Introduction: The Biggest Event of the Week
The upcoming Union Budget on February 1st is the week’s biggest event. Even though it falls on a Sunday, the market will remain open, following the tradition that full trading occurs whenever there is a budget announcement.
Why the Defence Sector is in Focus
While all sectors anticipate significant announcements, the defence sector is expected to gain from major statements by Finance Minister Nirmala Sitharaman.
Geopolitical Tensions
These high expectations result from ongoing tensions along the India-Pakistan border in 2025. The market’s reaction to big events like the IPL suspension highlights the need for increased defence spending.
Historical budget growth
The defence budget has been steadily rising for years.
- FY 2022: The allocation sat at around 4,80,000 crore rupees (≈ $63 billion).
- FY 2023: It climbed to 5.25 lakh crore rupees (≈ $66 billion), a 9.8 % increase.
- FY 2024: The figure rose to 5.93 lakh crore rupees (≈ $72 billion), reflecting about 13 % growth.
- FY 2025: Forecasted to grow 5‑6 %, reaching 6,21,940 crore rupees (≈ $74 billion).
- FY 2026: Expected to hit roughly 6,81,000 crore rupees (≈ $80 billion), a projected 9.5 % increase.
Key Expectations for Budget 2026
Both market analysts and government departments are advocating for a significant boost to defence spending.
- Capital Outlay Surge: Analysts expect the budget to rise by 8-15%. The Ministry of Defence has reportedly asked the Finance Ministry for up to a 20% increase to meet security needs.
- Modernisation & Tech: The focus is moving toward modern warfare technology.
- Capex for Assets: Capital expenditure for frontline assets is expected to rise from 26% to up to 30%.
- Drones & UAVs: Significant announcements are expected regarding Unmanned Aerial Vehicles (UAVs) and drones, as modern defence increasingly relies on advanced technology rather than traditional weapons.
- AI Integration: It is highly probable that announcements will be made about using Artificial Intelligence (AI) in defence applications to compete against advanced machinery.
- Manufacturing: A primary goal is to transition from merely assembling products to domestically manufacturing key internal components, such as radars, sensors, and engines, to reduce reliance on imports.
- Private Sector & MSMEs: There is a push to include private companies and MSMEs in defence production through tax incentives, allowing them to contribute significantly alongside government entities.
A “Make or Break” Moment
The defence sector holds the highest expectations for this budget. A substantial defence budget would not only satisfy the market but also send a powerful message to neighbouring nations.
- The $100 Billion Target: There is a long-standing expectation that the defence budget will cross the $100 billion mark, which has hovered around $60-80 billion so far.
- Market Reaction: If the budget meets these high expectations, defence companies will celebrate. However, if the increase remains “normal” or stagnant despite the geopolitical context, it could lead to significant disappointment and an adverse market reaction.
The Road to Profit
The goal is to prepare an investment strategy that ensures big profits before the budget is presented. The budget is not just a financial event; it is a directional document that will set the focus for the next 12 months.
The Big Numbers to Watch
4 critical figures that will define the market’s reaction:
- Fiscal Deficit: While the FY26 target of 4.4% appears achievable, the expectation for the next year is a consolidation to around 4.2-4.3% of GDP.
- Nominal GDP Growth: The forecast for the coming year is 10-10.5%, based on real GDP growth of 6.5-7% and inflation of 3-3.5%.
- Capex Growth: Last year’s budget was 11.2 trillion; an increase of 10-11% is expected. Any number beyond this will be a big positive for the market.
- Net Borrowing: The market expects this figure to stay around Rs 12 lakh crores. If borrowing exceeds this, we might see a jump in bond yields.
Sector-Specific Strategies
Research analysts are breaking down the sectors poised for major announcements:
- Defence & Railways: These sectors are expected to see increased allocation as part of the government’s capex push.
- Rural & Housing: A reasonable allocation for NREGA is expected to support the rural sector. Additionally, the criteria for affordable housing might be loosened to cover more units.
- Textile: The industry is seeking financial assistance to offset the impact of US tariffs.
- Sugar: The sector is demanding higher ethanol prices and a hike in thethe Minimum Support Price (MSP) for sugar has not changed since 2019.
- Gems & Jewellery: The cut-and-polish diamond industry seeks financial aid to mitigate tariff impacts.
- Cement: With 40-50% of demand coming from real estate and housing, any government push in these areas will be highly beneficial.
- Aviation: Expectations focus on developing new airports and enhancing capacity at existing ones.
- Commercial Vehicles: This industry is closely linked to rural income; any boost in rural income will positively impact CV sales.
- Healthcare & Pharma: The sector anticipates a correction in the inverted duty structure and a focus on R&D.
Conclusion
With the budget date set for February 1st, investors should keep a close watch on Capital Expenditure, Fiscal Deficit, and Divestment numbers. The budget will provide a clue to which areas the government will focus on in the following year.
