Whalesbook
Defence Budget: Efficiency Over Expansion Amid Geopolitical Shifts
India's defence sector continues to be a strategic priority, underpinned by a ₹6.81 lakh crore budget allocation for FY2025-26, a 9.5% increase from the previous fiscal year. This marks a sustained rise in defence expenditure, reflecting geopolitical tensions and the 'Make in India' initiative. However, the narrative of a simple budget hike masks a more complex reality: a growing emphasis on domestic production and exports, coupled with persistent questions about the efficient utilization of allocated funds and the declining share of capital outlay in the overall defence budget. While the headline figures suggest robust growth, the true measure of success may lie in the government's ability to translate spending into tangible strategic capabilities and address the inefficiencies that have historically plagued the sector.
THE SEAMLESS LINK
This budgetary increase, while substantial, is being viewed through a lens of strategic effectiveness rather than mere volume. Experts are divided on whether the increment adequately addresses the evolving threat landscape, particularly in light of recent geopolitical events like Operation Sindoor. The focus is shifting from simply increasing the defence budget to optimizing its deployment, ensuring that capital expenditure is robust and that allocated funds are fully utilized, a challenge that has historically seen a portion of the defence budget revert to the treasury. The drive for indigenisation, while yielding record production and export figures, also necessitates a critical look at how investments are being channelled to ensure India's strategic self-reliance and technological advancement in a rapidly changing global defence environment.
Capital Outlay and Modernisation Questions
The Union Budget for FY2025-26 earmarked ₹1.80 lakh crore, approximately 26% of the total defence outlay, for capital expenditure, aiming to bolster modernization efforts and domestic procurement under the Atmanirbhar Bharat initiative. While this represents a significant allocation, industry bodies like FICCI advocate for this share to rise to around 30%, arguing that future warfare's technology-driven nature demands investments beyond traditional platforms. Historical data indicates a trend of declining capital outlay as a percentage of the defence budget, falling below 30% in FY26 from 32% in FY14. This raises concerns about whether the current capital allocation is sufficient to meet the demands of modernizing the armed forces and refilling inventories amid escalating global geopolitical risks, as suggested by former Defence Secretary Girdhar Aramane who foresaw a 20-25% surge in capital outlay being feasible. Despite ambitious targets for defence exports to reach ₹50,000 crore by 2029 and domestic manufacturing to ₹3 lakh crore by 2029, the fundamental challenge remains in effectively deploying capital for strategic acquisitions and long-term capability development.
Global Context and Spending Comparisons
India's defence expenditure of $86.1 billion in 2024 places it as the fifth-largest global military spender, a position it maintained behind the United States, China, Russia, and Germany. While this represents a 42% increase since 2015, India's spending as a percentage of GDP stood at 2.3% in 2024, slightly lower than the 2.5% recorded in 2015. This figure is often debated, with some experts like Girdhar Aramane arguing that GDP share is not the most relevant metric for a developing nation focused on capability building, preferring instead to look at defence's share of the overall government budget. Globally, military expenditure surged by 9.4% in real terms to $2.718 trillion in 2024, the highest total ever recorded by SIPRI, driven by heightened geopolitical tensions across Europe and the Middle East. The US alone accounted for $997 billion, nearly 12 times India's budget. Despite being the fifth-largest spender, India remains the world's second-largest arms importer, though efforts are being made to boost domestic production, which now accounts for approximately 65% of defence equipment. While India has made strides, its defence industry's global sales capture only 1% of global arms sales, indicating significant room for growth.
Efficiency Challenges and Future Outlook
A critical concern highlighted by defence analysts is the persistent issue of unspent allocated funds within the Ministry of Defence, with funds sometimes returning to the Ministry of Finance annually. Lieutenant General SL Narasimhan (Retd) emphasizes the need for better utilization of existing funds, acknowledging other social priorities the government must address. While R&D funding has seen an increase to ₹26,816.82 crore for FY2025-26, a 12.41% rise from the previous year, the share of R&D in the defence budget has fluctuated, standing at 3.9% in FY26, down from 4.7% in FY15. The successful mitigation of drone attacks during Operation Sindoor has spurred calls for enhanced drone warfare capabilities and a broader counter-drone ecosystem, requiring sustained R&D investment. The Nifty Defence Index's surge of over 21% since the last Union Budget, and a 6.95% jump on January 28, 2026, signals strong market sentiment driven by expected budget allocations and defence reforms. Looking ahead, Budget 2026 is anticipated to focus on qualitative upgrades, including AI, cyber, and space capabilities, and further support for defence exports which reached a record ₹23,622 crore in FY25. However, the sector's long-term strength will depend on transforming episodic crisis-driven spending into sustained, predictable funding and improved financial execution.