India’s defence production sector has seen a significant boost, both in perception and performance, following recent military developments and long-term policy shifts. According to government data, domestic defence manufacturing and exports reached record highs in the past financial year, signalling rising confidence in India’s indigenous capabilities.

The change comes amid the backdrop of Operation Sindoor, India’s first military strike on Pakistan in May 2025, which has generated discussion and debate on the efficacy and strength of home-grown defence systems. While India continues to import a substantial portion of its defence equipment, signs of transformation are becoming increasingly visible.

Operation Sindoor Gives Stocks a Lift

One of the clearest indicators of this new confidence is the stock market performance of Indian defence companies. In the week of Operation Sindoor, defence stocks surged by nearly 21%, significantly outperforming the broader Nifty50 index, which rose by only 3.1% during the same period.

This rally was not a one-off. In the following week, while the Nifty50 dipped by 0.5%, defence stocks continued to rise by 5.4%, suggesting sustained investor optimism in the sector.

For this comparison, 18 companies from the Nifty Defence Index were evaluated. These included state-run enterprises such as Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL), as well as private sector leaders such as Paras Defence and Space Technologies Limited, Data Patterns, and Astra Microwave.

Prior to the military strike, Nifty50 stocks were consistently outperforming defence companies. However, Operation Sindoor marked a turning point, both in perception and performance, indicating that investors are pricing in future growth for India's indigenous defence sector.

Rise in Domestic Manufacturing and Exports

The stock market rally is backed by solid economic and industrial data. The Ministry of Defence recently released figures that confirm a sharp increase in production volumes and a record surge in defence exports.

In the financial year 2024–25:

• India’s defence production reached new highs, crossing ₹1.2 lakh crore, with a rising share from the private sector.

• Defence exports surpassed ₹21,000 crore, showing over 20x growth compared to the previous decade.

• Micro, Small and Medium Enterprises (MSMEs) contributed significantly, benefiting from government procurement reforms and favourable policies under the Atmanirbhar Bharat initiative.

Private Sector Gains Prominence

Earlier dominated by public sector undertakings (PSUs), India’s defence landscape is now witnessing active private sector involvement. With the launch of schemes like Innovations for Defence Excellence (iDEX) and the inclusion of startups and MSMEs into defence contracts, India has managed to:

• Open up critical technologies to competitive bidding

• Promote local manufacturing through production-linked incentives

• Foster R&D and innovation in sectors like drones, radar systems, space-based surveillance, and combat gear

Companies like Paras Defence, Tonbo Imaging, and IdeaForge have become flag-bearers of India's private defence ecosystem.

Nifty Defence Index vs. Nifty50: A Performance Snapshot

A closer look at market data shows that the Nifty Defence Index significantly outpaced the Nifty50 index in the month of May 2025:

• 21% gain during Operation Sindoor week (vs 3.1% for Nifty50)

• 5.4% gain in the following week (vs -0.5% for Nifty50)

• Year-to-date, defence stocks have risen by over 45%, fuelled by robust earnings, order book visibility, and policy clarity

This rally indicates that defence manufacturing is no longer viewed as a slow-moving, PSU-dominated sector, but rather as a high-growth industry with strategic relevance.

Policy Support and Strategic Focus

The Indian government’s defence modernisation agenda has played a key role in this momentum. Key initiatives include:

• Defence Acquisition Procedure (DAP) 2020, favouring Indian vendors

• 100% FDI allowed under approval route for defence manufacturing

• Establishment of two defence corridors in Uttar Pradesh and Tamil Nadu

• Focus on import substitution for over 300 items including radars, UAVs, and light tanks

• Inclusion of Make-II and Make-III procurement categories, giving industry more autonomy

These efforts are part of the wider vision to make India a net exporter of defence equipment and reduce strategic dependency on foreign suppliers.

Challenges Remain

Despite this growth, several challenges persist:

• High-tech components like engines, avionics, and sensors are still imported

• Joint ventures with foreign players need better intellectual property sharing

• Bureaucratic delays and lack of long-term procurement clarity can hamper investor sentiment

• Skilled workforce shortages and supply chain gaps may affect scaling capabilities

However, with continued reforms and greater collaboration between government, industry and research institutions, these issues can be gradually mitigated.

Conclusion

India’s defence manufacturing sector has reached an inflection point, supported by policy tailwinds, investor confidence, and rising global demand. Operation Sindoor has acted as a catalyst, shifting the narrative from import dependency to self-reliance, and from slow PSUs to agile private innovation.

As defence companies continue to outperform the broader market, and exports break new records, India is inching closer to becoming a global hub for defence production.

This transformation, however, requires sustained policy focus, strategic investments, and global partnerships, to convert the present momentum into long-term security and economic gains.

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