Defence Budget 2026: India Eyes Capex Hike Amid Geopolitical Tensions

Introduction: A Budget for a New Era of Warfare

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget for 2026-27, India's defence expenditure has become a central point of discussion. Against a backdrop of heightened geopolitical tensions and the increasing role of technology in modern conflicts, the debate is no longer just about allocating more funds. Instead, it revolves around a strategic reorientation of spending towards domestic manufacturing, research and development (R&D), and future-ready military capabilities. Experts agree that while a substantial hike is necessary, how the money is spent will be more critical than the absolute amount.

The Macroeconomic Picture: Rising Numbers, Declining Share

On the surface, India’s defence budget has seen a consistent increase. Total defence expenditure grew from approximately ₹2.94 lakh crore in 2015-16 to a budgeted ₹6.81 lakh crore for 2025-26. Capital expenditure, which is crucial for modernization and acquiring new assets, also rose from ₹83,614 crore to ₹1.92 lakh crore in the same period. However, when viewed as a percentage of the nation's Gross Domestic Product (GDP), the trend tells a different story. Defence spending has declined from around 2.4% of GDP in 2020-21 to an estimated 1.9% for 2025-26. This has led to calls from policy advisors, such as Dr. D.K. Srivastava of EY India, to raise the allocation to at least 3% of GDP to meet strategic needs effectively.

The Strategic Case for Higher Capital Outlay

India's complex security environment is the primary driver for increased defence spending. Challenges in the neighbourhood and lessons from recent conflicts like Operation Sindoor have underscored the need for rapid military modernization. Yuvika Singhal, an economist at QuantEco, notes that a higher defence capex is a "natural corollary" to these challenges. The focus is shifting from traditional platforms to advanced technologies like artificial intelligence (AI), cyber warfare, space assets, and unmanned systems. These domains require sustained, long-term investment that cannot be met through inconsistent, one-off budget hikes.

A Strategic Shift, Not Just More Spending

The consensus among experts is that India needs a sustained and carefully planned increase in defence capital expenditure, not indiscriminate spending. This approach emphasizes linking budgetary allocations to procurement and absorption capacity to avoid under-utilization of funds. Ranen Banerjee of PwC India highlights that while global defence spending is rising, allocations must be realistic. The goal is to ensure that every rupee spent strengthens strategic autonomy and builds domestic industrial capabilities, reinforcing India's long-term economic trajectory rather than straining it.

Key Defence Budget Figures: A Decade in Review

Balancing Security with Fiscal Prudence

The push for higher defence spending comes at a time when the government is focused on fiscal consolidation. The aim is to lower the debt-to-GDP ratio, which limits discretionary spending. Defence capex, at around 16% of the government's total capital expenditure in FY25, already represents a significant allocation. Some economists, like Sujan Hajra of Anand Rathi Group, believe allocations to defence may grow slower than sectors like roads and railways, which are seen as primary drivers of economic growth. However, others argue that defence spending, when channelled into domestic manufacturing, acts as a powerful economic stimulus with strong multiplier effects.

'Aatmanirbharta' and R&D at the Core

A recurring theme is the critical link between defence spending and the 'Aatmanirbhar Bharat' initiative. The government has increasingly reserved a significant portion of the modernization budget for domestic industries. In the 2025-26 budget, ₹1.12 lakh crore out of the ₹1.80 lakh crore capital outlay for armed forces was earmarked for domestic procurement. This strategy aims to build a robust defence industrial base, reduce import dependency, and create high-skilled jobs. Furthermore, the budget for the Defence Research and Development Organisation (DRDO) was increased by 12.4% to ₹26,816.82 crore, signalling a push towards innovation and indigenous technology development.

The Future is AI and Autonomous Systems

Modern warfare is being redefined by technology. Operation Sindoor demonstrated the battlefield value of AI, where Indian forces reportedly used AI-refined data to achieve high accuracy in targeting. This has accelerated the push for integrating AI, drones, and cyber capabilities across the armed forces. Recent contracts, such as the ₹100 crore deal with Indrajaal for autonomous counter-drone systems, show that these technologies are moving from labs to frontline deployment. Experts argue that future budgets must prioritize funding for AI infrastructure, secure data ecosystems, and R&D in these emerging areas.

Conclusion: Quality Over Quantity

As India awaits the Union Budget 2026, the direction for defence seems clear. The government is expected to continue its focus on capital expenditure-led modernization while adhering to fiscal discipline. The key signals to watch will be the growth rate of defence capex, the share allocated for domestic procurement, and investments in R&D and future technologies. The expert consensus suggests that India does need to spend more on defence, but how it spends—focusing on strategic, technology-driven, and domestically-sourced capabilities—will ultimately matter more than the headline number.