The Finance Minister has been rather generous. The new defence budget is being touted as being the first double digit jump in India’s defence expenditure in decades, ever since its steady decline from 2017. At 2% of the Budget, it sends a signal of strategic determination in a more than unusually turbulent world. The funds will have to be used prudently and expeditiously, which demand systemic change, not tinkering, in the Budget process. As ‘frenemies’ abound and a tenuous ‘rules-based order’ collapses, there is no time to lose.
The good and the bad
The most talked about aspect is the Budget’s 15% hike hitting 2% of GDP (up from 1.9% last year). Second, in a notable shift, capital expenditure has outpaced the revenue budget, up more than 22%, reversing years of neglect. Third, there is a clear thrust toward modernisation. The Indian Air Force gets a hefty 32% rise, while the Indian Army has got a 30% hike for heavy vehicles and weapons.
Oddly, the Indian Navy, with its ambitious commitments in the Indian Ocean, gets 3%. Ironically, this is probably due to its success in indigenisation, and a proven capability to absorb allotted funds.
All this is good. But the rupee has weakened substantially against the dollar, which means that payment for capital goods such as aircraft has become more expensive. It is not all bad news. Defence exports are rising — ₹23,000 crore last year as against ₹1,000 crore in 2014. A chunk of the Indian Army’s mobility equipment is made here by the Tatas, Ashok Leyland and others. But this does eat into the ‘double digit’ increase.
There are also the pension payments which rose by 6.56% but it is still at 21.84% when compared to 27.95% for capital expenditure of the Ministry of Defence (MoD)’s allocation. Before FY1987-88, they came under central government pensions and were not clubbed with the defence budget. Despite this, the Budget was still 3.31% of GDP. The size of the economy then was less than half of what it is today, but it still provides a certain perspective.
It might be time to reinvent that wheel.
Bureaucracy and delays
A welcome aspect is that 75% of the capital acquisition budget for procurement has been earmarked for domestic industries, which includes private players. The government’s thrust in this direction has been consistent, with defence production recording a 174% surge from 2014-15. But beyond this is the reality of a complex bureaucratic system, one aspect of which is the L-1 (lowest cost) rule which favours large industries rather than innovators who are vital for a tech-intensive industry. They cannot compete, especially when transitioning to manufacturing. This needs not only hand holding but also clarity in forward planning and promised volumes.
The next factor is this — the interminable delays in vital programmes such as Project 75 for submarines approved in 1997. Expected delivery times are now in the mid 2030s. The Rafale fighter aircraft deal which was envisioned in the 1990s, saw results only 2019-20. It is unsurprising then that the MoD had to return ₹12,500 crore of its capital allocation in FY2024–25.
It is time to re-examine the repeated demand for a Non-Lapsable Defence Modernisation Fund, which was announced in the FY 2004-05 Budget speech but never implemented. Financial convenience cannot result in the defence industry being held hostage.
R&D lies scattered
A key area is research and development (R&D). Funds for the Defence Research and Development Organisation (DRDO) and a slew of research organisations have been increased; many have potential benefits for defence production. But research is segmented. Despite often being dual use, it seldom translates into better defence capabilities. India’s overall research budget also remains 0.66% of GDP. Compare that to Japan at 3.70%, funded primarily by the private sector. In India, there is a near absence of private sector R&D. Those in the big league must loosen up and unify research and its direction.
A ‘pacifist’ country such as Japan has now allocated 2.2% for its defence. So has Australia with a far lower threat profile. Europe too is moving to larger allocations. At issue here is the ‘guns vs butter’ lens through which the defence budget is viewed. Instead, it needs to be melded with the vision of Viksit Bharat’s $30 trillion economy. The Border Roads Organisation, for instance, delivers the connectivity for “Vibrant Villages” programme which is vital to border development.
In another example, the Prime Minister remarked that indigenous shipbuilding has a 6.5 multiplier effect on employment, with its multiple ancillary industries. This applies almost across the board. The Budget has to be seen as a tool for powering growth, rather than being a ‘non development’ section. Once this is done, the processes will follow.
Dushyant Singh, a retired Lieutenant General, is currently Director General of the Centre for Land Warfare Studies (CLAWS). Tara Kartha is Director, Research and Analysis, at the Centre for Land Warfare Studies (CLAWS)
Published – February 06, 2026 12:08 am IST
