India considers significant defence budget increase amid regional security challenges

The Indian Ministry of Defence is proposing a potential 20% boost to its FY26 budget, aiming to advance modernisation, bolster indigenous production, and address heightened regional security threats, despite continuing challenges in spending as a percentage of GDP.

For fiscal year 2025–26 (FY26), India’s Ministry of Defence (MoD) has been allocated ₹6.81 lakh crore, marking a nearly 9.5 to 10% increase over the previous year. Despite this increase in nominal terms...

, defence spending as a proportion of the country’s Gross Domestic Product (GDP) remains below 2%, continuing a longstanding trend where the share of defence in the GDP is declining even as absolute budgetary allocations grow.

However, Defence Secretary Rajesh Kumar Singh has indicated that the government may seek a substantially larger hike, potentially around 20%, in the defence budget for FY26. This proposal represents a marked departure from the usual annual increase of about 10%. Singh attributed this anticipated rise to India’s challenging geopolitical environment, describing the country’s neighbourhood as “particularly tough.” This elevated defence expenditure is intended to address evolving external security threats and to support the comprehensive capability development plans that India is pursuing, which are expected to necessitate sustained budget increases over the coming years.

If approved, the increased allocation would fuel key defence priorities. A significant portion is expected to be directed towards modernisation and procurement of advanced weapon systems, including indigenous production efforts under the government’s “Make in India” initiative. The Ministry expects to sign defence contracts worth around ₹2 lakh crore in FY26, possibly matching or surpassing FY25’s record contract awards of approximately ₹2.09 lakh crore. Notably, a substantial subset of these contracts may focus on naval projects, including the acquisition of submarines under the P-75 and P-75I programmes.

The government is also emphasizing a boost to domestic defence manufacturing and self-reliance. Already, over ₹1.11 lakh crore of the FY26 budget has been earmarked for domestic procurement, and higher budgetary outlays could accelerate indigenous research and development (R&D), production, and exports in defence. The Defence Secretary has highlighted India’s diversified industrial base and the “absorptive capacity” of its defence ecosystem as factors enabling this ambitious modernisation push.

Additional expenditure will likely support R&D, infrastructure upgrades, strategic capability enhancements, and maintenance, ranging from upgrading aircraft, naval fleets, and missile systems to fortifying border infrastructure such as roads. Budgetary allocation to capital expenditure is significant, with about 26.4% of the defence budget for FY26 earmarked specifically for capital outlay, reflecting a focused effort to equip and modernise forces rather than merely covering recurring manpower costs such as salaries and pensions.

Despite the increase, defence spending remains just under 2% of GDP, lower than the 2.5% target that officials have signalled as aspirational for capital expenditure. Experts have long argued that India’s strategic readiness demands a higher GDP share in defence allocation. Yet, alongside the fiscal increase, challenges remain. Procurement delays, bureaucratic hurdles, and the balance between manpower costs and capital outlays continue to pose risks to achieving efficient modernisation. The MoD has made it clear that there will be firm consequences, including possible contract cancellation, if delivery timelines are not met.

The strategic rationale behind the increased budget is clear: India faces a complex and volatile regional security environment with multiple flashpoints requiring heightened readiness and deterrence. At the same time, the country aims to strengthen its domestic defence industrial base, which currently features 16 defence Public Sector Undertakings (PSUs), over 430 licensed companies, and approximately 16,000 micro, small, and medium enterprises (MSMEs). Government reforms and encouragement of public-private partnerships are seen as critical to expanding this ecosystem and improving its agility and responsiveness to modern warfare demands.

The fiscal implications of a larger defence budget are significant. With the government balancing various competing demands on public spending, from infrastructure to social welfare and healthcare, an increased defence budget might require reallocation of resources. However, the potential economic benefits are notable: a robust defence industrial base can spur job creation, stimulate sectors like shipbuilding, aerospace, and electronics, and propel India’s ambitions as a global defence manufacturing hub and exporter.

The MoD is expected to officially present its 20% hike proposal to the Ministry of Finance soon, detailing specific project pipelines and procurement plans to justify the increase. If sanctioned, FY26 could mark the onset of a multi-year drive aimed at boosting India’s defence capabilities and self-reliance, with a significant focus on maritime and aerospace domains. This would represent a critical step in India’s strategic posture, aligning budgetary resources with modernisation goals in a period of heightened regional security challenges.

Source: Noah Wire Services