Pitch Report: Defence industry hopes for moderate raise in outlay in Budget 2025, support for localisation

India is ranked as the fourth-largest military spender, allocating $84 billion in 2023, accounting for 2.4% of its GDP.

Defence sector expects only a moderate increase in outlay in the coming Union Budget.

On February 1, the Finance Minister Nirmala Sitharaman will announce the Union Budget 2025-26. Analysts have commented that a widespread modernisation drive is needed in the defence sector, but they are divided over the possibility of sufficient budgetary allocation.

In the FY2024-2025 budget, the finance minister allocated Rs 6.22 lakh crore to the sector -- a 4.79 percent increase from previous year, and out of which capital expenditure was Rs 1.72 lakh crore. This year, the capital-expenditure is expected to increase to Rs 1.9 lakh crore with more optimistic analysts expecting a large part of it going to improve mobility vehicles and infrastructure for the Navy.

In a conversation with Moneycontrol, Prabhudas Lilladher’s Amit Anwani said, "All three services -- Army, Navy, and Air Force -- require significant modernisation, both in terms of equipment and manpower training". He is optimistic about the chances of this being rolled out, given the emphasis the government has placed on localisation in defence manufacturing, with emphasis being placed on technology transfer and indigenous production.

Other analysts pointed out, while such an increase in spending would be welcome, the track record so far suggests that the spending will be more limited.

Anil R, Senior Research Analyst at Geojit Financial Services, said that capital expenditure in the defence budget has stayed in 28-30 percent range since 2010. He also said that there is a likelihood that the government will focus more on consumption, now that there is a slowdown in that segment.

Meanwhile, research reports have commented on the opportunity there is in import substitution.

A report by PhillipCapital said, "India is ranked as the fourth-largest military spender, allocating $84 billion in 2023, accounting for 2.4% of its GDP. Despite this, approximately 35% of India’s defence needs are still met through imports, presenting a significant opportunity for import substitution."

That said, the report also noted the surge in India's defence exports in the recent past. According to it, the exports have surged, growing at a 46 percent CAGR between FY17-24, with products like missiles, radars, and armoured vehicles exported to over 85 countries.