Indian defence stocks slid sharply on Budget day even as the government raised defence capital expenditure for FY27 by about 18%. The market reaction reflected a gap between expectations and what the Budget delivered for the sector, compounded by a broader sell-off across equities. The Nifty India Defence index fell as much as 6% at its lowest point before trimming losses, ending the session down over 4%.
Market reaction across defence stocks
The Nifty India Defence index closed at 7,847.15, down 336.85 points or 4.12%, with selling spread across most large and mid-sized defence names.
Bharat Dynamics was the worst performer, falling 8.82% to Rs 1,401.95. Garden Reach Shipbuilders & Engineers declined 7.13% to Rs 2,568.45, while Mazagon Dock Shipbuilders dropped 6.07% to Rs 2,416.85. Paras Defence and Space Technologies slid 5.59% to Rs 672.80, and Mishra Dhatu Nigam fell 5.33% to Rs 355.80. Cochin Shipyard lost 5.23% to Rs 1,573.10, BEML declined 4.75% to Rs 1,709.70, and Data Patterns (India) slipped 4.74% to Rs 2,544.30.
Large cap cap names were also under pressure. Bharat Electronics eased 4.08% to Rs 430.70, while Hindustan Aeronautics dropped 3.80% to Rs 4,442.35. Dynamatic Technologies fell 3.77%, Zen Technologies declined 2.67%, Solar Industries India lost 1.89%, Astra Microwave Products slipped 1.87%, and Cyient DLM ended 1.50% lower. MTAR Technologies was an exception, rising 2.94% to Rs 3,019.
What the Budget announced for defence
1. Defence capital outlay for FY27
The Union Budget raised defence capital outlay for FY27 to Rs 2.19 lakh crore, compared with the revised FY26 estimate of Rs 1.86 lakh crore, translating into an increase of roughly 18%. While the allocation was higher in absolute terms, it fell short of the growth rate that parts of the market had built in ahead of the Budget.
2. Measures beyond capital spending
Beyond capital expenditure, the Budget included targeted measures affecting defence manufacturing, taxation of personnel, and the administrative framework under which defence expenditure is managed, rather than announcing large, project-linked procurement decisions.
3. Customs duty exemption for defence aviation MRO
In defence aviation, the government announced a basic customs duty exemption on raw materials imported for the manufacture of aircraft parts used in maintenance, repair, and overhaul. The exemption applies specifically to imports made by Public Sector Units under the Ministry of Defence and covers aircraft components and engines used for MRO activities.
In her Budget speech, Finance Minister Nirmala Sitharaman said, “It is proposed to exempt basic customs duty on raw materials imported for manufacture of parts of aircraft to be used in maintenance, repair, or overhaul requirements by Units in the Defence sector.” This relief operates alongside a broader duty exemption on aircraft components used in manufacturing, but the MRO benefit is explicitly restricted to defence PSUs.
4. Income tax exemption for disability pension
The Budget introduced a specific income tax exemption for disability pension received by members of the Armed Forces and paramilitary personnel. The exemption applies to both the service element and the disability element of the pension where the individual has been invalided out of service due to a bodily disability attributable to or aggravated by military, naval, or air force service. The provision does not apply to those who retire on superannuation or on other grounds.
The finance minister stated that the proposal was to “provide a specific exemption for disability pension granted to members of the Armed Forces including paramilitary personnel… and to exclude cases of retirement on superannuation or otherwise.”
5. Defence expenditure framework and financial autonomy
Defence expenditure continues to be presented through five separate Demands for Grants: Ministry of Defence (Civil), Defence Services (Revenue), Capital Outlay on Defence Services, Defence Pensions, and Ministry of Defence (General). The Budget documents reiterate that the Delegation of Financial Powers Rules, 2024, do not apply to the Ministry of Defence for expenditure debitable to Defence Services Estimates.
In addition, the Ministry of Defence remains excluded from standard Asset Register disclosures, and defence accounting continues to be handled independently by the Controller General of Defence Accounts.
Why stocks still moved lower
The initial sell-off followed the absence of large, project-specific announcements linked to listed defence companies. Immediately after the Budget speech, defence stocks were among the worst hit as there were no fresh contracts, procurement programmes, or policy actions directly tied to near-term order inflows.
Expectations also weighed on sentiment. Jefferies had earlier said it was looking for defence capital expenditure growth of more than 25%, building on the pace seen in FY26. The brokerage noted thatt in FY26, around 62% of the Rs 1.8 lakh crore defence capex allocation was already spent between April and November 2025, significantly higher than the 41–54% utilisation seen during the same period in previous years.
It added that this was partly driven by emergency procurements following the India-Pakistan conflict under Operation Sindoor in May 2025.
Varun Gupta, CEO of Groww Mutual Fund, said the higher defence allocation reinforces the government’s focus on strategic preparedness and indigenous capability building. He noted that capital-led defence spending tends to have a wider impact through domestic manufacturing, technology development, and skilled employment.
The weakness in defence stocks also mirrored the broader market decline. Equities were under pressure due to a higher securities transaction tax on futures and options and a sharp risk-off move during the special Sunday trading session, which dragged multiple sectors lower.
Saurabh Bansal, Founder of Finatwork Investment, said, “Several priorities in the Union Budget are influenced by the changing geopolitical environment. Support for India’s goal of self-reliance and long-term strategic ability is indicated by the emphasis placed on domestic defence and security manufacturing.” On the tax measures, he added, “The customs duty exemptions on defence and aerospace components are an example of this focus on manufacturing for self-reliance.”
He also pointed to the export push embedded in the Budget, saying, “There is an effort to position Indian manufacturers more competitively in the global economy by focusing on domestic production while also focusing on exporting.”
Conclusion
Despite these announcements, the Budget did not include large, project-linked procurement decisions, new weapons programmes, or near-term order visibility for listed defence companies. With defence stocks having rallied sharply ahead of the Budget, the combination of an 18% capex increase that missed expectations, limited private-sector impact from customs relief, and broader market weakness led to a sharp sell-off.