India’s state-run defence sector is set for substantial growth, with public sector undertakings (PSUs) expected to clock an 18% annual increase over the next four years, driven by rising defence spending and strategic modernization efforts. A report from Omniscience Capital projects that the nation’s defence budget, currently around 2% of GDP, could rise to 3% or even 4% over the next decade, as India prioritizes military readiness in response to escalating security threats.
With India’s GDP expected to reach $10 trillion, the defence budget could expand beyond $300 billion by 2035, implying a compounded annual growth rate of 16–17%. Defence PSUs are projected to double their output to Rs 1.8 lakh crore by 2029, underlining a sustained surge in domestic production capacity.
The report notes that Operation Sindoor has intensified India’s focus on bolstering national security, leading to increased vigilance in border management, economic infrastructure protection, and cybersecurity. As part of this accelerated defence push, India has set a mid-term domestic production target of Rs 3 lakh crore by 2029.
In FY25, India’s defence production surpassed Rs 1.4 lakh crore, with defence PSUs contributing Rs 1.1 lakh crore, accounting for 78% of total domestic production. Listed defence PSUs alone generated Rs 90,000 crore, representing two-thirds of the sector’s state-backed revenue. Analysts forecast further expansion, with eight listed PSUs projected to grow at 18% in FY26 and 22% in FY27. Nine unlisted defence firms are expected to collectively surpass Rs 20,000 crore in turnover by FY26.
While defence pensions—currently comprising 25% of the total military budget—will expand at a slower rate, capital expenditures and supply investments are expected to outpace overall budgetary growth, potentially exceeding 20% annually. Over the next decade, India’s total defence spending could range from Rs 50 lakh crore (assuming a 2.4% budget share in 2035) to Rs 64 lakh crore (if defence allocations reach 3%).
Market valuations remain a key concern for investors. The median price-to-earnings (P/E) ratio for eight listed defence PSUs stands at 57, with forward projections at 45 for FY26 and 36 for FY27. Some private defence firms command even higher multiples, signaling that growth expectations are significantly priced in. The report urges investors to exercise caution when evaluating stock allocations at current levels, given the sector’s robust but highly valued outlook.
India’s increasing defence budget solidifies its long-term commitment to military preparedness, positioning domestic defence PSUs as pivotal players in advancing national security and technological self-reliance. Analysts anticipate that the Rs 3 lakh crore production target for 2029 could be revised upward, underscoring India’s growing influence in global defence manufacturing.
