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

Defence allocation in the Budget reversed its recent declining trend as a percentage of GDP, rising to just under 2 per cent (1.997 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 Estimates (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. Defence spending as a percentage of GDP fell below the crucial two per cent threshold — a long-standing demand of defence experts and industry — in 2023–24, registering at 1.97 per cent. 

 

According to data from the Stockholm International Peace Research Institute (SIPRI), 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 the May 2025 Operation Sindoor conflict with Pakistan, which marked the most intense clashes with the western neighbour since the 1999 Kargil War. Another possible reason cited by senior MoD officials is the increasingly turbulent geopolitical situation across the globe.

 

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. 

The capital outlay on defence services increased by 17.62 per cent over the FY26 Revised Estimates of Rs 1.86 trillion (Rs 1,86,454.20 crore) and by 21.84 per cent over the FY26 Budget Estimates of Rs 1.80 trillion (Rs 1,80,000.00 crore), reaching Rs 2.19 trillion (Rs 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, Rs 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.

 

Up to the third quarter of FY26, the MoD had concluded contracts worth Rs 2.10 trillion and given Acceptance of Necessity approval for more than Rs 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.