As Union Budget 2026 approaches, India’s defence sector is once again in sharp focus, with expectations of a meaningful jump in capital expenditure that could reshape the country’s fast-evolving defence technology ecosystem. Former Defence Secretary Giridhar Armane told CNBC-TV18 that defence capex could rise by 15–20% or even more, signalling a renewed government push towards military modernisation and indigenous manufacturing. The timing is significant. A new report by market intelligence platform Tracxn suggests India’s defence tech startup sector is entering a critical inflection point, as higher public spending and policy reforms could accelerate the transition from innovation to large-scale defence production.
Defence Tech Sector at an Inflection Point
According to Tracxn, India now has more than 200 defence technology startups, working across drones, aerospace systems, surveillance, advanced manufacturing, and battlefield logistics. However, the report underlines that while innovation is widespread, only a small group of companies are scaling into serious defence suppliers. Less than 10% of these startups have been able to raise Series A funding or beyond, reflecting how capital and procurement opportunities are increasingly concentrating around a handful of execution-ready firms. The next phase of growth, analysts suggest, will depend on the ability of startups to move beyond prototypes and integrate into the defence procurement pipeline.
Funding Crosses $711 Million, Concentrated Among Top Players
The sector has attracted over $711 million in funding so far, but investment remains heavily skewed. More than half of this capital has flowed into just five companies, led by drone and aerospace-focused players such as Raphe, ideaForge, and NewSpace Research. This concentration highlights a shift in investor priorities — from early-stage experimentation to companies that can deliver defence-grade manufacturing, scale, and long-term contracts.
2025 Sees Record Investment Surge
Tracxn’s data shows that funding momentum accelerated sharply last year. Indian defence tech startups raised $247 million in 2025, marking the highest-ever annual inflow for the sector. The surge was driven largely by large late-stage rounds, as investors increasingly back firms positioned for industrial-scale production rather than pilot projects. The jump also reflects growing confidence that India’s defence manufacturing ecosystem is maturing into a credible global opportunity.
Budget 2026 Could Be a Key Catalyst
With defence capex expected to rise meaningfully in Budget 2026, startups and investors are watching closely for signals on procurement reforms, manufacturing incentives, and deeper support for domestic defence innovation. A sustained increase in government spending could provide the predictable order flows needed for startups to scale into long-term suppliers — a critical hurdle in a sector defined by long development cycles and high compliance requirements.
Liberalisation in Focus
The funding surge is also unfolding as the Centre considers a potential policy shift: raising the foreign direct investment (FDI) cap in defence manufacturing from 49% to 74%. If implemented, the move could bring global aerospace and defence majors into India’s production ecosystem, further strengthening supply chains and partnerships just ahead of Budget announcements.
From Innovation to Execution
India’s defence tech ecosystem is no longer short on innovation. The next challenge is execution — scaling manufacturing, securing procurement access, and building globally competitive defence suppliers. As Budget 2026 nears, the combination of higher capex expectations, record funding, and possible FDI reforms could make the coming year a defining one for India’s defence startup ambitions.