India's defence spending: Why it's a critical component in Union Budget

Tejas aircraft

India’s defence spending has consistently been a critical component of its Union Budget, reflecting its strategic priorities and current geopolitical challenges. In FY 2024-25, defence allocations continued to hold a significant share, demonstrating the government’s commitment to bolstering military capabilities while navigating fiscal constraints. Accounting for about 13% of the total budget outlay, the defence budget was a little above 2% of the nation’s GDP. The three key segments of this allocation include capital outlay for new equipment and modernisation, revenue expenditure for salaries and maintenance, and pensions for retired personnel.

" A major focus of recent budgets has been modernising the armed forces and indigenising defence production under the "Aatmanirbhar Bharat" (self-reliant India) initiative. The increased capital outlay for defence modernisation and infrastructure development was accompanied by increased investment in indigenous procurement, including advanced missile systems, fighter jets as well as naval assets," said Shreevardhan Sinha Senior Partner, Desai & Diwanji. "The government’s emphasis on domestic defence manufacturing aims to reduce reliance on imports, aligning with the “Make in India” initiative," Shreevardhan Sinha further said.

Shreevardhan Sinha also said that, this rising defence expenditure poses fiscal challenges, particularly as India balances spending on welfare programs and economic growth. Pension liabilities, consuming a substantial portion of the defence budget (almost 25% in 2024-25), limit resources available for modernisation. This calls for reforms in pension management, including initiatives like the Agnipath scheme for short-term military service, aimed at containing long-term costs.

What Lies Ahead?

"Looking ahead to the 2025-26 Union Budget, defence spending is likely to maintain its upward trajectory, driven by evolving regional security dynamics and India's focus on military modernisation," said Shreevardhan Sinha."Given ongoing border tensions and the need for robust maritime security in the Indo-Pacific region, higher capital allocations for indigenous defence manufacturing, advanced weapons systems, and modernisation of naval and aerospace capabilities are expected," Sinha also said.

"The government is also likely to continue emphasising the Aatmanirbhar Bharat initiative, further incentivising private sector participation and defence start-ups through policy support and enhanced domestic procurement targets." "However, addressing the fiscal burden of defence pensions will remain a critical challenge. Reforms in personnel management and the scaling of initiatives like Agnipath could gain traction to contain long-term liabilities."

Talking about increased funding for research and development in defence technology, including AI, cyber warfare, and drone systems, Sinha said that it is anticipated in the Union Budget as India enhances its focus on next-generation warfare. "Overall, the 2025-26 budget will need to strike a delicate balance between operational readiness, modernisation, strategic self-reliance as well as fiscal prudence," Sinha said.