Budget 2026: Why Defence Stocks Fell Despite 18% Capex Hike

On Budget Day, Indian defence stocks saw intense selling pressure despite the government's announcement of an approximately 18% increase in defence capital spending for FY27. Investors were taken aback by the action, which exposed an evident gap between market expectations and what the Union Budget finally provided for the industry.

The Nifty India Defence index dropped as much as 6% during the session before trimming losses to close 4.12% lower at 7,847.15. The decline reflected not just disappointment over the Budget’s fine print but also broader weakness across equity markets on the day.

What Did the Budget Actually Announce for Defence?

The Union Budget raised the defence capital outlay for FY27 to ₹2.19 lakh crore, compared with the revised FY26 estimate of ₹1.86 lakh crore, translating into an increase of roughly 18%.

Beyond capital spending, the Budget focused on targeted and structural measures rather than large procurement announcements. These included a basic customs duty exemption on raw materials imported for manufacturing aircraft parts used in maintenance, repair and overhaul (MRO) by defence public sector units. The relief applies specifically to defence aviation MRO and does not extend broadly across private manufacturers.

The Budget also introduced an income tax exemption for disability pensions received by Armed Forces and paramilitary personnel who are invalided out due to service-related disability.

Overall, the lack of significant, project-linked procurement announcements influenced the initial market reaction, despite the fact that these actions were seen as incremental benefits for the defence sector.

Why Did HAL, BEL and Other Defence Stocks Slide?

The sell-off was broad-based across large, mid-sized and smaller defence companies. Bharat Dynamics was the worst performer, falling 8.82% to ₹1,401.95. Garden Reach Shipbuilders & Engineers declined 7.13%, while Mazagon Dock Shipbuilders dropped 6.07%.

Among large-cap names, Bharat Electronics slipped 4.08% and Hindustan Aeronautics fell 3.80%. Most other defence-linked stocks also ended the session lower, with MTAR Technologies emerging as a rare gainer.

The mismatch in expectations was the main trigger. Jefferies had stated before the Budget that it was aiming for an increase in defence capital expenditures of more than 25%, following on the robust pace shown in FY26. Approximately 62% of the ₹1.8 lakh crore FY26 defence capital expenditures have already been used between April and November 2025, according to the data, which is far higher than utilisation levels in prior years.

On the other hand, despite being higher, the FY27 allocation did not provide the type of positive surprise that investors had anticipated. The pressure was increased by the absence of new contract announcements or near-term order inflow visibility for public firms.

The decline was also amplified by broader market weakness. Equities were under stress due to a higher securities transaction tax on futures and options, along with a sharp risk-off move during the special Sunday trading session, which dragged multiple sectors lower alongside defence.

What Does This Mean for Defence Stocks Going Ahead?

As markets stabilised through the session, defence stocks recovered part of their losses, suggesting that some of the selling was driven by immediate sentiment rather than a fundamental reassessment. Hindustan Aeronautics pared losses to around 3%, while Bharat Electronics was down closer to 1.5% by the end of trade. A few names, such as Garden Reach Shipbuilders, even managed to turn marginally positive.

Market participants pointed out that the higher allocation still reinforces the government’s focus on strategic preparedness and indigenisation, even if near-term triggers were limited. Capital-led defence spending tends to have a wider spillover effect through domestic manufacturing, technology development and skilled employment.

Additionally, analysts pointed out favourable aspects of the budget, such as exemptions from customs duties for defence and aerospace components, which might progressively enhance cost structures for manufacturers in the public sector. They did, however, express caution that short-term stock performance is probably going to continue to be correlated with more general market trends.

Defence stocks may continue to see volatility in the near term, even as the sector remains aligned with India’s longer-term strategic and manufacturing priorities.

Sources:

Financial Express

ET