Budget 2025: Defence still below 2% of GDP; 'Aatmanirbharta' push continues

Latest allocation continues five-year trend of declining defence spending as a share of GDP and budget, with FY26 showing a slight recovery in the latter but remaining unchanged in the former

Finance Minister Nirmala Sitharaman on Saturday allocated Rs 6.81 trillion (Rs 6,81,210.27 crore) for the financial year 2025-26 (FY26) for the Ministry of Defence (MoD), while making history by presenting a record eighth consecutive Union Budget. As a proportion of Gross Domestic Product (GDP) and the overall Budgetary Estimate, FY26's MoD allocation remains broadly unchanged from the previous year.

 

The defence provision has been made "in pursuance of the Prime Minister Narendra Modi-led government's vision of 'Viksit Bharat at 2047', with technologically advanced and 'Aatmanirbhar' armed forces," said the official MoD release.

 

Defence budget stays below 2% of GDP

 

 

The allocation reflects a 6.26 per cent increase over the Revised Estimate of FY25 and a 9.53 per cent rise compared to the Budget Estimate of FY25. It accounts for 13.45 per cent of the overall FY26 national budget, the highest among ministries, and represents 1.91 per cent of GDP. 

 

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, and further declined to 1.91 per cent in 2024-25.

 

According to the latest available data from the Stockholm International Peace Research Institute (SIPRI), the United States spent 3.4 per cent of its GDP on defence in 2023, while China allocated an estimated 1.7 per cent in the same year.

 

The latest allocation follows the overall trend over the past five years of a relative decline in defence spending as a proportion of GDP and the national budget, with FY26 showing a slight recovery in its share of the national budget but remaining unchanged relative to GDP. This suggests a shift in government expenditure priorities while maintaining steady nominal increases in defence allocations.

 

Defence industry insiders are likely to be concerned about whether the latest allocation will remain sufficient to meet modernisation demands once inflation is taken into account.

 

Capital outlay indicates constraints

 

Out of the FY26 MoD allocation, Rs 1.8 trillion (Rs 1,80,000 crore), accounting for 26.43 per cent of the total, will be spent on Capital Outlay on Defence Services. Of this, Rs 1.49 trillion (Rs 1,48,722.80 crore) is allocated for capital acquisition, referred to as the modernisation budget of the armed forces, while the remaining Rs 0.31 trillion (Rs 31,277.20 crore) is designated for capital expenditure on research and development and the creation of infrastructural assets across the country.

 

The modest 4.65 per cent increase in Capital Outlay on Defence Services over the Budget Estimate (BE) 2024-25 of Rs 1.72 trillion (Rs 1,72,000 crore), along with the lower Revised Estimate for 2024-25 at Rs 1.60 trillion (Rs 1,59,500 crore), underscores potential capacity constraints in utilising allocations for capital acquisitions and modernisation within the defence sector. The FY26 allocation under this head is 12.85 per cent higher than the Revised Estimate.

 

Defence industry insiders believe that reforms in defence acquisition, particularly in expediting the process, are essential for the efficient utilisation of capital outlay allocations.

 

On this note, the MoD release also highlighted that the ministry has designated 2025-26 as the "Year of Reforms", which will "further strengthen the resolve of the government" for armed forces modernisation and aims to simplify the Defence Acquisition Procedure (DAP 2020) to ensure the optimum utilisation of budgetary allocations.

 

Boosting domestic defence procurement

 

In line with the MoD's decision to strengthen domestic industries and enhance self-reliance in the armed forces, a substantial share of the modernisation budget has been allocated for capital procurement from domestic industries since FY21.

 

For FY26, Rs 1.11 trillion (Rs 1,11,544.83 crore)—75 per cent of the modernisation budget—has been earmarked for procurement from domestic sources, including Rs 0.28 trillion (Rs 27,886.21 crore), which accounts for 25 per cent of the domestic share and is allocated specifically for domestic private industries.

 

This allocation will support major acquisitions planned for the upcoming financial year, while advancing jointness and integration initiatives. It will also facilitate the MoD’s expansion into new domains, such as cyber and space, and emerging technologies, including artificial intelligence (AI), machine learning, and robotics, according to the MoD release.

 

Some key acquisitions planned for the next year, including "long-endurance remotely piloted aircraft for high- and medium-altitude operations, stage payments for deck-based aircraft, and next-generation submarines, ships, and platforms," will be funded under this allocation, the release added.

 

Higher allocation for defence pensions and ex-servicemen welfare

 

After accounting for capital outlay, the remaining FY26 MoD allocation is distributed as follows: Rs 3.12 trillion (Rs 3,11,732.30 crore), or 45.76 per cent, is allocated under the Revenue Head for the Armed Forces, while Rs 1.61 trillion (Rs 1,60,795 crore)—23.60 per cent—is designated for defence pensions. An additional Rs 28,682.97 crore (4.21 per cent) is earmarked for civil organisations under the MoD.

 

The Rs 1.61 trillion allocation for defence pensions in FY 2025-26 represents a 13.87 per cent increase over the previous year. The MoD stated that this increase "will account for inflationary trends and provide ex-servicemen and their dependents with financial security to maintain a better quality of life."

 

According to the MoD release, there are "approximately 3.4 million (34 lakh) defence pensioners whose monthly pension is met out of the Defence Pension Budget."

 

For FY26, Rs 8,317 crore has been allocated to the Ex-Servicemen Contributory Health Scheme (ECHS), reflecting a 19.38 per cent increase over the Budget Estimate (BE) of FY25. During the mid-year review, an additional allocation was made to cover urgent medical treatment expenses.

 

Enhanced allocation for DRDO

 

The budgetary allocation for the Defence Research and Development Organisation (DRDO) has been raised to Rs 26,816.82 crore for FY26, reflecting a 12.41 per cent increase from Rs 23,855.61 crore in FY25. Of this, Rs 14,923.82 crore, accounting for 55.65 per cent of the total allocation, has been earmarked for capital expenditure and R&D projects.

 

According to the MoD release, this allocation will "financially strengthen DRDO" in developing new technologies, with a particular emphasis on fundamental research and collaborations with private industry under the Development-cum-Production Partner model. The increased capital allocation will also provide "adequate financial resources" to support projects undertaken with private partners through DRDO’s flagship Technology Development Fund, further advancing deep technology development in the defence sector.