The Finance Minister of India presented the Union Budget 2026-27 on 01 Feb 2026. The total annual national budget stood at Rs 53,47,314 crore, marking a steady increase from the Rs 50,65,345 crore projected in the previous year. She allocated a historic Rs 7.85 lakh crore to the Ministry of Defence (MoD), up 15.19 percent from the Rs 6.81 lakh crore allocated in Financial Year (FY) 2025-26. This monumental allocation accounted for 14.67 percent of the total budget (compared to 13.44 percent last year) and roughly 2.0 percent of the Gross Domestic Product (GDP), an increase from the previous 1.9 percent.
Defence allocations are generally made under four heads: Ministry of Defence (MoD) (civil), defence services (revenue expenditure), capital outlay for defence services, and defence pensions. The total defence budget (excluding defence pensions) for Financial Year (FY) 2026-27 was Rs 6,13,340 crore, a substantial leap from the Rs 5,20,415 crore set aside in the preceding year. The annual capital allocation mainly influences the modernisation of military forces in the budget. The Capital Outlay at Rs 2.19 lakh crore saw a massive increase of nearly 22 percent compared to the Rs 1.80 lakh crore allocated in Financial Year (FY) 2025-26. Rs 3,65,479 crore was allocated for Revenue expenditure, seeing an increase of 17.24 percent over the Rs 3,11,732 crore allocated in Financial Year (FY) 2025-26 (Budgetary Estimate (BE)) for the day-to-day operational running and training of the Indian Armed Forces. The Agnipath scheme saw an increased allocation of 51 percent over the previous Financial Year (FY) to accommodate the rising numbers of inductees, following an 84 percent increase the year prior.
Strategic Reorientation and Reforms
Building on the previous “Year of Reforms,” the Ministry of Defence (MoD) maintained a strong focus on Joint & Integration initiatives amongst the Indian Armed Forces, the operationalisation of the Integrated Theatre Commands, and the expansion into new domains such as Cyber, Space, Artificial Intelligence (AI), Hypersonics, and Robotics. The budget signaled a deliberate rebalancing of priorities, shaped significantly by recent geopolitical dynamics and Operation Sindoor, to ensure both sustenance and transformation through a simplified Defence Procurement Procedure.
Capital Budget Close Look
In the evolving geopolitical scenario, where the world witnessed a changing paradigm of modern warfare, the Indian Armed Forces needed to be equipped with state-of-the-art weapons and had to be transformed into a technologically advanced, combat-ready force. Keeping this in view, Rs 2,19,306 crore was allocated to the Capital Outlay of the Defence Forces. This allocation was nearly 21.8% higher than the Rs 1,80,000 crore Budgetary Estimate (BE) of Financial Year (FY) 2025-26.
Out of this, Rs 1.85 lakh crore was earmarked for Capital Acquisition, termed as the modernisation budget of the Indian Armed Forces, representing an increase of approximately 24 percent over the Rs 1.48 lakh crore allocated in the previous year. The remaining funds were dedicated to capital expenditure on Research & Development (R&D) and the creation of infrastructural assets across the country.
To strengthen domestic industries and make the forces self-reliant, the Ministry of Defence (MoD) continued earmarking a substantial share of the modernisation budget for capital procurement from domestic industries. Accordingly, for Financial Year (FY) 2026-27, Rs 1.39 lakh crore, i.e., 75 percent of the modernisation budget, was reserved for procurement through domestic sources. This represented a direct scaling up from the Rs 1.11 lakh crore set aside under the same 75 percent domestic quota in Financial Year (FY) 2025-26, providing a strong thrust to the Aatmanirbhar Bharat initiative.
Closer examination of capital expenditure showed an increase in rupee terms of approximately 31 percent and 30 percent for aircraft and aero-engines, and other equipment requirements over Financial Year (FY) 2025-26 (Budgetary Estimate (BE)) for the defence services, respectively. The allocation for Heavy and Medium Vehicles stood at Rs 4,580 crore for Financial Year (FY) 2026-27 (Budgetary Estimate (BE)), which was a 25 percent increase over the Rs 3,650 crore allocated the previous year (which had notably seen a 21 percent decrease before this correction).
This allocation took care of major acquisitions planned for the Financial Year (FY). These Capital Acquisition projects equipped the Indian Armed Forces with next-generation fighter aircraft, advanced weapons, ships, submarines, Unmanned Aerial Vehicles (UAVs), and drones. The capital investment in the defence manufacturing sector had a cascading and multiplier effect on the national economy, boosting the Gross Domestic Product (GDP) and providing greater job opportunities to the youth of this country.
Operational and Sustenance Budget (Revenue)
Revenue expenditure is to take care of Pay & Allowances of the Armed Forces Personnel, and for sustenance and operational preparedness. Accordingly, Rs 3,65,479 crore was allocated for this purpose, which was 17.24 percent higher than the Rs 3,11,732 crore budgetary allocation of Financial Year (FY) 2025-26. This facilitated the procurement of rations, fuel, ordnance stores, and maintenance/repair of equipment. In Rupee terms, the Indian Navy and the Indian Air Force (IAF) witnessed significant increases in their revenue budgets, continuing the trend of double-digit percentage growth seen in the previous year.
This allocation addressed the requirements due to the additional deployment of forces in the border areas, maintaining operational readiness, the hiring of vessels, an increase in expenditure on longer sea deployment of ships, and an increase in flying hours for the aircraft.
Capital Budget of the Indian Coast Guard
The Indian Coast Guard (ICG) was allotted a total of Rs 8,392.85 crore for the Financial Year (FY) 2026-27. This represented a 13 percent decrease compared to the high Rs 9,676.70 crore allocated in the Financial Year (FY) 2025-26 Budgetary Estimate (BE) stage, which had previously seen a massive 26.50 percent jump. Despite the fiscal adjustment, the Indian Coast Guard (ICG) continued to strengthen coastal security and assist neighbouring countries and commercial ships during emergencies through faster response protocols.
The allocated funds provided financial space for the maintenance, operations, and acquisition of Advanced Light Helicopters (ALH), Dornier Aircraft, Fast Patrol Vessels (FPVs), Training Ships, and Interceptor Boats.
Boost for DRDO Allocation
The budgetary allocation to the Defence Research and Development Organisation (DRDO) was increased to Rs 29,100.25 crore in Financial Year (FY) 2026-27 from Rs 26,816.82 crore in Financial Year (FY) 2025-26. Out of this, a major share of Rs 17,250.25 crore was allocated for capital expenditure and to fund Research & Development (R&D) projects, marking a steady rise from the Rs 14,923.82 crore allocated for capital expenditure in the previous year. The budgeting focus remained on indigenous Research & Development (R&D) and the procurement of major defence platforms such as aircraft and aero-engines. This financially strengthened the Defence Research and Development Organisation (DRDO) in developing new technologies with a special focus on fundamental research and the hand-holding of private parties through the Technology Development Fund, assisting the development of Deep Technology in the defence sector.
Boosting the Start-up Ecosystem for Innovation in Defence
For making the Indian Armed Forces self-reliant in defence technology and encouraging innovation, it remained imperative to engage private players and strengthen the start-up ecosystem in the country. Allocations to the iDEX scheme, including its sub-scheme, Acing Development of Innovative Technologies with iDEX (ADITI), continued to be utilised for funding innovative projects, building upon the Rs 449.62 crore allocation of the previous year to further mature the domestic industrial base.
Strengthening Border Infrastructure
To further improve border infrastructure and facilitate the movement of Armed Forces personnel through tough terrains, Rs 7,394 crore was allocated to the Border Roads Organisation (BRO) under the capital head, an increase from the Rs 7,146.50 crore allocated in 2025-26. The financial provision for the Border Roads Organisation (BRO) not only promoted the strategic interest of the nation in border areas by constructing tunnels, bridges, airfields, and roads—such as the vital LGG-Damteng-Yangtse in Arunachal Pradesh, Asha-Cheema-Anita in Jammu & Kashmir (J&K), and Birdhwal-Puggal-Bajju in Rajasthan—but also boosted socio-economic development, provided employment opportunities, and encouraged tourism. The Border Roads Organisation (BRO) created substantial employment opportunities by employing local youths and contributed to the local economies, fostering long-term employability and skill development.
BRO Working
Continuous Support for Ex-servicemen Welfare
The Government maintained its commitment to providing the best healthcare facilities to veterans and their families through the dedicated Ex-Servicemen Contributory Health Scheme (ECHS). For Financial Year (FY) 2026-27, Rs 12,100 crore was allocated towards the Ex-Servicemen Contributory Health Scheme (ECHS), an impressive 45.49 percent increase over the Rs 8,317 crore Budgetary Estimate (BE) of Financial Year (FY) 2025-26.
There are approximately 34 lakh defence pensioners whose monthly pension is met out of the Defence Pension Budget. With the ongoing implementation of the third revision of One Rank One Pension (OROP), Rs 1,71,338 crore was allocated for Financial Year (FY) 2026-27, marking a 6.6 percent increase over the Rs 1.61 lakh crore budget estimates from Financial Year (FY) 2025-26, ensuring timely financial support for ex-servicemen and addressing inflationary trends.
Defence Exports
India’s defence production reached a robust Rs 1.54 lakh crore, reflecting growing confidence in domestic capabilities. Defence exports continued their upward trajectory, ensuring the country is well on its way to meeting the annual defence production target of the Government to reach $35 billion and exports worth $6 billion by Financial Year (FY) 2027-28, keeping pace with the Rs 25,000 crore milestone passed in the previous fiscal cycle.
To Summarise
The projected growth rate for India remained strong among the leading economies of the world. This was the ninth consecutive budget of Finance Minister Nirmala Sitharaman. The Union Budget 2026-27 was a vital step towards fulfilling the Prime Minister’s resolve of Viksit Bharat by 2047 with technologically advanced and ‘Aatmanirbhar’ Armed Forces. The 14.67 percent allocation of the Union Budget remained the highest among all Ministries, outpacing the 13.44 percent share it held in Financial Year (FY) 2025-26.
The pattern of allocation was a clear signal that the domestic industrial complex was prioritised. The Union Budget 2026-27 advanced domestic manufacturing by linking higher capital outlays with basic customs duty exemptions on raw materials imported for aircraft manufacture. Contracts for LCA Mk1A aircraft, Light Combat Helicopters (LCH), maritime fighter aircraft, tanks, artillery guns, and submarines were pushed forward.
LCA TEJAS MK1A
With a significant modernisation gap, reviewing procurement procedural delays remained critical. The pace of acquisitions of weapons systems and platforms needs a stronger push at all levels. Rolling the capital budget was still the desired way to ensure the timely execution of contracts by the Ministry of Defence (MoD).
Some supply-chain bottlenecks from Foreign Original Equipment Manufacturers (FOEMs) are beyond the control of the government. But these needed to be anticipated, and alternative next-priority systems acquired.
From being a lead importer for decades, India has risen to rank among the top 25 countries as an exporter of arms. About 100 domestic companies are exporting a wide range of defence products such as DO-228 aircraft, artillery guns, BrahMos missiles, Pinaka rockets and launchers, radars, simulators, and armoured vehicles.
BRAHMOS
The government’s effort to reduce salaries and pension expenditure percentages remains a challenge. The real effect of the Agnipath scheme on the reduction of salary and pension bills will start showing up significantly only in the years following its inception.
Revenue expenditure, at roughly 46.6 percent of the total defence budget (excluding pensions), remained significant. The pension bill under the revenue head constituted approximately 21.8 percent of the 2026-27 defence budget, slightly down from 23.49 percent in 2025-26. To single out defence pensions as a burden is unfair, as it applies to all civilian government employees of the country.
If one looks deeper into indigenous content, there are many items or sub-systems still sourced from abroad that get covered under indigenous content. This needs a realistic assessment. The “Positive Indigenisation List” and the 75 percent domestic capital procurement paths are highly desirable. Establishing regulatory sandboxes for testing and validating new defence technologies helps accelerate the innovation and adoption of cutting-edge solutions.
The sizeable allocation for aircraft and aero-engines demonstrated the gravity of the problem the Indian Air Force (IAF) and the Indian Navy face in depleting their fighter combat aircraft strength.
Finally, India remains a highly threatened nation with China pulling ahead in both capability and numbers. Military-led Pakistan remains a spoiler. Capability-based defence budgeting is required. The defence budget sent a clear signal that the Modi government is seeking to build the nation’s defence capabilities by continuing to pursue gradual reforms, deeply influenced by the recent lessons of Operation Sindoor.
Header Picture Credit: Representative Image Generated using AI
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