Opinion | Why India’s Defence Budget Needs A Capability Reset

As India approaches the Union Budget for 2026, defence expenditure once again features prominently in public debate. The discussion, however, remains narrowly focused on headline allocations, whether spending should rise, how India compares with other major powers, or whether defence crowds out social-sector priorities. While legitimate, these questions miss a more consequential issue: how effectively defence spending is converted into usable military capability.

In 2025–26, India allocated approximately ₹6.81 lakh crore to defence, accounting for 13.45 per cent of total Union government expenditure and roughly 1.9 per cent of GDP. While this reflects a substantial fiscal commitment, the strategic value of defence spending is determined less

by its size than by the institutions, incentives, and industrial systems through which it is deployed. On this front, India’s defence budgeting framework continues to exhibit structural weaknesses that limit its ability to deliver sustained capability.

These constraints matter more than ever in a deteriorating security environment. Defence planning has long been shaped by the prospect of a two-front contingency involving Pakistan and China, a scenario that increasingly risks converging into a coordinated challenge, as illustrated by the experience of Operation SINDOOR. Along the Line of Actual Control, China’s sustained infrastructure build-up, rapid mobilisation capability, and integration of surveillance, precision firepower, and logistics have altered the operational balance. At sea, India’s responsibilities across the Indian Ocean Region have expanded amid intensifying Indo-Pacific competition. Meeting these challenges requires not merely higher spending, but predictable capital investment, timely induction and technological depth, and outcomes that India’s current budgeting and procurement systems struggle to ensure.

The Modernisation Squeeze

In nominal terms, defence spending has risen steadily over the past five years. In real terms, however, growth has been modest, with allocations remaining below 2 per cent of GDP for much of the past decade. More importantly, the composition of expenditure remains skewed. Capital outlay, which funds modernisation and new acquisitions, typically accounts for only about one quarter of total defence spending, while the remainder is absorbed by revenue expenditure such as salaries, pensions, and maintenance.

Defence pensions alone accounted for ₹1.6 lakh crore in FY 2025-26. While pensions and salaries of civilian defence staff are legitimate obligations of the state, their inclusion within headline defence expenditure obscures how much is actually being invested in active military capability. From a fiscal and policy perspective, this accounting practice overstates operational effort while masking the limited resources available for modernisation. A clearer separation of pension liabilities from core defence allocations would improve transparency and sharpen policy debate.

This imbalance is not the result of a single policy failure but of a historically manpower-intensive force structure. Treating it as inevitable, however, has operational consequences. Limited capital space has resulted in delayed inductions, fragmented acquisition plans, and prolonged reliance on ageing platforms across all three services. In effect, the system trades long-term combat effectiveness for short-term fiscal comfort.

Addressing the Dysfunction

The problem is compounded by the defence establishment’s limited ability to absorb even the capital funds that are allocated. The Ministry of Defence had to return ₹12,500 crore of its capital allocation in FY 2024–25 due to complex bureaucratic procedures, which resulted in procurement delays. Such underutilisation does not reflect surplus capacity; it signals deep dysfunction in the procurement system.

India’s defence acquisition framework is characterised by layered approvals, intricate procedural requirements, and prolonged negotiations. While probity and accountability are essential in defence procurement, excessive proceduralism has tilted the system towards risk avoidance rather than capability delivery. The result is a paradox in which funds exist on paper but fail to translate into contracts, platforms, or operational readiness.

At the core of this dysfunction lies the continued reliance on the L1 (lowest-cost) principle as the dominant basis for contract awards. While L1 offers audit comfort, it is poorly suited to technology-intensive systems where lifecycle costs, upgrade potential, reliability, and industrial learning matter far more than initial price. Over time, this cost-centric approach has discouraged firms from investing in indigenous design, production scale, and sustained innovation, reinforcing dependence on imports or licensed assembly.

A periodic review of the Defence Acquisition Procedure is insufficient to address these issues. What is required is a systematic shift in acquisition philosophy, from managing risk primarily through process compliance to managing risk through assured capability outcomes. This implies overhauling the current, cumbersome acquisition process into leaner procedures, clearer timelines, and greater emphasis on delivery, performance, and technological absorption.

Rethinking Industrial Strategy

Procurement reform is inseparable from industrial policy. Complex defence capabilities are rarely built through fragmented, vendor-neutral tenders alone. International experience suggests that long-term capability development requires stable industrial ecosystems anchored by assured demand and clear state commitment.

In critical domains such as combat aviation, submarines, missiles, electronic warfare, and unmanned systems, India may need to move selectively towards long-term capability partnerships with a limited set of domestic firms, public and private. Such partnerships would involve assured orders, clearly defined performance benchmarks, and strict accountability for cost, timelines, and technology absorption. This approach is not without risks and would require strong regulatory oversight to prevent complacency, ensure competition for the market and integrate MSMEs into broader supply chains. Without some form of industrial anchoring, however, indigenous capability is unlikely to scale.

India’s defence production has crossed ₹1.5 lakh crore, and exports continue to rise. Yet less than 5 per cent of the defence budget is devoted to research and development, far below levels seen in technologically advanced militaries. Private sector participation, while growing, remains concentrated in assembly and incremental indigenisation rather than original design. Predictable procurement pathways and long-term partnerships must therefore be matched by a willingness on the part of industry to invest in proprietary technology.

Technology, Jointness and Budget Credibility

The evolving character of warfare further exposes the limitations of current budgeting practices. Recent conflicts underscore the importance of unmanned systems, precision-guided munitions, cyber operations, and space-enabled intelligence. Their integration depends less on doctrinal intent than on multi-year capital funding insulated from revenue pressures.

Initiatives aimed at integrated air and missile defence architectures illustrate this challenge. Translating such concepts into credible capability requires sustained investment in sensors, command-and-control systems, and data fusion across services. Without predictable funding, these efforts risk remaining fragmented.

The credibility of the defence budget will also be judged by the extent to which it supports structural reforms such as jointness among the armed services. Integrated theatre commands and joint logistics require interoperable systems, shared infrastructure, and network-centric capabilities, all of which demand sustained capital commitment.

For the Union Budget 2026 to send a meaningful strategic signal, the focus must shift from headline numbers to institutional effectiveness. A defence budget that grows in size without correcting procurement incentives, industrial strategy and structural inefficiencies may reassure on paper, but it will deliver limited deterrence in practice.

A genuine capability reset, one that aligns fiscal resources with acquisition reform, industrial depth, and operational requirements, is the need of the moment. In an era of hybrid warfare and sustained competition along the Line of Actual Control and across the Indo-Pacific, the costs of delay are cumulative and difficult to reverse. The challenge is not merely spending more, but making every bit count.

Lt Gen Dushyant Singh is the Director General of the Centre for Land Warfare Studies (CLAWS), New Delhi. Tanya Nagar is Research Scholar, CLAWS. Views expressed in the above piece are personal and solely those of the authors. They do not necessarily reflect News18’s views.