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Defence budget through the years: Big leap for 2026-27, but what numbers since 1999 reveal

February 03, 2026 5 min read Internal Security Economics GS2 (Government Policies) GS3 (Internal Security Economy)
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What Happened

  • The Union Budget 2026-27 allocated Rs 7.85 lakh crore to the Ministry of Defence — the highest-ever allocation, representing a 15.19% jump over the previous year's Budget Estimates.
  • Capital expenditure within the defence budget rose to Rs 2.19 lakh crore (27.95% of the total), a 21.8% increase over FY 2025-26 BE.
  • Rs 1.85 lakh crore of the capital allocation is earmarked for capital acquisition, of which 75% (Rs 1.39 lakh crore) is reserved for domestic industry procurement.
  • A longitudinal analysis covering 1999–2026 shows that capital expenditure as a share of the total defence budget was consistently highest under UPA I and UPA II (2004-2014), often exceeding 35%.
  • Under the current NDA government, capital expenditure as a percentage of the total defence budget slipped below 30% for much of the period, reaching a low of ~23% in 2016-17, before the 2026-27 budget pushed it back up to ~28%.
  • Defence pension outlay has grown multifold since 1999 and now accounts for 21.84% of the total MoD allocation (Rs 1.71 lakh crore in 2026-27), up from Rs 1.61 lakh crore in 2025-26.
  • Salaries and pension combined account for roughly 48–50% of estimated defence spending, squeezing room for capital modernisation.

Static Topic Bridges

Capital vs Revenue Expenditure in Defence Budgeting

The defence budget is divided into two broad heads: revenue (operating costs — salaries, pension, maintenance, fuel) and capital (procurement of new weapons, platforms, infrastructure). A higher capital-to-revenue ratio signals greater investment in modernisation rather than mere sustenance.

  • In 2026-27: Revenue (pay and allowances) = 26.40% of MoD total; sustenance/operations = 20.17%; capital = 27.95%; pension = 21.84%; civil organisations = 3.64%.
  • Under UPA I & II, capital expenditure routinely exceeded 35% of the defence budget — reflecting aggressive procurement planning, though actual utilisation of capital funds lagged behind estimates.
  • The structural problem is the "pension overhang": approximately 34 lakh defence pensioners draw from the defence pension budget, and this liability grows faster than the overall budget.

Connection to this news: The 2026-27 jump in capital allocation is significant precisely because the historical trend showed a steady erosion of capital's share since 2014; the current budget represents a deliberate course correction.

Defence Acquisition Procedure (DAP) 2020 and Make in India

India's defence procurement follows the Defence Acquisition Procedure (DAP) 2020 (which superseded DPP 2016). It prioritises indigenisation through a hierarchy of categories:

  1. Buy (Indian-IDDM) — Indigenously Designed, Developed, and Manufactured; highest priority; minimum 50% indigenous content.
  2. Buy (Indian) — Minimum 50% indigenous content but not necessarily designed in India.
  3. Buy & Make (Indian) — Foreign platform with technology transfer for domestic manufacture.
  4. Buy (Global – Manufacture in India) — Foreign OEM sets up manufacturing subsidiary in India.
  5. Buy (Global) — Outright import; lowest preference.
  • The DAP 2020 replaced "DPP" with "DAP" and introduced a leasing category for the first time.
  • Make-I projects are government-funded; Make-II projects are industry-funded.
  • Categories exclusively reserved for Indian vendors (with FDI not exceeding 49%): IDDM, Make-I, Make-II, SP (Strategic Partner) Model.
  • In 2026-27, Rs 1.39 lakh crore (75% of capital acquisition) is earmarked for domestic procurement — the highest domestic reservation ever.

Connection to this news: The rising share of domestically earmarked capital acquisition directly reflects the DAP 2020 framework's push for indigenisation and the Atmanirbhar Bharat defence policy.

Defence Budget as a Share of GDP — The Structural Debate

India's defence spending as a share of GDP has hovered near or below 2% for most of the post-Cold War period, even as absolute allocations grew. This ratio matters because it contextualises whether India is genuinely boosting defence capacity relative to economic size.

  • Defence budget 2025-26: ~1.9% of GDP; 2026-27: ~2% of GDP.
  • The 14th Finance Commission had recommended raising defence spending to 3% of GDP; this target has never been met.
  • China spends approximately 1.6% of GDP on defence in official terms (widely considered an undercount); Pakistan spends roughly 4%.
  • The "revenue squeeze" from pension and salary growth reduces the effective modernisation budget even when overall allocations rise.

Connection to this news: The 15% nominal increase in 2026-27 barely moves the GDP-share needle, reinforcing the structural argument that pension liabilities and revenue expenditure are eating into modernisation headroom.

Defence Exports and Self-Reliance

A complementary metric to the capital budget is India's defence export trajectory, which indicates the maturity of the domestic defence industrial base.

  • India's defence exports crossed Rs 21,083 crore (~$2.5 billion) in FY 2023-24, up from under Rs 1,000 crore a decade ago.
  • Government target: Rs 50,000 crore in defence exports by 2028-29.
  • iDEX (Innovations for Defence Excellence) programme supports startups and MSMEs in defence manufacturing under DRDO/MoD auspices.
  • DPSU (Defence Public Sector Undertakings) such as HAL, BEL, BDL, and Mazagon Dock drive the bulk of production; private sector share is growing.

Connection to this news: Rising capital acquisition budgets channelled through domestic procurement create the order book that makes defence exports viable — the two are structurally linked.

Key Facts & Data

  • Total MoD allocation 2026-27: Rs 7.85 lakh crore (15.19% increase over 2025-26 BE)
  • Capital expenditure 2026-27: Rs 2.19 lakh crore (27.95% of total; up 21.8% YoY)
  • Capital acquisition 2026-27: Rs 1.85 lakh crore; of which 75% (Rs 1.39 lakh crore) for domestic industry
  • Defence pension 2026-27: Rs 1.71 lakh crore (21.84% of MoD total; ~34 lakh pensioners)
  • Defence spending as % of GDP 2026-27: ~2%; as % of Union Budget: 14.67%
  • UPA-era capital share: consistently >35% of defence budget (2004-2014)
  • NDA-era capital share low: ~23% in 2016-17, recovering to ~28% in 2026-27
  • India's defence exports FY 2023-24: Rs 21,083 crore (~$2.5 billion)
  • DAP 2020 top category: Buy (Indian-IDDM) — minimum 50% indigenous content