Defence Stocks Plunge Post-Budget 2026 Despite Record ₹7.85 Lakh Crore Allocation

Indian defence stocks, which had been trading at record highs in anticipation of the Union Budget 2026, witnessed a sharp correction on February 1, 2026. Despite Finance Minister Nirmala Sitharaman announcing a substantial 15.3% increase in the total defence outlay to ₹7.85 lakh crore, the sector faced intense selling pressure. The Nifty India Defence index plummeted by nearly 9% during a special Sunday trading session, reflecting a classic case of the market pricing in optimistic scenarios that the actual announcement failed to exceed.

Major industry players saw their share prices tumble within hours of the speech. Bharat Dynamics Limited (BDL) led the losers, with its stock price dropping between 10% and 14% to trade near ₹1,378 on the NSE. Other significant laggards included Garden Reach Shipbuilders & Engineers (GRSE) and Data Patterns, both of which saw declines of approximately 14%. Market heavyweights such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), and Mazagon Dock Shipbuilders also recorded losses ranging from 7% to 10%.

Dissecting the Defence Budget 2026-27

The fiscal roadmap for 2026-27 set the total defence expenditure at ₹7,84,678 crore, a notable jump from the previous year's allocation of ₹6,81,210 crore. A critical component of this budget is the capital outlay for modernization and asset creation, which was raised to ₹2,19,306 crore. This represents a 21.8% increase over the previous year's budgetary estimate of ₹1.80 lakh crore. The government also maintained its focus on the 'Atmanirbhar Bharat' initiative, earmarking ₹1.39 lakh crore—roughly 75% of the capital acquisition budget—for domestic procurement.

While these figures represent a strong growth trajectory, they fell short of the 25% increase that some aggressive market analysts and brokerages had anticipated. The gap between these high expectations and the actual 18-21% increase in capital expenditure triggered a wave of profit-booking. Furthermore, the absence of new, large-scale project announcements during the Budget speech itself contributed to the initial negative sentiment among investors.

Factors Driving the Sectoral Sell-off

Several factors converged to drive the sharp decline in defence shares. Beyond the missed expectations regarding the headline allocation, the broader market was spooked by the hike in Securities Transaction Tax (STT) on derivatives. The increase in STT for futures to 0.05% and options to 0.15% led to a general risk-off mood, affecting high-beta sectors like defence. Analysts also pointed toward the high valuations in the sector, where many stocks were trading at price-to-earnings (P/E) multiples of 40x to 80x, leaving little room for any perceived disappointment.

Strategic Reforms and Long-term Positives

Despite the immediate market reaction, the Budget introduced several structural reforms aimed at long-term growth. The Finance Minister proposed a customs duty exemption on components and raw materials used for the manufacture, repair, and overhaul (MRO) of aircraft. This move is expected to lower input costs and position India as a global hub for both military and civil aviation maintenance. Additionally, the establishment of a ₹5,000 crore Deep-Tech Fund for private sector R&D is designed to foster innovation in niche areas like AI and drone technology.

The budget also extended customs duty exemptions for nuclear power projects until 2035 and introduced incentives for critical minerals processing. These measures are intended to strengthen the strategic infrastructure and supply chain resilience required for advanced defence manufacturing. Industry experts suggest that while the immediate reaction was sentiment-driven, these policy tweaks provide a solid foundation for domestic players to scale their operations.

Market Impact and Future Outlook

The sharp correction has brought valuations down from their peaks, which some analysts view as a necessary cooling-off period. The capital-led spending in the defence sector is expected to have a multiplier effect on the broader economy, supporting skilled employment and technological development. However, the market's focus is now shifting from budgetary allocations to execution. Investors will be closely monitoring the order inflow and the pace of contract sign-offs in the coming quarters.

Budget Allocation Comparison

Analysis Section

The post-budget crash in defence stocks highlights the risks associated with high-valuation sectors during major policy events. While the 21.8% jump in capital outlay is structurally positive, the market had already priced in a more aggressive expansion. The sell-off was further exacerbated by the STT hike, which dampened overall market liquidity. Moving forward, the performance of defence stocks will likely become more selective. Companies with strong execution capabilities and clear earnings visibility, such as HAL and BEL, may stabilize faster than those trading purely on speculative order book growth. The government's continued push for indigenisation remains the primary long-term driver for the sector.

Conclusion

The Union Budget 2026 has reinforced the government's commitment to defence modernization and self-reliance through record allocations and strategic tax exemptions. While the immediate market reaction was negative due to unmet high expectations and broader fiscal changes, the fundamental growth story for Indian defence manufacturing remains intact. As the industry absorbs the new policy measures, the focus will transition to how effectively companies can convert these increased outlays into tangible orders and revenue growth in the next fiscal year.