What India’s Defence Manufacturing Means for Investors

India’s defence industry is on a steep growth trajectory, powered by heightened security needs and a push for self-reliance. The country now ranks among the world’s top four military powers, and recent policies have accelerated a shift from importing weapons to manufacturing them domestically. Record-breaking figures underscore this change – for instance, defence production hit ₹1.5 lakh crore in FY25, and defence exports surged to a record ₹23,622 crore (up from just ₹686 crore in FY2013–14). These trends reflect rising government support and broad participation across public and private players. 

In this context, Windmill Capital’s new Defence Tracker smallcase aims to capture the gains of companies that are integral to India’s defence ecosystem – from equipment manufacturers and aerospace suppliers to tech providers and strategic PSUs.

Strong Government Backing and Policy Push

India’s defence sector enjoys unprecedented government support. The Union Budget 2025–26 allocated a record ₹6.81 lakh crore for defence ( + 9.5% YoY), including ₹1.80 lakh crore (26%) for capital outlay on new weapons, aircraft, ships, and infrastructure ( + 5% YoY), and ₹7,146 crore for strategic agencies like the BRO. To boost self-reliance, 75% of modernisation spending is reserved for Indian suppliers, with ₹1,500 crore earmarked for procurement from start-ups.

Reforms such as the SRIJAN portal, PLI scheme for defence electronics, and five Positive Indigenisation Lists are driving import substitution—the fifth list (July 2024) added 346 items worth ₹1,048 crore for local sourcing. FDI limits have been liberalised to 74% automatic and 100% with approval, while strategic partnerships (e.g., INDUS-X with the US) promote technology co-development.

Two Defence Industrial Corridors in Uttar Pradesh and Tamil Nadu are attracting firms and over 190 defence-tech start-ups. The iDEX (Innovations for Defence Excellence) initiative, launched in 2018 and run by the Defence Innovation Organisation (formed by HAL and BEL), fosters innovation among start-ups, MSMEs, academia, and R&D bodies—strengthening the foundation for India’s defence manufacturing growth.

Domestic Production and Export Surge

India’s defence manufacturing and exports are witnessing rapid growth. Domestic firms now meet about 65% of India’s defence requirements (vs 35% imported earlier), led by major PSUs and a fast-growing private sector. Key platforms such as Arjun tanks, Tejas fighter jets, warships, and artillery systems are now built or assembled locally—most notably the INS Vikrant, India’s first indigenous aircraft carrier, commissioned in 2022 with 76% local content, underscoring strong supply-chain capability.

Exports have surged alongside. Shipments range from small arms to major platforms, including a ₹3,800 crore BrahMos missile deal with Indonesia. India now exports to 80–100 countries, with a target of ₹50,000 crore (US $6.6 billion) annual exports by 2029.

In FY25, the Ministry of Defence signed 193 contracts valued at over ₹2 lakh crore, of which 177 contracts—worth about ₹1,68,922 crore (roughly 81% of the total value)—were awarded to Indian firms. With rising security needs, strong policy support, and growing indigenous capability, India’s defence sector is firmly positioned as a multi-year structural growth story.

Innovation, Supply Chain and Start-Ups

India is rapidly strengthening its defence technology base. The iDEX programme (launched 2018) has opened 549 challenges, attracted 619 firms, and signed 430 co-development contracts for technologies like drones, radars, and secure communications. The DRDO, with a ₹26,817 crore FY26 budget (+12% YoY), is partnering with industry under the Technology Development Fund; startups like Bellatrix Aerospace have even demonstrated indigenous electric thrusters in space.

Public and private players—BEL, HAL, L&T, Tata, Mahindra—are expanding across aircraft, missiles, and vehicles, supported by 430 licensed manufacturers and 16,000 MSMEs. New frontiers include cyber defence, AI, robotics, and satellite surveillance (India plans 52 defence satellites by 2030).

Together, these initiatives are driving investment into local manufacturing, backed by the government’s ₹3 lakh crore production target by FY2029 and strong “Make in India” sourcing mandates.

Large-Scale Investment Opportunities

India’s defence sector presents several long-term structural opportunities. The scale of investment across key segments is significant:

• Aerospace: Around ₹4.33 lakh crore (US$50 billion) is expected to be invested in new aircraft, helicopters, drones and avionics, as the Air Force and naval aviation arms undergo modernisation.
  
• Naval shipbuilding: Estimated at ₹3.29 lakh crore (US$38 billion), this includes the construction of warships, submarines, patrol boats and auxiliary vessels.
  
• Missiles and artillery: Close to ₹1.82 lakh crore (US$21 billion) is projected for missile systems, artillery guns and advanced munitions.

India’s defence demand extends beyond weapons to armoured vehicles, electronic warfare, and secure communication systems, supported by ongoing upgrades and replacements. Defence services like training ships, simulators, and logistics are also increasingly sourced from domestic firms, deepening the ecosystem.

Government and industry estimates suggest ₹4 lakh crore (US $57 billion) in procurement opportunities for Indian firms over the next 5–7 years. With strong capital spending, import substitution, and rising exports, defence-focused companies are seeing steady order inflows.

Amid regional security pressures and a 25% private-sector allocation in domestic procurement, the sector offers long-term structural growth—aided by policy backing, technology adoption, and expanding global opportunities.

A Strategic Inflexion Point

India’s defence sector has entered a decisive phase. It is no longer just about procurement or budget allocations. The entire ecosystem from policymaking to production is being reshaped around self-reliance, innovation, and global competitiveness.

For investors, this is not simply a thematic play. It is a long-term structural story backed by policy clarity, rising capital outlays, and an increasingly capable domestic supply chain. The transition from imports to indigenous platforms, supported by research, private sector participation, and export ambitions, makes this a sector with staying power.

India is not just aiming to strengthen its arsenal. It is building a defence manufacturing base that can serve both domestic and international markets. That shift in direction is what makes the sector a serious consideration for forward-looking portfolios.

Introducing the Defence Tracker

The Defence Picks – AI Model smallcase is built to give investors structured exposure to India’s fast-evolving defence and aerospace ecosystem. 

The smallcase will include companies across aircraft equipment and manufacturing, defence communication and electronic systems, mobility equipment, essential defence materials and machinery,  explosives and missile systems, defence training solutions, and strategic shipbuilding sectors.  The smallcase is built with proprietary AI-based algorithms to find relevant defence-related businesses. It also includes a multi-factor screening process that looks at relative price strength and valuation filters to steer clear of overvalued companies.

As defence shifts from being just a cost centre to a strategic growth engine, it deserves thoughtful allocation in every future-ready investment portfolio.