Defence budget signals pursuit of gradual reforms

In her eighth consecutive budget and the first full one in the Modi government’s third term, Finance Minister Nirmala Sitharaman announced an increase in defence allocation, increasing it to Rs 6.8 lakh crore from Rs 6.21 lakh crores from the previous budget presented in July last year -  a jump of 9.5 percent.

However, if assessed as per the revised estimates the overall budgetary increase comes to around 6.3 percent. As has been the case with recent defence budgets, the current one also modestly increased the capital expenditure by 4.6 percent to Rs 1.8 lakh crore from the previous budget’s Rs 1.7 lakh crore, constituting 26.42 percent of the total defence budget.

Problems with arms acquisition process

There seems to be a challenge with the capital outlay of the defence budget as the Ministry of Defence (MoD) returned Rs12,500 crore allocated as part of the capital outlay under the interim budget of July 2024 to the Ministry of Finance. Yet the non-expenditure of this money can be misleading, which the government will also need to address by accelerating acquisitions, that by all accounts the armed services need but cannot spend all the money under the capital head within the stipulated fiscal year due to procurement delays in the MoD.

Thus, the pace of acquisitions of weapons systems and platforms will need a stronger push from Prime Minister Modi and the defence minister, Rajnath Singh. Otherwise, the government faces the classic chicken-and-egg problem to the extent that there will be a mismatch between the funds allocated for capital procurement and the capacity of the MoD to complete the timely execution of contracts to meet the capital defence requirements of the services. It has and will also lead to inter-ministerial recriminations.

The government faces the classic chicken-and-egg problem to the extent that there will be a mismatch between the funds allocated for capital procurement and the capacity of the MoD to complete the timely execution of contracts to meet the capital defence requirements of the services.

To be sure, some of the procurement delays in the pipeline are not exclusively the outcome of bureaucratic or procedural delays at the MoD’s end, there are also supply-related bottlenecks from Original Equipment Manufacturers (OEMs), which are beyond the control of the government. Nevertheless, the government must be on its toes to ensure the funds allocated to the MoD and each of the three forces are spent in a timely manner.

Pension outlays are squeezing space for capital acquisition

Revenue expenditure is significantly higher in the 2025-26 defence budget and constitutes to 71.75 percent of the total. The pension bill under the revenue head of Rs 1.60 lakh crore alone constitutes roughly 23.49 percent of the 2025-26 defence budget. Now the pension bill should be a source of worry and attention, because it mandates that the government act with greater alacrity in reducing it by implementing the human resources reforms intended to stem the growth of pension allocations and partially liberate resources for capital acquisitions. Otherwise, the government will be compelled to substantially increase the capital procurement budget in the years to come if it cannot stem manpower costs.

The pension bill under the revenue head of Rs 1.60 lakh crore alone constitutes roughly 23.49 percent of the 2025-26 defence budget.

In any case, the cost-savings and pay-offs from the effective implementation of the Agnipath scheme will not be met at least until the early 2030s, but the process has to start in earnest now.

Domestic industrial complex dominates supply

However, despite the revenue expenditure outstripping capital expenditure by a significant margin, Rs 1.1 lakh crore, or 75 percent of the resources allocated for capital expenditure, will be spent on defence technologies and hardware sourced from domestic industry, consistent with the government’s Atmanirbhar Bharat initiative (25 percent of overall defence capital outlay is earmarked for R&D and creation of infrastructure). It also represents a continuation from the interim budget of July, 2024 in which 75 percent of capital expenditure was dedicated to procurement from native industry.

Spending three quarters of the capital budget on procurements from indigenous defence industry will give greater fillip to domestic employment, strengthen native defence industrial capabilities and enable the development of defence products not just geared to meeting the needs of the armed forces, but equally for export.

Further, Rs 48,614 crore is allocated for aircraft and aero-engines. This is significant as it represents a sizeable 27 percent of the capital budget and demonstrates the gravity of the problem the Indian Air Force and to a more limited extent the Indian Navy confront in overcoming their depleting their fighter combat strength.

Conclusion

In a nutshell, the defence budget for 2025-26 does not depart substantively from the defence budgets presented by Modi government in the recent past as it aims to send out message to various stakeholders that it is seeking to build nation’s defence capabilities by continuing to pursue gradual reforms.

This commentary originally appeared in Money Control

• Indian Economy
• India
• Atmanirbhar Bharat
• capital expenditure
• defence budget 2025-26
• domestic defence manufacturing
• pension costs
• procurement delays

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