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Record FY26 production and 63% surge in defence exports underline India’s accelerating shift from import dependence to indigenous manufacturing, with production targeted to reach Rs 3 trillion by FY29

Emkay Global Financial Services in its latest report on Defence cited India’s defence sector is entering a new phase of scale, indigenisation and global expansion, with domestic defence production reaching a record Rs1.8 trillion in FY26, up 15.6% year-on-year and representing an approximately 18% CAGR since FY21. Defence exports also surged 63% to around Rs 380 billion, reinforcing the country’s growing position as a global supplier of defence equipment and systems.

According to Emkay’s Research report, the momentum is increasingly being supported by a structural shift in government procurement, rising private-sector participation, expanding indigenous design capabilities and a growing pipeline of large defence programmes. The government has set a target of Rs3 trillion in defence production and Rs500 billion in defence exports by FY29, pointing to continued expansion across the domestic defence manufacturing ecosystem.

India now exports defence products to more than 80 countries, with the US, France and Armenia among the major buyers. At the same time, the government’s indigenisation drive is broadening the addressable opportunity for domestic manufacturers. Five positive indigenisation lists covering 5,012 critical items have been notified, of which 3,025 have already been indigenised. Through the Srijan portal, more than 38,000 items have been identified for indigenisation, with over 13,900 successfully indigenised.

The shift is also visible in defence procurement. Of the approximately Rs1.4 trillion modernisation budget for FY27, 75% has been earmarked for domestic industry. The private sector’s contribution to overall defence production rose to 24% in FY26 from 22% in FY25, reaching around Rs420 billion. For FY27, around 25% of the domestic capital acquisition budget, or approximately Rs347 billion, has been earmarked for private industry.

This growing role for private companies is also changing the nature of participation across the defence value chain. Indian companies are increasingly moving beyond the traditional Build-to-Print model towards Build-to-Specification, Build-to-Design and Build-to-Requirements capabilities. Several private-sector players are also developing Lead System Integrator capabilities, positioning them to participate more deeply in the design, integration and delivery of complex defence platforms.

The scale of the opportunity is underlined by the government’s rising capital expenditure. Defence capital outlay for FY27 stands at approximately Rs1.9 trillion, up 24% year-on-year, supporting a substantial procurement pipeline across the armed forces. The Indian Air Force is progressing programmes including the Multi-Role Fighter Aircraft, LCA Tejas Mk-II, Su-30 MKI upgrades, medium transport aircraft, additional S-400 systems and the Advanced Medium Combat Aircraft. The Army’s pipeline includes Future Infantry Combat Vehicles, Future Ready Combat Vehicles, K9 Vajra-T systems, QRSAM, Akash-NG, loitering munitions, helicopters and next-generation Pinaka systems. The Navy is pursuing Project 75I, additional Scorpène submarines, next-generation frigates, naval utility helicopters, unmanned underwater vehicles and an indigenous carrier-based fighter.

The procurement pipeline is already translating into significant visibility for the industry. During FY26, the Defence Acquisition Council accorded Acceptance of Necessity for 55 proposals worth approximately Rs6.8 trillion, while capital procurement contracts covering 503 proposals were signed for around Rs2.3 trillion. Both represent the highest annual levels highlighted in the report, pointing to a deepening order pipeline for Indian defence manufacturers.

Research and technology development are also becoming increasingly central to the sector’s growth. The Defence Research and Development Organisation operates 41 laboratories alongside five DRDO Young Scientist Laboratories, while mission-mode projects account for the largest share of its development activity. The government is also increasing support for emerging defence technologies through initiatives such as iDEX and ADITI. Allocations of approximately Rs4.5 billion, nearly triple the level of two years earlier, are supporting start-ups working across artificial intelligence, unmanned systems, electronic warfare, advanced communications and sensors.

India’s defence industrial base is expanding geographically as well. The Uttar Pradesh and Tamil Nadu defence industrial corridors have attracted more than Rs91 billion of investment, while 289 MoUs represent potential investments of around Rs664 billion across 11 nodes. These corridors are creating additional capacity for manufacturing, technology development and supply-chain localisation.

The opportunity is extending beyond India’s borders as defence spending undergoes a reset in Europe. The European Union’s SAFE mechanism provides up to €150 billion in long-maturity loans, with procurement priorities including ammunition, missiles, drones, counter-drone systems, air and missile defence, electronic warfare and other strategic capabilities. The EU-India Security and Defence Partnership signed in January 2026 further opens potential avenues for cooperation in defence industry, maritime security, cyber and hybrid threats, space, counterterrorism and emerging technologies, creating opportunities for co-production and technology collaboration.

Leading Indian defence companies are already positioned to participate in this expansion. Hindustan Aeronautics Limited has an order book of approximately Rs2.5 trillion, supported by the Tejas Mk1A programme, and plans around Rs120 billions of capex through FY30 across programmes including LCA, HTT-40, LCH, Tejas Mk-II and GE-414. Bharat Electronics has increasingly evolved into a systems integrator, recording FY26 order inflows of around Rs297 billion, up 53% year-on-year, and an order backlog of approximately Rs723 billion. Bharat Dynamics has an order book exceeding Rs260 billion, with a pipeline spanning Akash-NG, Astra Mk-II, QRSAM and MRSAM. BEML, with an order book of around Rs217 billion, is also transitioning towards a technology-driven engineering and systems-integration model, with opportunities across future combat vehicles, high-mobility platforms and aerospace structures.

The combination of rising defence spending, sustained indigenisation, stronger private-sector participation, expanding exports and growing technology capabilities is reshaping India’s defence industry from a procurement-led market into a broader manufacturing and technology ecosystem. With record production already achieved in FY26 and ambitious production and export targets ahead, the sector is increasingly positioned around a longer-term structural growth opportunity rather than a short-term procurement cycle.

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