Decoding a decade-long transformation of defence budgets

For sure, India has many security challenges to warrant a robust annual hike in the defence budget. Since its independence, it has faced numerous threats ranging from military aggression to cross-border terrorist attacks and border incursions. The nature and degree of threats to India have increased manifold over the years, with India’s two principal rivals, Pakistan and China, increasingly colluding against India’s vital national security interests.

How has India responded to security threats through its defence allocations, considered the biggest source for building military capability? Can the new Budget, or the budgets of the recent past, throw some light?

There is no uniform agreement on what constitutes a country’s defence budget. Various countries and international organisations have defined it differently. In India, the MoD’s budget is largely treated as the official defence budget. Its budget comprises three major components, of which the defence services, primarily comprising the army, navy, air force and the Defence Research and Development Organisation (DRDO), constitute the biggest segment (75 per cent or ₹5.85 trillion in 2026-27). In second place comes Defence Pensions (22 per cent or ₹1.71 trillion), followed by the MoD (civil) expenditure (4 per cent or ₹28,555 crore) that caters to organisations such as the Indian Coast Guard and Border Roads Organisation (BRO).

Among the three, the smallest segment, the MoD Civil, has grown the most in percentage terms, followed by the defence services and defence pensions. Within this segment, the BRO, which was brought under the administrative control of the MoD in 2015 in a strategic move to boost border connectivity, has seen its budget grow at a much faster pace than the rest. Between 2020-21 and 2026-27, its capital expenditure, meant for infrastructure development, has grown from ₹3,104 crore to an estimated ₹7,394 crore, which is an increase of 138 per cent.

The MoD’s expenditure is broadly distributed between two categories: revenue expenditure and capital expenditure. The former caters to the running expenses of the defence establishment (such as salary, pension and fuel, repair, refit, transportation and maintenance, etc) and the latter to procurement. Of MoD’s ₹7.85 trillion budget for 2026-27, revenue expenditure accounts for 71 per cent (₹5.54 trillion), with the remaining 29 per cent (₹2.31 trillion) earmarked for capital expenditure.

Much of the MoD’s capital expenditure is accounted for by the defence services. Out of MoD’s ₹2.31 trillion capital expenditure, the defence services’ share is ₹2.19 trillion (95 per cent), with the remaining amount allocated for capital expenses of various organisations under the MoD (Civil). (The entire defence pension is part of the MoD’s revenue expenditure).

Even though the defence services make up the overwhelming share of the MoD’s capital expenditure, their revenue expenditure still dominates their overall budget. In the latest allocations for the defence services, the revenue expenditure amounts to 62 per cent as opposed to 38 per cent for capital expenditure. In their 10 latest budgets, the share of the revenue expenditure has fluctuated from a high of 67 per cent in 2017-18 to a low of 60 per cent in 2022-23.

It is worth noting here that the MoD’s budget does not include several thousand crore rupees worth of expenses which should ideally be part of the defence budget, yet are not counted. Among those expenses, the ones incurred on guarding India’s external borders by the four border guarding forces — Border Security Force, Indo-Tibetan Border Police, Assam Rifles and Shashastra Seema Bal — are notable. These forces, which come under the administrative control of the Ministry of Home Affairs, have been allocated ₹66,340 crore for the year 2026-27.  It is also worth noting that all the elements of the MoD’s budget do not necessarily add to India’s defence capability. As indicated earlier, a large segment of the MoD’s budget is spent on pensions for the veterans, which many argue should not be treated as part of India’s defence budget.   

Last 10 years

Figure 1: MoD’s expenditure and its annual growth

In the latest 10 budgets presented to Parliament, the MoD’s spending has more than doubled from ₹3.80 trillion in 2017-18 to ₹7.85 trillion in 2026-27. However, there is a high degree of fluctuation in the annual growth in the budget, indicating a lack of consistency in resource augmentation for the defence establishment. As Figure 1 clearly shows, out of 10 years, only in three (2019–20, 2022–23, and 2025–26) is the growth in double digits. Significantly, none of these years has been followed by a similar double-digit hike, indicating the government’s inability to sustain a high-growth defence spending beyond a year.

The highest increase in the 10-year period was in 2025-26, when the revised budget was 15 per cent higher than the actual expenditure of the previous year. The increase, as indicated by the MoD, is partly driven by Operation Sindoor to meet the operational requirements of the armed forces. The second-highest increase of 14 per cent came in 2022-23, in the midst of the Galwan crisis. The 12 per cent increase in 2019-20 followed the Balakot strike of February 2019. However, the Doklam crisis of 2017 does not have a major immediate influence on the MoD’s overall budget.

Soon after the Union Budget was presented in February, the MoD noted that its “allocation stands at 2 per cent of the estimated gross domestic product (GDP)” for 2026-27. In the same vein, it also noted that its “budget is 14.67 per cent of the central government expenditure (CGE)”. The MoD’s reference to GDP and CGE is not without reason. Afterall, in the Union Budget 2025-26, presented in February 2025, the defence’s share had declined to 1.91 per cent and 13.45 per cent of the estimated GDP and CGE, respectively, causing some anxiety in the defence establishment and the larger strategic community.

The marginal increase in defence’s share in GDP and CGE in the MoD’s latest budget notwithstanding, the general trend is of a downward trajectory, indicating that defence expenditure has not kept pace with the country’s economic growth or the government’s overall expanding expenditure profile.

Though not a perfect indicator of how much a country needs to spend on its defence, the defence-GDP ratio — often called the country’s defence burden — remains the most cited indicator for comparisons. This indicator has often been used by successive United States (US) presidents, especially President Donald Trump, to force European allies of the North Atlantic Treaty Organisation (NATO) to increase their defence spending. In June 2025, NATO members committed to increasing their ‘core’ defence spending to 3.5 per cent of their respective GDPs. Japan, which has historically limited its defence spending to 1 per cent of GDP, has now decided to increase this to 2 per cent in view of China’s increasing belligerence and Trump’s transactional approach to its alliance partners.

India’s defence burden remains lower than those of countries like Russia (7.05 per cent), the US (3.42 per cent) and even Pakistan (2.67 per cent), but higher than that of China (1.71 per cent), which nonetheless outspends India by a huge margin on a pure dollar-to- dollar term. According to the Stockholm International Peace Research Institute, China, with a military expenditure of $314 billion in 2024, outspent India’s $86 billion by a factor of four.

Given India’s low defence burden, some argued that the country has the fiscal space for a major hike in defence spending if the situation demands. This is not necessarily true. Suffice it to say that the entire GDP of a country is not available to the government to spend. What is available to spend is a fraction of the GDP that flows to the government’s exchequer, primarily through taxes.

Given the informalisation of a vast portion of the Indian economy, its tax-to-GDP ratio is one of the lowest among comparable countries. As per the Reserve Bank of India, India’s combined central and state government taxes as a share of the country’s GDP were 18.6 per cent in 2024-25. In comparison, OECD (Organisation of Economic Co-operation and Development) countries’ average tax-to-GDP ratio was 34.1 per cent in 2024. The ratio for China is 20.4 per cent. Implying, if India’s tax-to-GDP ratio does not increase noticeably in the coming years, India could substantially hike its defence spending either by cutting resources for other competing sectors of the economy or through higher deficit financing — neither option being free from adverse consequences. It may be mentioned that the latest defence budget hike comes at a time when the central government’s tax collections and overall expenditure have remained subdued, and the fiscal deficit is above the level mandated by the Fiscal Responsibility and Budget Management Act.

In the MoD’s latest budget, pay and allowances and pension together account for 48.24 per cent — the lowest in over a decade (see Figure 2).    The decline in the share of manpower cost notwithstanding, it still remains the single biggest item of the MoD’s expenditure, largely due to the sheer size of personnel (both serving and retired) who are paid through the MoD’s budget. According to a 2020 study by the Manohar Parrikar Institute for Defence Studies and Analyses, a think-tank, the MoD pays salary or pension to over 5.3 million people, of whom 3.2 million are defence pensioners. The number of pensioners has now increased to more than 3.4 million.

The high manpower cost has meant that other crucial items of expenditure — such as capital acquisition, stores and research and development, which are critical for modernisation, operational readiness and innovation, respectively — have remained subdued. In fact, the modernisation budget, prior to the allocations for 2026-27, has remained well below the defence pension budget (In the MoD’s 2026-27 budget, allocations for acquisition account for 24 per cent or ₹1.85 trillion in comparison to 22 per cent or ₹1.71 trillion for the defence pension). The research and development (R&D) budget, as accounted for by the DRDO, the premier R&D agency of the MoD, has stagnated at 4 per cent of the MoD’s budget, even though the government’s focus on self-reliance has increased manifold.

One of the noticeable features of the MoD’s latest budget is the big hike in the capital acquisition budget. With an allocation of ₹1.85 trillion, the acquisition budget, used for procurement of capital assets ranging from aircraft and helicopters to missiles, radars, ships and submarines among others, marks a 24 per cent increase over allocations made in the previous budget. The hefty increase of 24 per cent also comes on top of a 14 per cent increase in the capital acquisition budget of 2025-26. The two successive years of double-digit growth in the modernisation budget do not, however, hide its highly uneven growth in the past 10 budgets, with the annual increases varying from -4 per cent to 31 per cent.

As mentioned in the MoD’s official press release, the hike in the capital acquisition budget is influenced by Operation Sindoor, which necessitated emergency procurement of items, including those of a capital nature. At the same time, it is also influenced by many high-value contracts that have either been signed in 2025-26 or are about to be signed in 2026-27. In 2025-26 (up to December), the MoD signed contracts valued at 1.82 trillion, including for light combat aircraft (LCA) Mk1A, Rafale-M, LCA Prachand and advanced towed artillery gun systems.

In 2026-27, the MoD has several mega-contracts lined up for signing, including one for six submarines for the Indian Navy under the P75 (I) project at a cost of about $8 billion. The air force would also hope that negotiations would go well for it to sign a contract for 114 Rafale aircraft, which was green-lighted by the Defence Acquisition Council on February 12. The Rafale contract is likely to cost about ₹3.25 trillion.

The Indian Army, the biggest among the armed forces, has historically been the biggest stakeholder in the defence budget. However, its share has come down sharply from a high of 57 per cent in 2016-17 to less than 50 per cent in 2026-27. Much of the space vacated by the army is taken up by the navy, which has seen its share increase to 21 per cent from 14 per cent in 2017-18. The changing share also reflects the changing nature of India’s threat perception. With China becoming a major maritime power and its increasing forays into the Indian Ocean Region, the Indian Navy has assumed greater salience in India’s security calculus, hence its increased share in the defence pie.

Adding a further boost to the self-reliance efforts in defence, the MoD has retained the 75 per cent share of the modernisation budget for capital procurement from the domestic industry in 2026-27. This will result in a flow of ₹1.39 trillion to the Indian industry. Along with earmarking a dedicated budget, the MoD has also allocated ₹1,708 crore for prototype development under the Make category, through which the government subsidises industry’s R&D efforts for the development of new equipment for the armed forces. 

The dedicated allocation for domestic procurement, whose share has increased from 58 per cent in 2021-22 (when it was first announced as a budgetary measure to assure the domestic arms manufacturers), is an indication of the growing capability of the Indian defence industry, and also shows the materialisation of the various measures that the government has undertaken over the years. To the credit of the MoD, it has introduced a host of measures to boost domestic arms production, including a domestic industry-friendly procurement manual, liberalised licensing process, a list of over 500 major defence items banned for import and innovation schemes such as Innovations for Defence Excellence and Technology Development Fund.

The cumulative impact of the reforms undertaken so far is visible in India’s rising defence production and arms exports, which reached ₹1.54 trillion and ₹23,622 crore, respectively, in 2024-25 (In 2016-17, the corresponding figures were ₹74,054 crore and ₹1,522 crore).

In conclusion, it can be said that a decadal analysis of India’s defence expenditure throws a mixed picture. While, the MoD’s expenditure has increased continuously, more than doubling between 2017-18 and 2026-27. Along with the continuous growth, the budget has also positively responded to several cross-border tensions, and prioritised border infrastructure, naval threat and the domestic industry. On the other hand, the uneven growth in defence spending, combined with defence’s declining share in the GDP/CGE, raised questions on growth consistency and the appetite to bear a relatively higher defence burden within a constrained fiscal space. Moreover, the high share of manpower cost, along with a modest share for R&D and modernisation, has limited the innovation push and the firepower that the budget is required to provide.

Undoubtedly, given India’s volatile neighbourhood and the churn in global geopolitics, defence expenditure needs substantial year-on-year hikes. The 16th Finance Commission, which submitted its report to the government recently, has concurred with this, noting further that capital expenditure, in particular, needs a substantial hike of 30 per cent year-on-year. Will the government listen and maintain the growth momentum in the coming budgets?

The double-digit increase in the defence budget has made a huge difference to the allocation for defence services, the biggest component of the MoD’s budget. Comprising the Indian Army, Navy, Air Force and the DRDO primarily, their budget has increased by 19 per cent to ₹5.85 trillion, representing 75 per cent of the MoD’s new total.

Of the defence services’ new allocations, 62 per cent (₹3.65 trillion) is earmarked for the revenue expenditure and the remaining 38 per cent (₹2.19 trillion) for capital expenditure, most of which is spent on the acquisition of arms and equipment for the modernisation of the armed forces.

The acquisition budget of the armed forces has seen a big hike of 24 per cent to ₹1.85 trillion. Coming on top of 14 per cent increase in the previous acquisition budget, the new allocation is driven partly by Operation Sindoor that necessitated emergency procurement, and partly by various mega contracts that the MoD has signed in FY26 or will sign in FY27.

Within the acquisition budget, ‘aircraft and aero engines’ has grown the most, at 31 per cent to ₹63,734 crore, providing a boost for the Air Force, which is looking to sign contracts for platforms such as mid-air refuelers, airborne early warning and control system and, possibly, the Rafale aircraft, in 2026-27. The budget for ‘other equipment’ catering to munitions, missiles, gun systems, electronics and unmanned aerial vehicles, has increased by a 30 per cent to ₹82,218 crore, and remains the biggest acquisition budget-head of the armed forces.

Surprisingly, the ‘naval fleet’ meant for procurement ships and submarines for the Navy has grown modestly at 3 per cent to ₹25,024 crore. Given that the navy is about to sign a mega deal worth $8 billion for procurement of six conventional submarines, the new allocation looks inadequate.

The MoD has retained 75 per cent of the new modernisation budget for procurement from the Indian industry. This will ensure a flow of ₹1.39 trillion to domestic manufacturers, including Indian private firm, which have recently emerged as crucial players.

The budget of the DRDO has grown at 8.5 per cent to ₹29,100 crore, amounting to 5 per cent of the defence services’ budget and 3.7 per cent of the MoD’s total allocations. The overall moderate growth notwithstanding, its capital expenditure has increased by 16 per cent to ₹17,250 crore.

Defence pensions, the second biggest component of the MoD’s budget, continues to have a large share in the MoD’s budget. With an increase of 7 per cemt to ₹1.71 lakh crore, it accounts for 22 per cent MoD’s latest budget. Together with the salary budget, it makes up 48 per cent of the budget and remains the single biggest item of defence expenditure.

The MoD (Civil) catering to organisations such as the Border Roads Organisation (BRO) and the Indian Coast Guard (ICG) remains the smallest component of the budget, with its occupying just 4 per cent of the MoD’s total, and has marginally dipped to ₹28,555 crore. The decline in MoD (Civil) is largely due to the 20 per cent reduction in ICG’s capital expenditure to ₹4,000 crore. The BRO’s capital expenditure has, however, increased, though marginally by 3.5 per cent to ₹7,394 crore.