How India’s defence manufacturing ecosystem is undergoing a transformation

In a world shaped by geopolitical volatility and technological disruption, India has significantly expanded defence spending to strengthen military preparedness and indigenous manufacturing. The sector has been steadily transformed through innovation, technological advancement, and strategic reforms. The first phase of India’s defence manufacturing was largely about import substitution. The next phase will be about technology ownership and global competitiveness.

The recent BT-Deloitte India survey of India’s manufacturing companies bears witness to the trend. Aerospace & defence sector companies saw their combined profitability more than triple over five years. The 26 listed companies in the sector reported a total profit of Rs 23,111 crore in FY26, up from Rs 7,507 crore in FY21, a rise of 208%.

The profitability of several Indian aerospace, defence and allied companies has surged sharply over the past five years, according to ACE Equity data. Zen Technologies recorded the highest growth, with its net profit jumping 7,757% to Rs 217.9 crore in FY26, from just Rs 2.8 crore in FY21. Jaykay Enterprises saw a 727% increase, while Astra Microwave Products and Solar Industries India posted profit growth of 569% and 503%, respectively. 

Among larger defence companies, Hindustan Aeronautics (HAL) reported a net profit of Rs 9,115.5 crore in FY26, up 181% from FY21, while Bharat Electronics (BEL) saw its profit rise 191% to Rs 6,023.5 crore. Mazagon Dock Shipbuilders reported a 434% increase to Rs 2,421.9 crore.

In September, India’s Defence Acquisition Council cleared proposals worth Rs 1.1 lakh crore, with 98% to be sourced from Indian companies. From FY25 to FY27 so far, these approvals add up to a massive Rs 13 lakh crore. 

Alaric Diniz, Partner, Strategy, Risk & Transactions, Deloitte India, says the next phase of investment is expected to prioritise sustainable value creation, long-term capability development and globally competitive defence technology. 

Operation Sindoor highlighted the growing importance of dual-use technologies such as unmanned aerial vehicles (UAVs), AI-enabled command and control systems, satellites and AI-powered radars.

“With the sector transitioning into a more mature, technology-driven ecosystem, the future deal landscape in India’s defence industry is expected to see increased transaction flow, particularly in dual-use technology segments and export-ready businesses with scalable models,” says Diniz.

Schemes such as Innovations for Defence Excellence (iDEX) and ADITI (Acing Development of Innovative Technologies with iDEX) are actively engaging industries, start-ups, individual innovators, research institutions and academia to develop defence technologies. Both schemes have been introduced in the past five years.

By March 2026, iDEX had engaged 676 start-ups, MSMEs, and innovators; 551 design and development contracts had been signed. To strengthen this ecosystem, the DRDO has opened its advanced testing infrastructure to private industry through the Defence Testing Portal.

India has been strengthening military preparedness while expanding domestic manufacturing and research capabilities. Overall, defence production has grown at 13% a year, while exports have been rising 40% a year for the past 10 years. The defence budget has increased from Rs 2.53 lakh crore in FY14 to Rs 7.85 lakh crore in FY27. More importantly for listed manufacturers, capital acquisition spending has zoomed and, at Rs 1.85 lakh crore, is now 24% higher than last year’s budget estimate.

India has moved decisively from importing complete systems towards designing, developing and manufacturing an increasing proportion of defence equipment domestically. 

“Defence production reached about Rs 1.78 lakh crore in FY26, while exports reached Rs 38,424 crore. Importantly, the private sector’s contribution to defence production has been increasing and reached about 24% in FY26. For companies that invested in technology and qualification capabilities over many years, this is now translating into larger production opportunities,” says MV Reddy, MD, Astra Microwave Products.

The company designs and manufactures advanced microwave and radio frequency (RF) systems that power satellites, radars, missiles, and communication networks. It recently bagged a Rs 2,205 crore order from HAL for the Uttam AESA Radar programme.

“As indigenous content and technology contribution of Indian companies increase, so does the value addition. That is the more sustainable driver of profitability. The larger change is movement of Indian companies up the value chain from build-to-print manufacturing to build-to-specification, from components to subsystems, and increasingly from subsystems to complete systems,” he says.

The order books of companies are surging, especially for those in modern warfare drones and AI-enabled command and control systems. HAL, the largest player, has an order book of Rs 2.5 lakh crore, while Bharat Electronics’ order book is Rs 72, 258 crore. 

For defence companies, though, order books don’t automatically translate into balance sheet performance as these projects have long timelines, especially in areas like aircraft and submarines, where delays are routine.

Supply chains are also complex, so revenue depends on production capacity, component availability, testing, acceptance, and delivery schedules. Still, rising order book numbers are a magnet for investors, and that’s driving defence company valuations higher. The Nifty India Defence index is up roughly 22% in 2026, even as the Nifty has dipped around 9%.

Bodhisattwa Sanghapriya, Founder & CEO, IG Defence, says the company’s revenue grew 3.7x in FY26 due to a structural shift in policy. 

“Positive indigenisation lists, iDEX, the Buy Indian-IDDM preference, and emergency procurement powers have made indigenous systems the first choice for the forces. Operation Sindoor showed how central drones and counter-drone systems are to modern warfare, and orders moved from trial quantities to volumes,” says Sanghapriya.

IDDM stands for Indigenously Designed, Developed, and Manufactured.

Restrictions on foreign-origin components in military drones have also rewarded companies that invested early in indigenous supply chains. 

“IG Defence owns its design and software rather than assembling imported kits. Our margins widen as volumes grow. At the centre of the growth will be our AI-powered battle management platform and one-way long-range strike drone KAL,” he says.

Astra Microwave, with a standalone order book of Rs 2,156 crore, is progressively moving towards higher-value subsystems and systems while continuing to deepen its core expertise in RF, microwave and strategic electronics.

“Radar will remain a major area for us. We see opportunities across airborne, ground-based, naval and specialised radar programmes. Electronic warfare, seekers, data links, communication systems, counter-UAS (unmanned aerial system) technologies and other advanced RF applications will also become increasingly important,” says Reddy.

Private sector companies account for nearly half of India's defence exports, even though they are only about 24% of domestic defence production. According to Astra Microwave, the second important growth engine will be exports, and India cannot build a globally competitive defence industrial base purely on domestic demand.

“Companies need sufficient domestic scale to develop and qualify products, and thereafter they must compete internationally. Therefore, I see the next decade being defined by three things: greater indigenous design content, Indian companies taking responsibility for larger and more complex systems, and a stronger export orientation,” says Reddy.

“Policy is a tailwind here too: export promotion, defence lines of credit, and defence attachés actively pitching Indian systems have opened doors that didn’t exist five years ago. The next phase depends on export approvals keeping pace with that demand from the international market,” says Sanghapriya.

Reddy says the next stage should focus increasingly on predictability, technology development and procurement speed.

“Industry will invest much more aggressively in manufacturing capacity, R&D and specialised infrastructure when there is reasonable visibility of procurement over five to ten years,” he adds.