National security: How India can secure much-needed funds for defence

Experts say increasing the defence budget as a share of GDP even by ten basis points could significantly increase access to funds

Following the national security challenges that emerged after the Pulwama terror attack in February 2019, the National Democratic Alliance (NDA) government that year issued additional terms of reference for the 15th Finance Commission (FFC). In July 2019, as part of the reference, the finance ministry asked the FFC to examine whether a separate mechanism for funding defence and internal security ought to be set up and, if so, how such a mechanism should be operationalised.

 

Six years later, in the wake of the Pahalgam terrorist attack on April 22 and subsequent military conflict between India and Pakistan after the Indian military launched “Operation Sindoor”, funding India’s defence requirements has once again come into sharp focus. 

 

Earlier this month, the ministry of defence (MoD) granted Rs 40,000 crore under its emergency powers towards procurement of arms and ammunition. As the situation continues to evolve between the nuclear-armed neigbours, experts say it is time to seriously reconsider India's defence expenditure which has stayed stagnant at 2-2.1 per cent of GDP for the past four years. 

 

State of defence funding

 

India was the fifth largest military spender in the world in 2024, according to the data released by Stockholm International Peace Research Institute (Sipri) in April 2025, after the United States, China, Russia and Germany. Pakistan is in 29th place with an annual spend of $10.2 billion towards its military needs.

 

India's Union Budget for FY2025-26 has allocated Rs 6.81 trillion to the MoD, a 9.53 per cent rise compared to the Budget Estimate of FY25, and a 6.26 per cent increase over the Revised Estimate of FY25.  

 

“This is just the beginning of the fiscal year. The fiscal deficit target of 4.4 per cent gives us enough room to spend more on defence as per requirement. We don’t expect a large increase in demand for defence expenditure in FY26,” finance ministry sources said.

 

However, between FY20 and FY25, India’s defence expenditure as a percentage of central government expenditure declined from 16.9 per cent to 12.9 per cent. Its share in GDP declined from 2.25 per cent to 1.91 per cent during the same period.

 

Given the size of its border regions and often-hostile actions by neighbouring countries, India requires significantly greater funding not just to sustain its defences effectively but also to bolster them, experts say.  

 

Laxman Kumar Behera, associate professor at the Special Centre for National Security Studies, Jawaharlal Nehru University, feels that India’s defence spending should rise to about 2.5 per cent of GDP and additional allocations should be fully earmarked for capital acquisitions and enhanced research and development (R&D), with the latter given top priority. He also emphasises that existing mechanisms are adequate to achieve this.

 

“We must immediately double our allocation for defence R&D,” Behera said, noting this would align with lessons from Operation Sindoor. For FY26, the budgetary allocation for the Defence Research and Development Organisation (DRDO) stands at Rs 26,817 crore, of which Rs 14,924 crore, or about 56 per cent, has been designated for capital expenditure and R&D projects.

 

Behera said even a 0.1 per cent increase in the defence budget as a share of GDP would amount to roughly Rs 36,000 crore - sufficient to boost both capital acquisitions and R&D in the short term.

 

India’s defence expenditure had increased to 2.45 per cent of GDP in FY2020-21, partly due to the India–China border standoff that started in May 2020 and escalated with the Galwan Valley clash the next month.

 

Earlier this month, ratings agency Moody’s said that tensions with Pakistan are not expected to cause any major disruptions to India’s economic activity but higher defence spending could potentially weigh on its fiscal strength and slow its fiscal consolidation.

 

Optimising defence expenditure

 

In its submission to the FFC, the MoD had said that big defence acquisitions require large capital outlays and that the current provisions are inadequate; hence, the need for alternate sources of additional funding.

 

The FFC had in its final report suggested that the Union Government constitute, in the Public Account of India, a dedicated, non-lapsable fund - called the 'Modernisation Fund for Defence and Internal Security' - to bridge the gap between projected budgetary requirements and budget allocation for defence and internal security.  

 

However, sector experts say such a fund may be constitutionally unsound and not in consonance with the procedural integrity of parliamentary scrutiny.

 

“There is only one way to fund increased defence expenditure: the Budget. Spend more than allocation. If an appropriate head does not exist, spend from the contingency fund,” said former finance secretary Subhash Chandra Garg.

 

The FFC had also recommended that the defence ministry take immediate measures to innovatively bring down the salaries and pension liabilities. The commission said that the MoD should reduce its dependence on defence imports with a specific roadmap by corresponding enhancement in indigenous production at a faster rate.

 

According to an earlier report by Sipri, India was the fourth-largest importer of defence goods and services in 2018.

 

“There has been a recent thrust for indigenous production of defence equipment but it needs to be matched with predictability and stability in the flow of adequate resources for capital investment as part of overall strategy of defence modernisation,” the FFC had said.

 

The FFC suggested that a non-lapsable fund under the Public Account of India with four sources of incremental funding: (i) transfers from the Consolidated Fund of India; (ii) disinvestment proceeds of defence public sector enterprises; (iii) proceeds from monetisation of surplus defence land; and (iv) proceeds of receipts from defence land likely to be transferred to State Governments and for public projects in future.

 

The FFC, however, ruled out a cess as a defence funding mechanism as proposed by the defence ministry. While the government “in principle” accepted setting up a non-lapsable fund, it was never implemented. Government sources said the finance ministry didn’t accept the funding mechanism suggested by the FFC.

 

On the idea of sequestration of funds for defence and internal security from the available divisible pool for distribution among states, Behera said that that would be too radical a step, which would risk unnecessary friction between the Centre and the states. 

 

Delays in procurement a challenge  

 

Funding, however, does not seem to be as big a present challenge as delays in order placement and the time required to manufacture platforms domestically.

 

“Equipment deliveries typically take 5–7 years post-sanction,” said a former defence secretary, noting that such delays are common globally. He declined to be identified for this article. He explained that speeding up defence procurement faces a dual challenge — the complexity of the platforms, driven by modern battlefield demands, and the complexity of the acquisition procedure, shaped by the diligence required in spending public funds.

 

Therefore, the government and defence public sector undertakings need to create capital-intensive infrastructure for defence manufacturing, which the former defence secretary said was not feasible for private players to fund alone.

 

In March 2025, the Centre approved guidelines to reduce timelines at various stages of the capital acquisition process. Procedural reforms to the Defence Acquisition Procedure 2020, to streamline India’s defence procurement policy, are expected to be completed by early September.