Whalesbook
This focus on high-tech and defense capital expenditure (capex) arrives within a disciplined fiscal framework. EY's report suggests that continued fiscal consolidation is desirable to create room for private investment. The firm's forecast indicates that the government can meet its 4.4% of GDP fiscal deficit target in FY26, paving the way for a 4.0% target in FY27. With limited options for major tax reforms, directed capex becomes the primary tool for stimulating strategic growth.
The High-Tech Capex Pivot
EY's central argument is a compositional change in government spending. The recommendation is to channel a larger share of expenditure into capex for advanced sectors where initial costs are high but long-term economic multipliers are significant. This includes AI, GenAI, space technologies, and robotics. The market has already shown strong appetite for these themes. The Nifty India Defence Index, for instance, has surged nearly 40% over the past year, vastly outperforming the Nifty 50, and saw a sharp 6.95% jump on Wednesday alone. This performance suggests investors are already positioning for a policy environment that favors domestic manufacturing and technology in strategic sectors.
Sector Spotlight: Defence and Industrials
A heightened focus on defense and advanced infrastructure capex would directly impact a cohort of public and private sector companies. State-owned firms like Hindustan Aeronautics Ltd (HAL) and Bharat Electronics Ltd (BEL) are prime candidates to benefit. HAL, a key player in India's aerospace ecosystem, currently trades at a P/E ratio of around 34-36. BEL, a specialist in defense electronics, boasts a substantial order book of approximately ₹730 billion as of January 2026, providing strong revenue visibility. Analysts remain structurally overweight on the defense sector, anticipating a 10-15% year-on-year growth in capital outlay in the upcoming budget. Engineering and infrastructure conglomerate Larsen & Toubro (L&T), with its heavy involvement in both defense manufacturing and critical infrastructure projects, is another key name. The company, trading at a P/E ratio of roughly 32, is integral to the government's 'Make in India' initiative.
Fiscal Realities and Growth Outlook
This strategic capex push is set against a backdrop of steady macroeconomic projections. EY estimates India's real GDP will grow at 6.5% for 2026-27, with nominal growth around 9.5%. This aligns with forecasts from other agencies, though some like the IMF project a slightly more moderate 6.4% growth for the same period. The report further advises that the government's capital expenditure growth in FY27 should, at a minimum, keep pace with nominal GDP growth. The private space industry is also lobbying for government support, seeking 'critical infrastructure' status and assured procurement mandates to de-risk heavy initial investments, a sentiment that aligns with EY's call for public-private partnerships in these nascent fields.