Early next month, the Finance Minister, Nirmala Sitharaman, will present the Union Budget 2025-26 to the Parliament. The defence forces, the industry and the strategic community would be keenly watching the allocations, especially on the capital side, much of which is spent on procurement of weapons and other platforms required by the armed forces.

The defence expenditure, as accounted for by the MoD, has increased at a compound annual growth rate (CAGR) of 8.1 percent in nominal terms in the last 10 years from Rs 2.85 lakh crore in 2014-15 to Rs 6.22 lakh crore in 2024-25. However, it has not kept pace with either the gross domestic product (GDP) or the government’s overall expenditure. This has resulted in defence’s declining share; while the share of the MoD’s budget in GDP has declined from a high of 2.4 percent in 2020-21 to 1.9 percent in 2024-25, the share in the central government expenditure (CGE) has dwindled from 17.8 percent in 2016-17 to 12.9 percent in 2024-25.

Although a drastic increase in the defence’s share in GDP or CGE is not feasible in the upcoming budget, it is hoped that the finance minister will not just arrest a further decline but take measures to scale up defence spending in the light of India’s unique security environment.

Note: Figures for 2023-24 and 2024-25 are revised estimate and budget estimates, respectively.

It is true that that the MoD accounts for the highest allocations among all the ministries. In terms of major items of expenditure, the defence expenditure is the second largest after the interest payment. Given the size, the defence expenditure impacts not only the government spending on various socio-economic programmes but has a direct bearing on the country’s fiscal health. But it is also true that India’s defence burden, measured as a percentage share of GDP, is one of the lowest in the world. No major country in the world with a security environment as complex and unstable as India’s has such a low share. With two hostile nuclear rivals—Pakistan and China— at its borders, India needs to scale up its defence budget to 2.5 percent of GDP in the near- to medium-term and to 3 percent in the long-term.

While stepping up the defence expenditure in the upcoming Union Budget, it is expected that the finance minister would meet at least the projected requirements of the MoD, which are invariably higher than what the successive budgets have been able to provide. In the current fiscal year, the difference between the MoD’s resource projections and budget allotted to it amounts to Rs 58,369 crore. Bridging that gap would be first step towards meeting the full requirements of the defence establishment and also raising the defence’s share in the GDP.

In increasing the allocations, it is also expected that the finance minister would take due care to correct the imbalance in the MoD’s current expenditure. MoD’s budget is already manpower heavy, with the salary and pensions amounting to nearly 53 per cent of the overall budget. Significantly, the manpower cost will remain high in the foreseeable future as the Agnipath scheme—announced in 2022 in a move to arrest the burgeoning salary and pension costs—is unlikely to have a benign impact in the short-to-medium-term.

It is worth noting that the high share of the manpower cost in the past has left little leeway for the MoD to spend on other critical items of expenditures from the Defence Services Estimates (DSE) that caters to both revenue and capital expenses of the armed forces, among other agencies.  The non-salary segment of the DSE, most of which is spent on the upkeep of the existing military stores, and the capital expenditure, bulk of which is meant for acquisitions, have either remained mostly stagnant or witnessed a modest growth in the recent past.

The modest rise in the capital procurement budget in the recent past has been a key stumbling block in the India’s defence modernisation drive.  Going forward, the defence forces would require substantial annual hike in the procurement budget as the MoD has approved a huge pipeline of mega projects for procurement. Crucially most of the approved projects are meant for the domestic industry which are vital for deepening India’s defence indigenisation process. Suffice it to say that in the first 11 months of 2024, the MoD has approved procurement proposals worth of Rs 4.2 lakh crore, of which 94 percent would be sourced from the domestic industry. Some of the big-ticket projects planned for acquisition include future ready combat vehicles, air defence fire control radars, flight refueller, maritime reconnaissance aircraft, Dornier-228 aircraft, next generation fast patrol and offshore patrol vessels and heavy weight torpedoes, among others. To acquire these projects in a time-bound manner, the MoD would require a substantial hike in the procurement budget than it currently has.

The domestic industry would be keen on how much additional amount the finance minister would provide for procurement from the indigenous sources. They would hope the share of the budget earmarked for procurement from domestic sources, which has been progressively increased from 58 percent in 2020-21 to 75 percent in 2024-25, is raised further. A further spike in the share in the upcoming budget would a big statement on government’s commitment towards atmanirbhar defence.

For a sustainable atmanirbhar defence that is rooted in indigenous technology, the Defence Research and Development Organisation (DRDO), the R&D wing of the MoD, would expect a substantial hike in its budget. In 2024-25, its budget is pegged at around 4% of the MoD’s budget. This is not only a decline from the previous highs but grossly inadequate to make India self-sufficient in defence technology. To realise the vision of Make in India that espouses India to transform from being a big importer of defence items to a net exporter of arms, a big R&D budget, together with a rising share of domestic industry in a much bigger procurement budget, is the need of hour.

Views are personal and do not represent the stand of this publication.