Share of defence spending in Centre’s overall expenditure has steadily declined over the last seven years though the size of the defence budget has gone up, with ₹6.22 lakh crore allocated to the Ministry of Defence (MoD), highest among union ministries.

For FY24-25, defence is projected to account for just 12.9 percent of central expenditure, down from 13.9 percent in 2023-24, PhillipCapital noted in its research report titled “Defence 2.0, Modernize, Innovate For A Changing World”.

As a percentage of GDP, defence spending for FY24-25 is estimated at 1.9 percent, the lowest since FY13-14, it stated. Standing Committee on Defence, however, had recommended 3 percent of GDP allocation towards the defence spending.

Falling short

Despite India’s ranking as a top global military spender, its defence budget is increasingly constrained by economic factors, falling short of recommendations for higher allocations, PhillipCapital stated.

The allocation pattern showed that central expenditure on defence, which was 17.1 percent in FY14-15, went up marginally to 17.8 percent in following the financial year, but has been on the decline since then.

This year’s defence budget allocation of ₹6.2 lakh crore is 0.3 per cent lower than FY23-24’s revised estimates, the report found.

“While capital outlay (covering equipment and arms purchases) is set to rise by 9 percent, it is projected at 29 percent for 2024-25, below the ideal figure of minimum 30 percent of the total defence budget, partly due to the growing burden of defence pensions, which limits capital spending,” it said.

Impacting modernisation

Capital outlay directly impacts the military’s modernisation, operational readiness, and strategic capabilities.

The capital spending in FY24 was closer to projections, but the revised estimates indicate a 4 per cent reduction from the budgeted amount, PhillipCapital pointed out.

The restricted funding is impacting defence modernisation which faces 48 per cent funding shortfall over five years, from 2021. 

To address this, the 15^th Finance Commission has recommended four funding sources: Transfers from the Consolidated Fund of India, disinvestment proceeds, monetisation of surplus defence land and proceeds from land transfers to State governments.