The Union Budget 2026 raises defence spending by 15%, the first double-digit increase since 2017, taking it close to 2% of GDP.
Allocation Trends in the Budget
- CapEx Dominance: Capital expenditure accounts for 27.295% of the defence allocation and has grown by over 22%, overtaking revenue expenditure and signalling a decisive shift towards long-term modernisation.
- Service-Wise Allocation Pattern: The Indian Air Force received a 32% increase and the Indian Army a 30%, reflecting an emphasis on aircraft, heavy vehicles, and weapons, while the Indian Navy received only a 3% increase.
- Domestic Procurement Push: Nearly 75% of the capital acquisition budget is earmarked for the domestic industry, including private players.
Structural and Fiscal Constraints
- Exchange Rate Pressure: Rupee depreciation against the Dollar increases the cost of imported platforms such as Rafale aircraft, diluting the real value of higher allocations.
- Pension Burden: Since 1987-88, defence pensions (roughly 21.84% of total requirements) have been accounted for under the Central Government rather than the defence budget itself.
- If these were included, the total defence allocation would actually be around 3.31% of GDP.
- Uneven Allocations: The Navy’s modest increase contrasts with its expanding Indian Ocean responsibilities, reflecting absorption capacity rather than strategic prioritisation.
Bureaucratic Bottlenecks in Defence Procurement
- Procurement Rules: The current procurement system follows the “Lowest Cost” (L1) rule, which often favours large established industries over innovative startups that might have higher-potential technology but lack the scale to underbid giants.
- Programme Delays: Chronic delays in major platforms such as submarines and fighter aircraft highlight systemic inefficiencies.
- Example: Project-75 submarines, approved in 1997, are projected for delivery only in the 2030s, while Rafale negotiations began in 1990, but aircraft were inducted only in 2019, highlighting chronic procurement delays.
- Underutilisation of Funds: In the 2024-25 financial year, the Ministry of Defence returned ₹12,500 crore unspent because it could not be utilised within the timeframe
- Addressing Fund Lapse: Despite repeated recommendations, the proposed Non-Lapsable Defence Modernisation Fund, intended to prevent lapse of unspent capital allocations for long-gestation defence projects, has not been operationalised.
Research, Development, and Local Manufacturing
- Scattered Research: Despite increased allocations to the Defence Research and Development Organisation and allied institutions, research remains siloed and weakly linked to production.
- R&D Gap: India spends only 0.66% of GDP on R&D, significantly lower than countries such as Japan (3.7%).
- Missed Dual-Use Potential: Civil-military research integration remains limited.
- Indigenisation Success: Local production has grown by 174% since 2014-15, with systems like BrahMos, Akash, and Pinaka serving as prime examples of indigenous success.
- Export Growth: Defence exports have surged from ₹1,000 crore in 2014 to ₹23,000 crore today, showing a massive shift toward an export-oriented economy
Defence Spending and Economic Development
- Global Comparisons: Countries such as Japan and Australia have increased defence spending despite lower perceived threats. Europe, too, is moving to larger allocations
- Beyond ‘Guns vs Butter’: The defence budget must move beyond the ‘guns versus butter’ binary and be aligned with Viksit Bharat, recognising defence expenditure as a driver of national development rather than a trade-off with welfare.
- Defence spending acts as a catalyst for infrastructure development, border area development, and local economic growth, as reflected in the Border Roads Organisation’s role under the Vibrant Villages programme.
- Industrial Multipliers: Strategic investments, particularly in shipbuilding, have a significant multiplier effect, generating 6.5 times the employment of other sectors.
Conclusion
A $30-trillion, Viksit Bharat hinges on defence self-reliance; without procedural reform and economic integration, higher defence spending will not translate into real military capability.
6 Feb 2026
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