Finance Minister Nirmala Sitharaman presented the Union Budget 2024 in Parliament on July 23, 2024. In the current geopolitical scenario and with the two major objective of promoting self-reliance and exports, the Defence Budget has touched Rs 6,21,940.85 crore in the Financial Year 2024-25. This comes out to be 12.90% of total Union Budget of Rs.48.20 lakh crore.
The Ministry of Defence (MoD) continues to receive one of the highest allocation among the Ministries. From this budgetary allocation of Rs.6.22 lakh crore, 45.5% (Rs. 2.83 lakh crore) is reserved for revenue expenditure such as Pay and allowances etc, 22.7% (Rs. 1.41 lakh crore) for defence pensions and 4.1% for civil organisations under MoD.
While a major share of 27.7% will be spent as capital outlay on defence services, which is used by the armed forces for capital expenditure that largely includes purchasing new weapons, aircraft, warships and other military hardware. Capital Outlay on Defence Services for FY24-25 has increased by 9.4% to an all-time high of Rs. 1.72 lakh crore from Rs.1.57 lakh crore in the FY24 (revised estimates). While the Total Defence budget has increased 37% in the last five year, Its Capital Outlay has surged 55% from Rs.1.11 lakh crore in FY19-20.
Under this capital outlay Rs. 40,278 crore will be spent Aircraft and Aero Engines, Rs. 23,800 crore for Naval Fleet, Rs. 6,830 crore for Naval Dockyard/ Projects, Heavy and Medium Vehicles at Rs. 4,638 crore and Rs. 62,198 crore will used for Other Equipments.
Rohit Sarin Co-Founder of Client Associates said, India’s defence sector, while increasingly vital, continues to rely significantly on international partners such as the USA, Russia, Israel, and France. The sector includes aerospace, land systems, and naval systems. Companies such as Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), Cochin Shipyard, and Mazagon Dock Shipbuilders have a notable presence in the market. Their performance has been supported by government initiatives and policies aimed at improving the domestic defence sector. Sarin added, this budgetary support underscores the government’s commitment to strengthening the defence sector, which in turn has buoyed investor sentiment. Additionally, Government initiatives like “Make in India” and “Atmanirbhar Bharat", have been crucial in supporting the defence sector. These initiatives aim to boost domestic manufacturing and reduce dependency on imports. While the budget is to be supporting the defence sector, thus increasing market confidence, it is essential for investors to adopt a balanced approach. “When compared to historical performance, the current price-to-earnings (P/E) ratios of these stocks appear elevated. This raises concerns about whether these stocks are overpriced. High valuations often come with the risk of market corrections, particularly if companies fail to meet the high expectations set by investors. While the defence sector’s reliance on government contracts provides long-term revenue streams and stability, any adverse changes in government policy or budget allocations can significantly impact these stocks’ performance”, Sarin said.