Budget 2026: Defence spending rises to 2% of GDP, pushes for modernisation

The government's allocation touches 2 per cent of the GDP months after Operation Sindoor and with an eye on modernisation

Finance Minister Nirmala Sitharaman on Sunday allocated ₹7.85 trillion for defence, which is almost 2 per cent of the GDP, in the 2026-27 Union Budget.

 

Within months of Operation Sindoor and with an aim to continue modernising the armed forces, the government has increased defence spending — but not by a lot.

 

While the increase is about 7 per cent compared to the FY26 revised estimates (₹7.33 trillion), the FY27 budget estimates (BE) represent a 15 per cent rise over the FY26 BE.

 

The overall defence allocation was ₹6.81 trillion last year, almost ₹6.22 trillion in FY25 and ₹5.94 trillion the year before that. The FY26 budget saw spending hover around 1.9 per cent of the GDP. It fell to 1.9 per cent of the GDP in FY25 from 2.4 per cent in FY21.

 

 

Modernisation of the armed forces is an important aspect of the Budget, said the Ministry of Defence (MoD) in a media statement after Sitharaman’s announcements. It said in the current geopolitical scenario, a “quantum jump in the modernisation Budget is a strategic imperative” for India.

 

Some ₹2.19 trillion has been allocated under capital outlay, of which ₹1.85 trillion is kept aside for acquisitions alone — a 24 per cent jump from the capital-acquisition budget of FY26 (according to BE). The acquisitions include next-generation fighter aircraft, smart and lethal weapons, ships and submarines, and unmanned aerial vehicles and drones.

 

An amount of ₹1.39 trillion, or 75 per cent of the capital acquisition budget, has been earmarked for procurement from domestic industry. The MoD decided in 2021 that a substantial share of the modernisation budget will be set aside for capital procurement from domestic sources, with a portion of this share further kept for acquisitions from Indian private companies.

 

For the FY26 budget 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 represents a 25 per cent increase over the FY26 BE.

 

An analysis of the FY27 capital outlay shows that the highest allocation was made under “other equipment” at ₹82,217.82 crore, followed by “aircraft and aeroengines” at ₹63,733.94 crore. This stands in contrast to the FY26 revised estimate’s allocations, where aircraft and aeroengines topped the list with ₹72,780.15 crore, up 49 per cent from ₹48,614.06 crore, according to BE.

 

“If you go by the capital expenditure, this is a good defence budget,” said Lieutenant General S L Narasimhan (retired). “But we will have to see if the government can keep defence spending at 2 per cent or higher in 2027-28.”

 

Cutting-edge technologies, including artificial intelligence (AI) applications, “can serve as force multipliers for better governance”, said Sitharaman in her speech.

 

India is hosting an international AI summit in February. But no separate spending on AI in defence was mentioned in this Budget. The United States and China are spending billions of dollars on defence AI.

 

Narasimhan said AI will be implemented through civil-military fusion, and the armed forces will adapt to it.

 

Sitharaman also announced the lowering and the removal of, respectively, customs duty on some critical minerals and on raw materials to manufacture parts of an aircraft or for the maintenance, repair or overhauling of an aircraft or its components, including engines, when imported by public sector units under the MoD. These will reduce input costs, boost domestic manufacturing and promote export competitiveness.

 

Narasimhan said the measures will help the defence sector.

 

The budgetary allocation to the Defence Research and Development Organisation has been increased to ₹29,100.25 crore in FY27 from ₹26,816.82 crore in FY26.

 

Laxman Kumar Behera, who teaches at the Special Centre for National Security Studies, Jawaharlal Nehru University, Delhi, said: “The overall Union Budget has increased by 5 per cent of the GDP, which means the increase (15 per cent) in the defence budget is good.”

 

Operation Sindoor had an effect but the defence budget shows the government is taking the modernisation of the armed forces seriously, he added.

 

Defence Secretary Rajesh Kumar Singh told an industry event in November that the MoD would seek a 20 per cent increase for modernisation in the FY26 defence budget, double the 10 per cent or so rise seen in the recent years.

 

The FY27 budget has allocated ₹1,71,338.22 crore for the disbursement of monthly pensions to more than 3.4 million defence pensioners. It is 6.56 per cent higher than FY26 at the BE stage.