Artificial Intelligence (AI) In Defense Market - Strategic Insights and Forecasts (2026-2031)

The global AI in Defense market is forecast to grow at a CAGR of 30.1%, reaching USD 32.8 billion in 2031 from USD 8.5 billion in 2026.

Key Highlights

Market Overview

The Artificial Intelligence (AI) in Defense market is being reshaped by an accelerating race among major military powers to field AI-enabled warfighting systems, with governments directing sharply higher budgets, new procurement structures, and dedicated institutional bodies toward AI adoption. The market spans decision-support and command-and-control systems, autonomous and unmanned platforms, intelligence and surveillance tools, predictive maintenance, and enterprise-wide AI integration across defense ministries. As the United States, India, NATO members, and other governments move to embed AI across warfighting, intelligence, and enterprise functions, and as private defense-technology companies scale up AI-enabled hardware and software, demand for defense AI capabilities is expanding rapidly across procurement, R&D, and infrastructure spending.

• The U.S. Department of War directed the Department to become an "AI-first" warfighting force in a January 2026 memorandum, "Artificial Intelligence Strategy for the Department of War," establishing seven initial "Pace-Setting Projects" spanning warfighting, intelligence, and enterprise mission areas. This includes AI-enabled battle management and decision support, accelerated simulation, and department-wide generative-AI access for the Department's three million civilian and military personnel.

• The same DoW approach also ensures significant investment in AI compute infrastructure is from datacenters to the edge. At the same time, the Department's deployment of newly released AI models to warfighters within 30 days of public release establishes model-update cadence as a key benchmark for future AI acquisitions.

• The Union Budget 2026-27 allocated ?7.85 lakh crore to the Ministry of Defence, which is the highest ever allocation by the Government of India, providing industry, including MSMEs and start-ups, an opportunity to further contribute to the vision of Self-Reliant India across various areas ranging from automation, artificial intelligence, robotics, and advanced manufacturing.

• In July 2022, Defence Minister launched 75 new AI technologies at the inaugural “AI in Defence” (AIDef) symposium organised by the Ministry, which has previously emphasised the role of AI-based tools to assist the defence forces in decision support, analysis of sensor data, predictive maintenance, situational awareness, and data extraction.

• In October 2021, NATO Allied Defence Ministers formally adopted an Artificial Intelligence Strategy, revised in October 2024, which is based on Principles of Responsible Use for AI, with the Data and Artificial Intelligence Review Board and NATO's Autonomy Implementation Plan as operational instruments, both endorsed by the Defence Ministers in October 2022.

• NATO's AI Strategy has also facilitated the growth of the Alliance's AI ecosystem, including promoting collaboration between NATO and allied industry and academia on emerging and disruptive technologies such as AI, and the Defence Innovation Accelerator for the North Atlantic (DIANA) and the NATO Innovation Fund.

• Government AI strategies are also causing the need for supporting talent and data infrastructure. For instance, the DoW strategy requires each Military Service and Component to develop AI hiring and talent-development plans, and it requires Components to maintain federated data catalogs to enable the exposure of data assets for AI across varying classification levels.

Market Drivers

Government Funding and Strategic Defense Initiatives

The Artificial Intelligence (AI) in Defense Market is growing due to several key factors, including government funding and strategic defense initiatives. AI is now perceived as a game-changing technology for defense, one that can enhance warfighting, intelligence collection, and national security. Additionally, budgets, procurement, and dedicated institutional bodies are being increasingly focused on AI in defense efforts. This is further supported by increased procurement of R&D funds for defence and a spate of strategic collaborations between the technology sector and defence ministries to introduce AI capabilities across land, air, sea, space, and cyber domains.

• In January 2026, the U.S. Department of War directed the Department to become an "AI-first" warfighting force, launching seven initial "Pace-Setting Projects" spanning warfighting, intelligence, and enterprise functions, and committing to expand its access to AI compute infrastructure "from datacenters to the edge" as part of its accelerated AI and Autonomy investments.

• The Department of War's Chief Digital and Artificial Intelligence Office (CDAO) previously established an AI Rapid Capabilities Cell in collaboration with the Defense Innovation Unit to conduct Frontier AI pilots to leverage generative AI in relation to warfighting and enterprise use cases. The office also awarded $100 million Small Business Innovation Research (SBIR) award for non-traditional and small businesses developing generative AI solutions.

• According to the Ministry of Defence data, India's defence budget has increased by 2.6 times from ?2.53 lakh crore in 2013-14 to ?7.85 lakh crore in the Union Budget 2026-27, and further increased to ?6.81 lakh crore in 2025-26.

• The Ministry of Defence has scaled up its ‘Acing Development of Innovative Technologies with iDEX’ (ADITI) scheme, with a total of ?449.62 crore provisioned for 2025-26, comprising ?25 crore for each of the two initiatives for critical and strategic technologies such as Artificial Intelligence, Autonomous Weapons, Quantum Technology and Advanced Cyber Technology.

• The market is actively seeking out fresh product innovations and partnerships to further the development and commercialization of AI-based defense solutions. Raytheon, an RTX business, said in February 2025 that it has completed flight testing of its first AI/ML-powered Radar Warning Receiver, integrated into fourth-generation aircraft using its Cognitive Algorithm Deployment System (CADS) approach.

• In March 2026, the U.S. Army announced an award for Anduril Industries to bundle the procurement and management of the company's AI-powered Lattice software suite, hardware, infrastructure and support services, which the Department previously managed under over 120 individual procurement actions for Anduril's solutions.

• In 2021, NATO Allied Defence Ministers accepted an Artificial Intelligence Strategy, which was updated in 2024, and in October 2022 approved the Alliance's Autonomy Implementation Plan and launched the Data and Artificial Intelligence Review Board to implement responsible AI use within the Alliance.

• According to the European Defence Agency, the EU Member States’ defence research and development budget is expected to grow from €17 bn in 2025 to €20 bn in 2026, and the overall level of EU defence spending is projected to rise from €418 bn in 2025 to a total of €454 bn in 2026.

Naval Operations Research

The increasing research in Naval operations is anticipated to drive AI in the defense market expansion. In recent years, AI, which presents the potential to maintain control over ever-increasing areas against increasingly robust adversaries, has been garnering recognition within naval research. The Navy is also working to improve the range of autonomy for unmanned systems with AI. Some use cases for the military could be unmanned aircraft, unmanned surface vessels, and drones. AI can gather all the data observed from several sensors and satellites with the Air Force, among other defense forces. This could also lead to the defense staff being more confident in taking authority in deciding a suitable course of action. In the end, AI can make a drone take off and land, and even finish doing it alone.

In addition, as AI is further developed, advancements can be made in submersible boats and other craft to have mine-detecting abilities while on land. Examining the object and identifying it leads to making an appropriate decision that leads to quick action in mine detection. Some have built-in military hardware that can operate autonomously while keeping human lives out of harm's way.

Major Segment Analysis

Intelligence, Surveillance & Reconnaissance (ISR)

Based on application, the Artificial Intelligence (AI) in Defense Market is segmented into Intelligence, Surveillance & Reconnaissance (ISR), Cyber Security, Combat Training, and Others. AI can decipher a large volume of data and offer predictive analysis by identifying data patterns, which is an essential component for diverse applications in defense strategies. The Intelligence, Surveillance & Reconnaissance (ISR) segment is expected to show significant growth, fueled by the increasing reliance of armed forces on AI to process massive volumes of multi-domain sensor data.

• The growing use of AI-enabled multi-domain ISR platforms across land, air, sea, space and cyber domains is fuelling demand for AI-based solutions enabling automated target recognition, sensor fusion and real-time situational awareness.

• During NATO's BALTOPS 2026 and Ramstein Flag 2026 joint exercises, NATO's Intelligence Numbering System Force (INSRF) flew about 180 flight hours with five RQ-4D Phoenix aircraft and produced over 500 intelligence products, representing a growing share of AI-assisted ISR data processing.

• In April 2025, Lockheed Martin Skunk Works and Arquimea revealed their new AI-powered integral ISR systems that fused processing onboard to enhance autonomous intelligence collection via an intelligent assistant, reduce analyst action, and progressive battlefield decision-making.

• The increasing deployment of edge AI on Unmanned Aerial Systems (UAS) and autonomous ISR platforms is allowing defense organizations to process surveillance information at the source, thereby decreasing communication delay and improving mission responsiveness in contested environments.

• In June 2026, Thales and AURA AERO signed a memorandum of understanding to explore an indigenous ISR solution integrating the ENBATA drone with Thales's AirMaster C airborne radar and electronic warfare systems to enhance AI-aided aerial surveillance and autonomous intelligence capabilities for next-generation defense operations.

• The long-term growth outlook for the AI-enabled ISR segment remains strong as defense agencies progressively resort to AI-driven automated imagery analysis, object detection and predictive intelligence systems to cope with the exponential increase in data generated by satellites, drones, radar and electro-optical sensors.

Regional Analysis

North America: the US

• Artificial Intelligence is gaining traction in the US market with various industrial opportunities being explored. With the ongoing transition towards next-generation equipment and weaponry-system adoption, the AI applications in the country’s defense sector is also expected to rise.

• Additionally, the high defense spending in the USA is also establishing a framework for investments in AI technologies. The U.S. Department of Defense (DOD) requested a budget of $849.8 billion for FY2025 and is seeking $892.6 billion for FY2026, representing its continued commitment to advancing technology integration such as AI-enhanced methods of warfare and digital modernization for the armed forces.

• Furthermore, the country harbors one of the highest numbers of companies, including start-ups operating in AI, further driving market expansion. Additionally, the growing concern regarding cyber threats has led the US government to bolster its defense infrastructure, providing new growth prospects for the adoption of defense-purpose technologies.

• In December 2024, the AI Rapid Capabilities Cell (AI RCC) was established by CDAO and the Defense Innovation Unit (DIU). It relates to opportunities for rapid transition of commercial AI technologies to operational military use across priority applications such as intelligence, ISR, autonomous systems, and mission planning.

• Additionally, White House also released the AI Action Plan to strengthen the United States' leadership in AI and accelerate the delivery of secure AI infrastructure and deployment of AI across national security & defense sectors.

• Likewise, the ongoing collaboration with defence companies and major market players such as Lockheed Martin Corporation and IBM Corporation has also elevated the possibilities for AI adoption.

• Moreover, favorable program implementation, such as ‘Viper Experimentation and Next-Gen Operations Model (VENOM)' that marked a significant step towards the development of fighter aircraft featuring autonomous combat capabilities, is also paving the way for future market expansion.

Company Profiles

International Business Machines Corporation (IBM), founded in 1911 and headquartered in New York, USA, is a global leader in technology and consulting services. With approximately 300,000 employees and 2024 revenue of US$62.75 billion, IBM plays a pivotal role across various sectors, including defence, by leveraging its expertise in Artificial Intelligence (AI), cloud computing, cybersecurity, and quantum computing.

IBM maintains strategic partnerships with government defence agencies and NATO for research and AI deployment. However, it also advocates for responsible AI use, emphasising ethical frameworks, transparency, and data privacy in defence applications.

Key Developments

• June 2026: Shield AI announced on June 17, 2026, that it received a U.S. Air Force production contract to deploy Hivemind mission autonomy software for the Collaborative Combat Aircraft (CCA) program, enabling software-first autonomous combat aircraft operations.

• March 2026: GE Aerospace and Palantir Technologies announced on March 12, 2026, a multi-year partnership expansion deploying agentic AI to improve U.S. Air Force military aircraft readiness, predictive maintenance, production efficiency, and mission availability.

• January 2026: SPARC AI Inc. launched its fully offline AI-powered navigation and laser-free target acquisition application on Samsung Tactical Edition smartphones, providing GPS-denied navigation and targeting capabilities for military personnel operating in contested defense environments.

• January 2026: Legion Intelligence introduced Centurion, a deployable edge AI system designed for denied, degraded, intermittent, and limited (DDIL) environments, enabling resilient agentic AI workflows and autonomous mission execution for defense and tactical operations.

• January 2026: Palladyne AI announced it had been awarded an Air Force Research Laboratory (AFRL) contract to advance its SwarmOS™ artificial intelligence platform, enabling coordinated multi-domain autonomous operations across satellites, drones, maritime, and land-based defense systems.

• January 2026: Booz Allen Hamilton announced the general availability of Vellox Reverser™, an agentic AI-powered malware reverse engineering platform that automates complex malware analysis and delivers machine-speed threat intelligence for federal defense and national security missions.

AI in Defense Market Scope