By Lt Gen KK Aggarwal (Retd)
Smt Nirmala Sitharaman, the Hon’ble Finance Minister, presented her eighth successive Union Budget on 01 February 2025. By all accounts, it appears a growth oriented budget and was hailed by eminent Economists and Captains of Industry. The budgetary numbers at the macro level are summarized below.
GDP: The Government has estimated a nominal GDP growth rate of 10.1% in 2025-26 (i.e. real growth plus inflation).
Fiscal Deficit : The Fiscal Deficit for the ensuing financial year is estimated to be 4.4% of GDP, continuing the process of fiscal consolidation. For the Financial Year 2024-25, the actual fiscal deficit is likely to end at 4.8% of GDP (planned figure was 4.9%).
Debt to GDP Ratio : The Central Government Debt to GDP ratio is estimated to decline to 56.1 % in FY 2025-26 from 57.1 % in FY 2024-25. The Central Government debt is on declining path to attain a Debt to GDP level of about 50±1 per cent by 31st March 2031.
Expenditure: The Government proposes to spend Rs 50.65 Lakh Crore in 2025-26, which is an increase of 7.4% over the Revised Estimate (RE) of 2024-25. Out of the total expenditure, Revenue Expenditure is estimated to be Rs 39.44 Lakh Crore and Capital Expenditure is estimated to be Rs 11.21 Lakh Crore (3.1% of GDP). Excluding loans and advances, the Capital Outlay has increased by just 10% over the RE 2024-25.
Receipts: The receipts (other than borrowings) in 2025-26 are expected to be to Rs 34,20,409 Crore, an increase of 10.76% over RE of 2024-25.
Source : Note on Demand of Grants 2025-2026, https://www.indiabudget.gov.in/doc/eb/allsbe.pdf https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf
Defence Budget
Allocations in the Defence Budget at the macro level are summarized below.
Total Allocation : Rs 6.81 Lakh Crore, 13.45% of total Central Govt Expenditure and 1.85 % of GDP. It is a jump of 9.53% over Budget Estimate (BE) of previous year (Rs 6.16 Lakh Crore) .
Capital Outlay : Rs 1.8 Lakh Crore, an increase of 4.65% over BE of 2024-25. It is 26.43% of the total Defence budget. Distribution amongst the three Services has not been given, ostensibly due to the unpredictability of the tedious procurement process. Out of this, Rs 1,48,723 crore is planned to be spent on Capital Acquisition, termed as modernisation budget of the Armed Forces and remaining Rs 31,277 crore is for capital expenditure on Research & Development and creation of infrastructural assets across the country.
Revenue (Excluding Pensions) : Rs 3.12 Lakh Crore, an increase of 10.24% over BE of 2024-25. It is 45.76% of the total Defence budget. Out of this, Rs 1.14 Lakh Crore crore has been allocated on account of non-salary expenditure (Ration, Fuel, Ordnance Stores and maintenance/repair of equipment etc). The breakdown amongst the three Services is as follows :-
Air Force : Rs 53700 Crore (increase of 16.1%)
Navy : Rs 38150 Crore (increase of 16.3%)
Army : Rs 207520 Crore (increase of 7.7%)
DRDO : Rs 26,817 Crore (increase of 12.4%). Out of this, a major share of Rs 14,924 crore has been allocated for capital expenditure and to fund the R&D projects.
BRO : Rs 7,146 Crore (increase of 9.74%)
iDEX & ADITI : Rs 450 Crore, an increase of almost three times in two years.
Defence Pensions (including Defence Civilians) : Rs 1.61 Lakh Crore (increase of 14.1%). It is 23.6% of the total Defence Budget.
MoD (Civil) : Rs 12503 Crore (Capital) and Rs 46995 Crore (revenue)
(excluding revenue receipts)
(Rs 28683 Crore given for civil organisations under MoD)
Source : Note on Demand of Grants 19,20,21,22 for 2025-26 https://pib.gov.in/PressReleasePage.aspx?PRID=2098485
A substantial share of modernisation budget is being earmarked for the capital procurement from domestic industries. In order to encourage the private sector for manufacturing and technological development in the defence sector, a notable percentage of domestic share is further earmarked for acquisition from domestic private industries. Accordingly, for FY 2025-26, Rs 1,11,544 crore i.e. 75% of modernisation budget has been earmarked for procurement through domestic sources and 25% of domestic share i.e. Rs 27,886 crore has been set for procurement through domestic private industries.
Comparison of Defence Budget with RE 2024-25
The present budget allocation of Rs 6.81 Lakh Crore, although 9.5% higher than BE 2024-25, yet it is just 6.2% higher as compared to the Revised Estimate (RE) 2024-25 of Rs 6.41 Lakh Crore (on an overall basis). This is evident from the interesting table below, which reveals that at the RE stage 2024-25, revenue budget had to be increased by Rs 14,450 Crore while the capital expenditure fell short by Rs 12,500 Crore. Clearly the major factors were the additional expenditure on operational sustainment (Revenue) while the vagaries of Defence Procurement Process took a toll on Capital expenditure.
Defence Budget Composition (in Rs Crore)
| Major Head | BE 2024-25 | RE 2024-25 | BE 2025-26 | % Change 2025-26 BE to 2024-25 RE |
| MoD (Civil)* | 52448 | 57516 | 59498 | 3.44% |
| Defence Services (Revenue) | 282772 | 297222 | 311732 | 4.88% |
| Capital Outlay (Defence) | 172000 | 159500 | 180000 | 12.85% |
| Defence Pensions | 141205 | 157681 | 160795 | 1.97% |
Extracted from Page 9 Serial 19-22, Demand For Grants 2025-26
*Excluding revenue receipts
For pensions, as is evident from the table above, there was a huge increase of about Rs 16476 Crore (11.7%) at the RE stage, ostensibly to meet the requirement on account of revision of Armed Forces Pensioners/ Family Pensioners under One Rank One Pension (OROP). Thus, the BE 2025-26 reflects an increase of just about 2% in the Pension outlay vis a vis RE 2024-25.
Analysis of Overall Defence Budget
As outlined earlier, Defence Budget 2025-26 has a total allocation of Rs 6.81 Lakh Crore including approximately Rs 1.61 Lakh Crore in pensions. There is a perception of Defence Budget being large and the need to cap it, especially the need for reducing the ever-burgeoning Pension bill. Every year sees an increased allocation to Defence; every year it is called the highest ever defence budget allocation. True, in terms of absolute figures but the whole gamut of figures associated with the defence budget need a nuanced scrutiny and ratio analysis with standard yardsticks along with their progression over the years to arrive at a meaningful inference.
Over the last 40 years, there has been a secular decline in the Indian Defence Budget as a % of GDP, falling from about 3.5% to 1.85% in 2025-26. This is despite the Standing Committee on Defence (2018) recommending that the Ministry of Defence should be allocated a fixed budget of about 3% of GDP to ensure adequate preparedness of the Armed Forces. If Pensions are excluded from the calculations, the Defence Budget stands at 1.41% of GDP.
It will also be of interest to compare the defence spending of our neighbouring and developed countries, the budgets as a percentage of GDP and overall Govt expenditure. According to the data submitted by the Ministry of Defence to the Standing Parliamentary Committee on Defence in 2018, the Defence Expenditure comparison is as follows:-
Country As % of GDP As % of Govt Expdr
China 1.9 5.5
Pakistan 4 18.5
US 3.2 9
Russia 3.9 11.4
UK 1.8 4.6
It is evident that India can afford higher defence expenditure (from the perspective of GDP progression), yet the defence allocation is reducing in comparative terms vis a vis the overall Govt expenditure. Budget allocation to defence every year falls short of the resource projection by the Forces. Over the last ten yrs, it is estimated that the money allocated to defence has been on an avg 22% lower than the projected needs every year.
From the brief analysis of 2024-25 budget, as also earlier budgets, it is also evident that while revenue allocations have to be increased at the RE stage, the expenditure on Capital account is sluggish and reappropriations have to be resorted to at RE stage. This is indicative of two aspects; one that estimates of revenue expenditure tend to be conservative while Capital expenditure is beset with the tedious procurement process, even though there are large number of pending modernization projects. Since the pay and pension portion of revenue allocations of defence budget (based on Central pay scales and norms) tends to be inelastic, the brunt of inadequate financial resources is borne by the capital portion, which in turn adversely affects the modernization of Forces.
Implications on National Security
Every nation determines the resources which need to be spared for security and defence of her territorial sovereignty, based on its national security strategy. A developing nation has to juggle with competing requirements of Education, Health, Poverty Alleviation etc while finalizing the resource allocation. However, for a country like India, surrounded by hostile neighbours on the Northern and Western front, alongwith internal security challenges, it is inexplicable that the defence budget as a percentage of GDP is in a secular multi-decadal decline, the modernization budget is almost stagnant in real terms, while the national GDP has charted an impressive growth over the last three decades, growing more than 10 times in last three decades. The resultant inadequate focus on modernisation of Forces, ultimately affects the equipping of Forces and their operational readiness. The recent lament of the Chief of Air Force only underscores this point.
Operational preparedness of the Defence Forces, which directly impinges on national security, is a function of Soldier Readiness (Staffing and Training), Equipping & Equipment Readiness, together with the Doctrines/Strategy/Tactics. Thus, if equipping of the Forces with state of the art, modern generation fighter aircrafts, warships, missiles, drones, guns, armoured vehicles etc is delayed while the adversaries upgrade their Forces, it is bound to have a debilitating effect on operational preparedness. Now these delays in equipping / modernization may be due to inadequacy of the Defence Industrial Base, dependence on costly imports from foreign arms manufacturers, tedious procurement processes and finally inadequate financial resources. Thus, it will require concerted, multi-pronged efforts to alleviate the problems of delayed modernization.
With Rs 1.11 Lakh Crore (75% of modernization budget) reserved for the indigenous Defence Industrial base, in consonance with the Atmanirbhar policy), it is imperative that both the public and private sector upgrade their technological and manufacturing capabilities expeditiously, if required in collaboration and joint ventures with foreign OEMs. Ultimately, the indigenous component of weapons / equipment manufactured by indigenous firms has to substantially increase. For this to happen, the resources allocated for R & D have to substantially increase, both at the Ministry of Defence level as well as the private sector. India is currently spending just about 0.75% of GDP on R & D, which is very low, the world average being 1.8%. This is inadequate for development of new technologies and state of the art weapon systems in the long run. It again boils down to the requirement of a substantial increase in capital portion of defence budget as also larger resources for R & D allocated at the national level, including private sector.
The Ministry of Defence has taken a decision to observe 2025-26 as ‘Year of Reforms’ which will give impetus to modernization of Forces by simplification in the Defence Procurement Procedure (DPP) to ensure optimum utilisation of the allocation. Hopefully, revision of DPP this time will enhance the ease of doing business for private sector and encourage them to grab the numerous opportunities in the defence space. However, for effective utilization of financial resources, the recommendations of 15th Finance recommendation on non lapsable modernization fund have to be implemented. Notwithstanding all the measures contemplated, there is still an inescapable requirement of a meaningful increase in the moderrnisation funds allocated to defence so that the Forces get the latest generation equipment, liquidate the major war like equipment deficiencies and achieve the desired military deterrence to effectively insure against any threat from the adversaries.
Inferences
• Indian Defence spending, whether as a percentage of GDP or on pro rata basis is decreasing gradually and continuously.
• The Defence funding is lower in comparison to most countries of interest, even though India has higher security concerns.
• Salary and Pension bills being rather inelastic, the funding squeeze will either be on Capital Expenditure (modernization) or on Operational Sustenance of Forces. This has adverse implications for overall national security
• Higher ab-initio allocation is required for operational sustenance of Forces. However, there is evidence of commendable flexibility in additional funding of defence requirements at RE stage, based on operational requirements.
• Within the Defence Budget, focus is on modernization and infrastructure; however, procedural constraints seem to hamper full absorption of allocated funds. The recommendations of 15th Finance recommendation on non lapsable modernization fund have to be implemented. It is also evident that Capital Outlay for procuring modern Weapon Systems/Platforms can increase significantly only if higher funds are allotted to defence, ie a higher % of GDP or Central Govt Expenditure.
• The initiatives on Indigenisation of Defence Manufacturing are a potent way to conserve Capital and need to gather further pace. Atmanirbhar is the way to go, but it will require increase in domestic production capacity and upgraded technological prowess for which higher R&D expenditure is required.
• Overall, a way has to be found in the ensuing decade to reverse the decline in defence spending as a percentage of GDP, accelerate the modernization of Forces and have higher defence contribution in Comprehensive National Power of India while insuring the nation against all security threats.
AVM Rajiv Gandotra
Excellent insight. For a potent and professional defense, appropriate fans allocations are vital. Capital acquisitions, R & D and Revenue allocations need regular enhancements to keep up the Op Preparations.