India’s defense sector is poised for robust growth in FY2026, with revenue expected to rise by 15–17%, according to a new analysis by credit rating agency ICRA. Despite challenges such as long operating cycles, the sector’s momentum is being fuelled by a combination of policy support, rising exports, and a strong order book.
Strong Order Pipeline Driving Momentum
ICRA’s analysis highlights that defense companies are benefitting from strong execution progress supported by a robust order book, with the Order Book-to-Operating Income (OB/OI) ratio standing at 4.4 times as of the end of FY2025. This high OB/OI ratio reflects strong revenue visibility and underscores continued demand for indigenously produced defense platforms and systems.
ICRA has also maintained a positive outlook for the defense sector due to continued government support in the form of budgetary allocations and policy initiatives.
Government Push for Indigenization and Self-Reliance
The Government of India has rolled out several key reforms under the Atmanirbhar Bharat initiative to boost domestic defense manufacturing and reduce dependency on imports. Key initiatives include:
Liberalization of Foreign Direct Investment (FDI) norms in defense
Implementation of the Defense Offset Policy
Development of two Defense Industrial Corridors
Publication of five Positive Indigenization Lists
Launch of the SRIJAN portal for domestic vendor engagement
Furthermore, the capital outlay for the defense sector has risen significantly, growing at a CAGR of 8.29% over the past five years, reaching ₹1.92 lakh crore in FY2026.
Suprio Banerjee, Vice President and Co-Group Head of Corporate Ratings at ICRA, stated:
“Entities across land, naval, aeronautical, armaments and ICT domains are expected to benefit from the sustained expansion in budgetary allocation. We foresee continued healthy order inflows as the Government prioritizes domestic procurement.”
Rising Domestic Procurement and Export Performance
ICRA’s data reveals that the share of defense procurement from domestic vendors has increased from 61% in FY2017 to approximately 75% in FY2025. Simultaneously, defense exports have surged by more than 15 times, growing at a CAGR of 41% during FY2017–FY2025 to reach ₹23,622 crore.
This growth demonstrates the success of India’s defense export strategy, with increased global demand for indigenous platforms such as artillery systems, drones, radars, and naval equipment.
Public vs Private: Segment-Wise Participation
ICRA’s report points out a clear segmentation trend in the industry:
- Public Sector Undertakings (DPSUs) continue to lead in aerospace, naval systems, and armaments
- The private sector is increasingly active in land-based systems and ICT applications
Despite the evolving participation, funding structures differ significantly between public and private entities. DPSUs enjoy the advantage of mobilization advances, whereas private players largely rely on Qualified Institutional Placements (QIPs) and preferential allotments for raising working capital.
Working Capital Management: A Key Challenge Ahead
While the sector has made strides, it continues to grapple with high working capital intensity. ICRA notes that its sample companies had an average gross operating cycle exceeding 400 days in FY2025 a challenge that can strain cash flows due to the need for maintaining large inventories and delayed receivables.
However, the sector is said to be in a comfortable financial position, with most players adopting proactive strategies to fund working capital needs.
