Budget 2026: Defence spending nears 2% of GDP, reversing decline

Defence's share of GDP declined from 2.25 per cent in FY20 to 1.91 per cent in FY25, a level that was maintained in FY26 as well

Budgetary allocation for defence reversed its recent declining trend as a percentage of GDP, rising to just under 2 per cent (1.99 per cent) with a Budget Estimate (BE) allocation of ₹7.85 trillion (₹7,84,678.28 crore) for 2026–2027 (FY27), compared with ₹6.81 trillion (₹6,81,210.27 crore) for FY26, which represented 1.91 per cent of GDP.

 

The FY27 BE represents a 15.19 per cent increase over the FY26 BE, while the rise over the FY26 Revised Estimate (RE) is about 7.12 per cent. The FY26 RE stood at ₹7.33 trillion (₹7,32,511.76 crore).

 

Defence’s share of GDP had declined from 2.25 per cent in FY20 to 1.91 per cent in FY25, a level that was maintained in FY26 as well. As a percentage of GDP, it fell below the crucial two per cent threshold — a long-standing demand of defence experts and industry — in FY24, registering at 1.97 per cent.

 

According to data from the Stockholm International Peace Research Institute, the United States spends about 3.4 per cent of its GDP on defence, while China spends an estimated 1.7 per cent.

 

The apparent reversal in this declining trend comes after Operation Sindoor, conducted by the Indian armed forces against Pakistan between May 7 and 10 last year in response to the Pahalgam terrorist attack. The conflict marked the most intense clashes with the western neighbour since the 1999 Kargil War. Another possible reason cited by senior Ministry of Defence (MoD) officials is the increasingly turbulent geopolitical situation across the globe.

 

Modernisation boost amid improved utilisation

 

The capital outlay on defence services increased by 17.62 per cent over the FY26 RE of ₹1.86 trillion (₹1,86,454.20 crore) and by 21.84 per cent over the FY26 BE of ₹1.80 trillion (₹1,80,000.00 crore), reaching ₹2.19 trillion (₹2,19,306.47 crore) in FY27. This accounts for 27.96 per cent of the total MoD allocation.

 

Out of the total allocation under the capital head, ₹1.85 trillion is earmarked for capital acquisition — the modernisation budget of the armed forces — which is approximately 24 per cent higher than the FY26 BE under the same head. Describing this as a “quantum jump”, an MoD release said it was a “strategic imperative” in the current geopolitical scenario.

 

A sub-component of the capital allocation, the modernisation budget finances the capital acquisition requirements of the army, navy and air force, covering new aircraft, ships, tanks, weapons, missiles, and other modernisation needs.

 

This comes in the wake of the defence secretary, Rajesh Kumar Singh, stating at an industry event in November 2025 that the MoD would seek about a 20 per cent increase in the modernisation component of the FY27 defence budget — roughly double the usual 10 per cent increase seen in previous years.

 

Enhanced utilisation and faster contract signings have also proved to be enablers. Up to the third quarter of FY26, the MoD had concluded contracts worth a record ₹2.10 trillion and given Acceptance of Necessity approval for more than ₹3.50 trillion worth of acquisitions. “The upcoming projects under capital acquisition will equip the Armed Forces with next generation fighter aircraft, smart and lethal weapons, ships and submarines, unmanned aerial vehicles, drones, and specialist vehicles, etc,” said the MoD. Moreover, the military modernisation budget was exhausted for the first time in five years in FY25.

 

Several major capital acquisition deals — from additional Rafale combat aircraft for the Indian Air Force to advanced conventional submarines for the Navy — are also in the works.

 

Aircraft and aero engines lose top spot in capital outlay

 

An analysis of the FY27 capital outlay shows that the highest allocation was made under the head of “other equipment” at ₹82,217.82 crore, followed by “aircraft and aero engines” at ₹63,733.94 crore. This stands in contrast to the FY26 RE allocations, where aircraft and aero engines topped the list with an allocation of ₹72,780.15 crore, up 49.7 per cent from the ₹48,614.06 crore BE allocation.

 

Bonanza for Indian defence firms continues

 

In line with MoD policy, ₹1.39 trillion — 75 per cent of the capital acquisition budget — has been earmarked for procurement from domestic industries in FY27.

 

In FY21, the MoD decided that a substantial share of the modernisation budget would be set aside for capital procurement from domestic sources, with a portion of this domestic share further earmarked for acquisitions from private Indian industry.

 

For FY26 as well, more than ₹1.11 trillion — once again 75 per cent of the modernisation budget — was earmarked at the BE stage for procurement from domestic sources. The FY27 allocation under this head represents a 25.2 per cent increase over BE FY26.