India should benchmark military spending at 3% of GDP, says EY report

The June edition of EY's Economy Watch recommended that India consider allocating 3 per cent of its GDP to defence spending, noting that the share of defence expenditure in GDP has gradually declined

India should consider setting defence expenditure at 3 per cent of gross domestic product (GDP), establishing a non-lapsable defence modernisation fund, and promoting domestic manufacturing, according to a report released by EY on Monday.

 

The June edition of EY’s Economy Watch stressed the importance of a forward-looking approach to defence budgeting. Such a strategy, it argued, would help India develop a more resilient and responsive defence infrastructure, better positioning the country to respond to changing geopolitical and technological challenges.

 

Recommendations to strengthen defence readiness

 

The report specifically recommended "benchmarking defence allocations at 3 per cent of GDP", supplemented by the creation of a "non-lapsable defence modernisation fund, and incentivising domestic manufacturing to unlock long-term economic growth multipliers".

 

It also called for improving the efficiency of procurement processes and placing greater focus on defence-related research and development.

 

Decline in defence spending share over time

 

EY noted that India’s defence spending as a proportion of GDP has steadily declined from nearly 3 per cent in the early 2000s to just over 2 per cent today. In contrast, the United States and Russia continue to allocate substantially higher shares of their GDP to military expenditure.

 

Modernisation fund could offer fiscal predictability

 

DK Srivastava, chief policy advisor at EY India, said that benchmarking defence spending at 3 per cent of GDP and establishing a dedicated non-lapsable modernisation fund could offer the fiscal predictability needed to invest in advanced technology and bolster domestic defence manufacturing ecosystems.

 

Reviving the modernisation fund proposal

 

The report referenced the 15th Finance Commission’s proposal to create a Modernisation Fund for Defence and Internal Security (MFDIS) — a non-lapsable corpus under the Public Account of India. The fund was intended to be financed through disinvestment proceeds, monetisation of surplus defence land, and voluntary contributions.

 

Although the Indian government had accepted this idea "in principle", the fund has not yet been implemented. The EY report stated that reviving the proposal could provide consistent capital support and insulate critical defence investments from year-to-year fluctuations.

 

According to data released by the Stockholm International Peace Research Institute (SIPRI), India is on course to spend $86 billion in 2025–26. Just around 22 per cent of the annual defence budget for 2025–26 is earmarked for capital procurements of new weapon systems. India’s defence spending as a percentage of GDP has decreased from 2.25 per cent in 2014–15 to 1.91 per cent in 2024–25.