India’s FY27 defence budget rose to ₹7.85 trillion, with a sharp increase in capital expenditure focused on modernisation, drones and next-generation warfare capabilities.
India expanded defence ties with the US, France, Israel and Russia through co-production, technology transfer and supply chain agreements.
While rising defence expenditure strengthens deterrence amid growing geopolitical tensions, economists warn it could increase fiscal pressure, inflation and medium-term economic risks.
A year ago, India retaliated against the Pahalgam attack with Operation Sindoor. It was a brief yet one of the most intensive military operations by New Delhi, showcasing zero tolerance for terrorism.
The military strike was a clinically sharp and coordinated tri-services mission, with the Indian Army, Navy and Air Force striking nine identified terror-linked locations across Pakistan and Pakistan occupied Kashmir.
1 May 2026
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Eventually on May 10, 2025 Islamabad and New Delhi agreed to pause the military strikes following diplomatic dialogues between the Directors General of Military Operations.
However, the strike was not just retaliation. It was a signal. It also marked a broader shift in how India views national security, military preparedness and strategic deterrence in an increasingly volatile geopolitical environment.
The FY27 budget of ₹7.85 trillion marks a clear signal of intent, yet it highlights a complex fiscal balancing act. While absolute spending has jumped from ₹6.81 trillion, defense as a share of GDP has slipped to 1.91%—falling below the 2% benchmark often cited by experts as necessary for deep modernization.
This suggests a strategic choice: India is leveraging a fast-growing GDP to increase its military muscle in absolute terms, while simultaneously freeing up fiscal space for public capital expenditure—like high-speed rail and digital infra—that fuels long-term economic rebound.
The numbers, therefore, reflect not just higher spending, but an attempt to balance hard power ambitions with long-term developmental priorities.
Modernizing India’s Defence Sector
Operation Sindoor was also a defining moment in terms of modernization and improved fund utilisation in the defense sector. Capital outlay on defence services increased by 17.62% over the FY26 Revised Estimate (RE) of ₹1.86 trillion and by 21.84% over the FY26 BE of ₹1.80 trillion, reaching ₹2.19 trillion in FY27.
This accounts for 27.96% of the total Ministry of Defence (MoD) allocation. The sharp rise in capital expenditure indicates a growing policy emphasis on future-readiness rather than merely maintaining existing capabilities.
Out of the total allocation under the ‘capital’ head, ₹1.85 trillion is earmarked for capital acquisition — the modernisation budget of the armed forces — which is approximately 24% higher than the FY26 BE under the same head.
India also witnessed the adoption of drones accelerating in the last one year. Over the past year, the Army cleared projects worth over ₹5,000 crore for indigenous UAVs (Unmanned Aerial Vehicles), including a tri-service initiative involving a ₹25,000–₹30,000 crore project to acquire 87 Medium Altitude Long Endurance (MALE) drones.
The increasing focus on drones reflects a wider transformation in military doctrine globally, where unmanned and surveillance-based warfare is becoming central to strategic operations.
A 2047 vision document unveiled by the government in March envisages the creation of four new specialised tri-service organisations: a defence geospatial agency, a data force, a drone force and a cognitive warfare action force.
According to reports by the Press Information Bureau, in 2025 India’s defence sector prioritised indigenisation, signing 193 contracts worth over ₹2.09 lakh crore, with 177 deals favouring domestic industry.
Major deals included 156 LCH Prachand helicopters worth ₹62,700 crore, approval for the AMCA jet programme, and a ₹3,800 crore BrahMos missile export to Indonesia. Defence production hit ₹1.5 lakh crore.
The strong emphasis on domestic manufacturing also aligns with India’s larger ambition of reducing import dependence and positioning itself as a global defence production hub.
Defence Partnership
New Delhi signed multiple pacts with several strategic and economic partners in the defence sector. Beyond domestic modernisation, India also spent the past year recalibrating its defence diplomacy through deeper technology-sharing and co-production agreements.
India and the US announced a landmark 10-year defence partnership in October 2025. This moves ties between the two countries from a transactional buyer-seller relationship towards a more strategic partnership.
The agreement will focus on co-development of defence systems, supply chain resilience, and technology transfers.The partnership also reflects Washington’s growing strategic interest in strengthening India’s role in the Indo-Pacific amid rising tensions with China.
India and France formalised an agreement to jointly manufacture the HAMMER air-to-ground precision weapon system in India. The deal is set to bring advanced technology from France for indigenous production under Make in India.
In November, India and Israel signed a new MoU to expand defence cooperation via joint production of military equipment, collaboration in artificial intelligence and cyber security.
In a significant move, India and Russia took their strategic defence partnership a level further, now focusing more on co-production, licensed manufacturing, technology transfers and modernization of legacy platforms. India continues to remain Russia’s largest defence buyer.
India’s multi-aligned defence engagement also highlights its attempt to diversify partnerships without becoming overly dependent on any single geopolitical bloc.
A Global Trend: Defence Spending and Macroeconomics
A classical debate in macroeconomics is the ‘Guns vs Butter’ production argument. The theory highlights opportunity cost, suggesting that for every penny spent on defence production, a penny is potentially diverted away from social welfare and developmental programmes.
As defence budgets rise globally, this debate has once again gained relevance for both advanced and emerging economies alike.
According to the IMF's April 2026 World Economic Outlook, global defence spending has reached a record $2.887 trillion in 2025, marking a 2.9% increase from 2024.
The share of global GDP spent on the military rose from 2.4% in 2024 to 2.5% in 2025, driven by surging expenditure in Europe and Asia. And between 2016 and 2025, global defense spending has increased by 41%.
The rising global defense spending is fueling short-term economic activity but creating medium-term risks, including higher inflation, public debt, and worsening fiscal balances.
Large defence booms—common in emerging economies—often worsen deficits by roughly 2.6 percentage points of GDP, creating long-term fiscal vulnerabilities.
This creates a difficult policy challenge for governments trying to balance national security concerns with macroeconomic stability.
Across regions, geopolitical uncertainties have intensified. The Russia-Ukraine war since 2022, the West Asia crisis including the latest Iran-US war, military coups in Africa and South America, rising military demonstrations by China in East Asia, and political unrest in South Asian nations have necessitated higher defence spending and preparedness.
In many ways, rising military expenditure is no longer being viewed as optional, but increasingly as a strategic necessity in an unstable global order.
However, these rises in spending come with significant economic costs, especially for emerging market economies like India. The surge in defence spending could strain budgets and may even be financed through deficits.
While it strengthens strategic and military positioning, it could also slow economic growth in the medium term through reduced capital expenditure elsewhere, inflationary pressures from imports, and external imbalances.
The IMF suggests that while increasing defense spending can enhance deterrence, it should be matched by fiscal adjustments to maintain long-term sustainability. It has called for coordinated monetary and fiscal policy measures to manage inflationary pressures while meeting growing defence requirements.
