Is the increase in defence allocation’s share in GDP, which has reversed a prior decline, a temporary outcome of Operation Sindoor or an indication of a longer-term direction?
From the point of view of the Ministry of Defence (MoD), we would like to see defence expenditure rise to 2.5 per cent of GDP over the next five years. This will mean a 15-20 per cent compound annual growth rate (CAGR) over that period. Of course, the Budget is an annual exercise, and we will work with the Ministry of Finance to move towards this goal. For its part, the MoD has ensured effective utilisation, ensuring that funds are not surrendered, and will continue to do so. This will strengthen our case.
Capital expenditure, which the Budget document terms “capital outlay on defence services”, has increased its share in defence allocation to 28 per cent, up from the usual 25-26 per cent.
Can this trend also be expected to continue?
We would like to see the capital expenditure component grow above the rate of economic growth, once again at a CAGR of between 15 per cent and 20 per cent.
You have brought up utilisation. FY25 was the first time in about five years that the modernisation Budget (capital acquisition) for the armed forces, which makes up the lion’s share of the capital outlay, was fully utilised…
We are confident of full utilisation in FY26 too. We have utilised 80 per cent of the funds for capital acquisition, even after accounting for the ₹7,000 crore additional funds that were provided at the stage of the revised estimates. We signed contracts worth about ₹2.1 trillion so far in FY26, compared with the then record ₹2.09 trillion in FY25. We should be able to clock about ₹2.5 trillion by the end of the financial year. We are committed to signing more large contracts swiftly. This will facilitate easier payments to vendors.
You had projected a higher than usual jump in the modernisation Budget, which has now materialised. At ₹1.85 trillion, allocation under this head is about 24 per cent higher than in the Budget estimates for FY26 — more than double the usual 10 per cent increase seen in previous years.
How should this be interpreted?
The enhanced allocation will help meet the demands of the changing nature of warfare, as witnessed during Operation Sindoor. It will support the strengthening of air-defence capabilities under Mission Sudarshan Chakra, cater to the additional platforms the Indian Air Force requires to shore up its fighter aircraft squadron strength, enable the acquisition of more long-range standoff weapons, and contribute to enhancing the undersea arm of the Indian Navy. These programmes and acquisitions will account for the bulk of the expenditure. The bulk of the expenditure will be directed towards domestic firms.
Starting in FY21, the MoD decided that a substantial share of the modernisation Budget would be set aside for procurement from domestic sources, with 75 per cent as the normative target…
The share of domestic firms in the value of capital procurement was 87 per cent in FY25. This level will never fall below 75 per cent, and we will probably exceed it in FY26 as well.
Salaries and pensions still account for a large share of the defence Budget — a long-standing concern — will this be addressed?
The percentage increase in capital outlay is much higher than the rise in pensions or salaries. As this trend continues — barring outlier events such as revisions by the Pay Commission — the respective shares of these components in the overall defence Budget will automatically realign to more desirable levels.
 "Illustration: Binay Sinha")