Against the backdrop of intensifying global and regional strategic turbulence, India's latest defence budget signals continuity more than disruption. The allocation of ₹7.85 lakh crore to the Ministry of Defence - up from ₹6.81 lakh crore last year - reinforces the centrality of security considerations in India's fiscal priorities. Of this, ₹2.19 lakh crore has been earmarked for capital expenditure aimed at modernising the armed forces, including ₹63,733 crore for aircraft and aero-engines and ₹25,023 crore for the Navy. The remaining ₹5.54 lakh crore is devoted to revenue expenditure, with pensions alone accounting for ₹1.71 lakh crore.
Alongside these allocations, the government has sought to advance its long-standing objective of defence self-reliance. The decision to exempt basic customs duty on components and parts required for the manufacture of civilian, training and other aircraft - and to waive duties on raw materials used for aircraft maintenance, repair and overhaul - signals an attempt to align fiscal policy with industrial strategy. These measures are intended to strengthen domestic aerospace manufacturing and reduce import dependence, particularly in high-value segments of the defence supply chain.
Over the past several years, India's defence budget has exhibited a steady upward trajectory. This reflects a recognition of India's increasingly complex security environment, shaped by persistent tensions along its northern and western borders and the broader sharpening of great-power competition in the Indo-Pacific. Modernising ageing military equipment has become an imperative rather than a choice. Yet, headline increases in defence allocations can be misleading. When adjusted for inflation and the rising costs of advanced military technologies, real gains in capability often fall short of expectations. The challenge, therefore, lies not merely in spending more but in spending more effectively.
One notable trend is the gradual rise in the share of capital expenditure within the overall defence outlay. Between FY20 and FY25, defence capital spending has grown at a compound annual rate of around 9.1% and has nearly doubled over the past decade. This shift indicates a conscious move away from an overwhelming focus on routine operational expenses - such as salaries, pensions and maintenance - towards investment in platforms and technologies that will shape future military capabilities.
Such a reorientation is strategically significant. Investments in advanced aircraft, submarines, unmanned systems and network-centric warfare capabilities are essential if India is to transition from legacy force structures to a more agile, technology-driven military posture. Yet capital expenditure still constitutes a relatively modest proportion of the overall defence budget. Fiscal constraints, competing developmental priorities and the structural burden of revenue expenditure continue to limit the pace at which modernisation can proceed.
The emphasis on modernisation over numerical expansion also reflects the changing character of warfare. Technological edge, rather than sheer manpower, is increasingly decisive. However, India's relative position remains constrained when viewed against regional competitors. China, in particular, continues to outspend India by a significant margin, especially in areas such as next-generation platforms, cyber capabilities, space assets and artificial intelligence-enabled systems. While Indian defence planners have begun to prioritise cyber, electronic warfare, space and unmanned technologies, budgetary allocations for these domains remain modest compared to investments in conventional platforms. Sustained increases in defence research and development will be critical if India is to narrow this gap.
The Atmanirbhar Bharat initiative has further reshaped defence spending patterns. In recent years, more than 70% of capital procurement has been earmarked for indigenous sources, reflecting a determined push to build domestic manufacturing capacity and reduce reliance on imports. This strategy has yielded tangible results: defence production has reached record levels, and exports have grown sharply, reaching approximately ₹23,500 crore and spanning over 90 countries.
These developments enhance India's strategic partnerships and bolster its geopolitical profile, while also validating the expanding role of the private sector in defence manufacturing. Nevertheless, the limits of self-reliance remain evident. India continues to depend on foreign suppliers for critical technologies and high-end platforms. Bridging this gap will require not just policy intent but sustained investment in R&D, a deeper industrial ecosystem, and greater efficiency in procurement and budget execution.
Despite nominal increases, defence spending as a share of GDP has hovered around 2.1%, going up marginally this year to 2.2%. This reflects broader fiscal pressures and the government's effort to balance defence imperatives with developmental and macroeconomic priorities. The persistent dominance of revenue expenditure - particularly salaries and pensions - further constrains flexibility. Managing this structural tension between immediate operational needs and long-term strategic transformation remains one of the most pressing challenges for India's defence planners.
In sum, India's defence budget underscores a familiar paradox: strategic ambition constrained by fiscal and structural realities. The direction of travel is clear, but the pace may prove insufficient unless deeper reforms accompany higher spending.
(Harsh V Pant is Vice President, Observer Research Foundation, New Delhi.)
Disclaimer: These are the personal opinions of the author
