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Internal Security February 03, 2026 5 min read Daily brief · #26 of 26

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

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 ...

GS2 (Government Policies) GS3 (Internal Security Economy)

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
On this page
  1. What Happened
  2. Static Topic Bridges
  3. Capital vs Revenue Expenditure in Defence Budgeting
  4. Defence Acquisition Procedure (DAP) 2020 and Make in India
  5. Defence Budget as a Share of GDP — The Structural Debate
  6. Defence Exports and Self-Reliance
  7. Key Facts & Data
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