billion in the revised estimate, Jefferies said, and only 15 per cent of the original amount was actually spent.
Since this allocation is usually underutilised, the brokerage firm has excluded the Rs 417 billion earmarked for “New Schemes” in FY26 from its capex growth forecast of 10–12 per cent year-on-year. “We also adjust the BSNL infusion, which reflects in telecom capex as it is mainly for funding losses vs capex,” it added.
Road, rail capex
Further, road capex surged 119 per cent while rail capex went up by 8 per cent on-year in May. For the year so far, road spending is up 3 per cent despite a 5 per cent decline projected in the FY26 budget, and rail spending is up 5 per cent against a flat budget estimate.
Jefferies maintained that the government’s strong push on road and rail capex since FY20 has now entered a slower growth phase, as seen in the FY25 and FY26 budgets. So far, about 21–22 per cent of the full-year budgeted capex for both sectors has already been spent.
States capex: Mixed early trends
Transfers to states fell 25 per cent on-year in May 2025, with only 4 per cent of the FY26 budget estimate used so far. This is not unusual, Jefferies said, as such transfers are typically low in the first half of the year and pick up later. Over time, the share of transfers to states in overall capex has grown from 5 per cent in FY21 to 17 per cent in FY25.
Meanwhile, capex by key states rose 23 per cent year-on-year so far this fiscal. In May alone, spending by 14 major states, which account for 82 per cent of FY25 state capex, jumped 36 per cent YoY. However, according to Jefferies, this growth is still below the 33 per cent increase projected in their FY26 budgets.
Earlier in May, according to a report by Moneycontrol, Finance Secretary Ajay Seth had noted that state capex must improve from current levels.
Capex implications for stocks
The growth outlook for the defence sector is supported by a strong order book and earnings visibility for key public sector undertakings such as Hindustan Aeronautics Ltd (HAL), Bharat Electronics Ltd (BEL), and Data Patterns Ltd. Jefferies has identified these as top investment picks benefiting from this surge
Jefferies noted that several stocks have rallied over 20 per cent since their February 2025 lows, with further upside expected across key names:
1) Siemens should benefit from revenue and margin upside on execution of its Rs 263 billion locomotive order;
2) HAL has 5-year growth visibility of 19 per cent EPS CAGR, driven by indigenisation, which should keep multiples elevated;
3) L&T – strong visibility with conservative guidance should drive upside;
4) KEI is a holistic play on power, capex, housing and exports.