Defence Budget 2026: Will India Boost Military Spending Amid Rising Tensions?

India’s Defence Budget 2026 is expected to reflect a cautious yet steady increase, balancing geopolitical challenges, modernisation requirements, and the government’s continued push for indigenisation and self-reliance. While tensions along India’s borders and global instability remain elevated, experts believe fiscal prudence will shape allocations.

Defence Sector Remains a Long-Term Growth Theme

The defence sector continues to be viewed as a structural, long-term opportunity as India positions itself as a global power. Reflecting this optimism, the Nifty Defence Index has surged by over 21% since the last Union Budget, significantly outperforming broader indices such as the Nifty 50 and Sensex.

Market Performance Since Last Budget

• Nifty Defence Index: 21.4%

• Nifty Bank: 18.1%

• Nifty 50: 6.7%

• Nifty Midcap 150: 6.2%

• Sensex: 5.2%

From Feb 1, 2025 to Jan 23, 2026

The rally has been driven by the government’s emphasis on ‘Make in India’, rising domestic defence production, and heightened global and regional security concerns.

How Much Could Defence Allocation Grow in 2026?

Union Budget 2025 allocated ₹6.81 lakh crore for defence, marking a 9.5% year-on-year increase. However, expectations for FY26 remain divided despite geopolitical tensions.

"The increase in the defence budget will be somewhere between 7 and 12%. That has generally been the trend in recent years," said Lt Gen SL Narasimhan (Retd), Adjunct Distinguished Fellow for China and National Security Studies at Gateway House.

Defence analyst Sanket Kulkarni echoed similar views, suggesting a measured and conservative rise rather than an aggressive jump.

Long-Term Defence Spending Trend

India’s defence expenditure has grown by over 40% since the 2020 Budget, translating to an average annual growth of around 9.2% over the last five years.

Impact of Operation Sindoor and Regional Tensions

Despite heightened tensions following the Pahalgam terror attack and Operation Sindoor, experts believe immediate events are unlikely to drastically alter budget allocations.

Narasimhan argued that:

“If that’s the case, then after 2020, there should have been a very large increase in the budget. But that did not happen. One or two budgets are not going to set these things going.”

Even so, defence stocks reacted strongly to recent developments. Between April 25 and May 14, defence companies added over ₹1.2 lakh crore in market capitalisation.

Capital Outlay: Could Capex See a Bigger Push?

Former Defence Secretary Girdhar Aramane believes capital expenditure could surprise on the upside.

He said a 20–25% rise in capital outlay looks feasible due to:

• Large defence orders reaching the payment stage

• Emergency procurement needs

• Investments in next-generation technologies

However, data from PRS Legislative Research shows that the share of capital outlay in the defence budget has declined over time—from 32% in FY14 to below 30% in FY26.

Focus on Drone Warfare After Operation Sindoor

Kulkarni expects the Budget to prioritise drone warfare capabilities, citing lessons from recent conflicts.

“Operation Sindoor was the first full blown contest between the two countries in drone warfare. While India came out with flying colours in mitigating drone attacks, this was the beginning of a new kind of warfare in South Asia,” he said.

He added that India must urgently expand its counter-drone ecosystem along both land borders and coastlines.

Defence Modernisation and Indigenisation Push

Domestic Manufacturing Gains Momentum

India’s push for Aatmanirbharta has significantly reshaped defence procurement. According to government data:

• At least 65% of defence equipment is now manufactured domestically

• This marks a sharp reversal from the earlier 65–70% import dependency

Record Production and Export Growth

• Defence production: ₹1.51 lakh crore in FY25 (record high)

• Target by 2029: ₹3 lakh crore

• Defence exports: ₹23,622 crore in FY25, up 12.04% over FY24

• Export target by 2029: ₹50,000 crore

Despite progress, India remains the world’s second-largest arms importer, according to SIPRI.

R&D Spending and Innovation Concerns

Kulkarni stressed the importance of innovation and foreign collaboration:

“A sustained momentum in R&D spending will safeguard India from geopolitical uncertainties and its impact on defence technology partnerships.”

R&D Allocation Snapshot

• Modernisation (2025 Budget): ₹1,48,722.80 crore

• R&D and infrastructure: ₹31,277 crore

R&D as % of Defence Budget

Defence Spending: GDP Share vs Budget Share Debate

Aramane noted that defence spending has hovered between 1.5% and 1.9% of GDP, but questioned the relevance of this metric.

"Percentage of GDP is not the right measure for a country like us, a middle income country, which was importing lot of equipment from outside… So percentage of GDP, I will discount as a measure."

Instead, he suggested focusing on defence spending as a share of the total government budget, while also accounting for defence-related expenditure through space, science, and research ministries.

Utilisation of Funds Remains a Key Challenge

While expectations of a large budget hike remain limited, Narasimhan highlighted the need for better fund utilisation.

“While we would like to have an even bigger defence budget, there are other social realities that the government needs to focus on.”

He also pointed out that unspent funds often return to the Ministry of Finance, underlining the need to extract better value from existing allocations.