Budget 2026: Here’s What Motilal Oswal Sees for the Defence Sector in the Upcoming Budget

SYNOPSIS: Union Budget 2026 is expected to focus on defence-led capex and sunrise sectors, while maintaining fiscal discipline, with Motilal Oswal projecting tighter revenue spending and a lower deficit target.

Defence and Sunrise Sectors Likely to Take Priority

According to Motilal Oswal Financial Services (MOFSL), the upcoming budget is expected to place greater emphasis on defence and allied industries, and other sunrise sectors including power and electronics. At the same time, the government is likely to keep a tight check on revenue expenditure (revex), with limited expansion in subsidies and non-essential expenditure, relying on RBI dividends to manage the fiscal balance.

The brokerage expects the gross fiscal deficit of 4.3 percent of GDP in FY27, slightly lower than the 4.4 percent projected for FY26. This, MOFSL notes, signals a meaningful shift towards using debt-to-GDP as the key fiscal anchor. With nominal GDP growth assumed at around 10.1 percent, the budget may have limited headroom to support growth without compromising consolidation.

Defence and allied industries, in particular, are expected to take centre stage. The brokerage points out that the Defence Acquisition Council (DAC) approved capital acquisition proposals worth Rs. 79,000 crore during the winter session, pushing cumulative approvals in FY26 so far to Rs. 3.3 lakh crore, nearly double the defence capital outlay budgeted at Rs. 1.8 lakh crore.

Building on this momentum, Motilal Oswal estimates that defence capex could rise by around 15 percent in FY27, from the FY26 base of Rs. 1.8 lakh crore. Allied segments such as shipbuilding, electronics, and critical minerals are also expected to benefit as the government continues to prioritise indigenisation and strategic self-reliance.

Overall, Motilal Oswal sees scope for higher allocations in sunrise or non-traditional sectors. These include defence and allied industries, pharmaceuticals, power and nuclear energy, electronics, critical minerals, and labour-intensive industries that global trade tariffs have impacted. Many of these priorities were already outlined during the winter session of Parliament, offering a preview of what’s to come.

Fiscal Discipline and Total Capex to Shape the Budget

On the spending front, MOFSL projects total government expenditure to grow about 7 percent year-on-year in FY27, reaching roughly Rs. 52.9 lakh crore, or 13.4 percent of GDP. Revenue expenditure is estimated at Rs. 40.5 lakh crore, while the subsidy bill is projected at around Rs. 4.1 lakh crore, driven largely by food allocation at Rs. 2.1 lakh crore and fertiliser support at Rs. 1.9 lakh crore.

Capital expenditure by the Centre is modelled at Rs. 12.4 lakh crore in FY27, up 10.3 percent YoY or 3.1 percent of GDP, led primarily by increased defence spending. The brokerage also noted that FY26 included a one-time emergency defence procurement of around Rs. 40,000 crore.

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