India’s plans to modernise its military and strengthen domestic defence production are facing mounting challenges due to financial constraints, despite a net boost in the country’s defence budget. The government has set aside roughly $78.7bn for military spending in the fiscal year beginning April 1, 2025, but a large share of that is already earmarked for salaries and pensions, leaving little room for new acquisitions and technological upgrades.
India’s FY2025-2026 defence budget has allocated $21.2bn for capital expenditure, a modest 4.65% rise from FY2024-2025. However a report by the Delhi Policy Group analysing the budget argues that this increase is nowhere near enough to meet the military’s growing needs, particularly as regional tensions escalate. India’s spending is heavily weighted towards personnel costs, with pensions alone rising 13.5% y/y to $19.2bn.
New Delhi’s push for self-reliance in defence production under the "Atmanirbhar Bharat" initiative has been a central pillar of its strategy to sustainably cut costs, but the country’s domestic manufacturers still face significant hurdles, including limited capacity and technological shortfalls. Furthermore India has also introduced the “Agniveer” service recruitment programme in 2022, which allows the three services - Army, Navy and Airforce - to hire officers and enlisted personnel only for a four year stint.
The Agniveer programme has to some extent reduced the constantly rising pension obligations for the Indian (Ministry of Defence)MoD.
However any significant savings from the programme will only start to reflect around the year 2042 - as Indian Armed Forces personnel are only eligible for a full pension after completing 20 years of service in most cases. The MoD approved procurement plans worth billions for FY2025-2026, but bureaucratic delays continue to slow down acquisitions. India has long sought to cut its dependence on foreign suppliers, yet local production remains constrained, affecting key projects such as fighter jet manufacturing and naval vessel upgrades.
These setbacks have left critical modernisation efforts running behind schedule. At the same time, India’s defence spending as a percentage of GDP has slipped to 1.9%, raising concerns about the country’s ability to keep pace with its regional rivals.
As data from a report by the US based China Aerospace Studies Institute shows, China, by contrast, has increased its military budget by 7.2% in FY 2025-2026 to $245bn, highlighting the widening gulf between the two Asian powers. This leaves fewer resources available for infrastructure and weapons upgrades, a growing concern for military planners.
The government has been working to reform its procurement processes, but inefficiencies persist - with tenders getting cancelled, to constantly changing requirements due to minor policy changes.
Unspent funds from previous budgets also point to delays in acquiring essential equipment, limiting the country’s armed forces's ability to phase out ageing systems - which not only puts the lives of Indian servicemen in danger but also significantly reduces their ability to compete with adversarial forces of equal magnitude.
It is imperative that India must ramp up capital investment and cut through red tape to speed up the deployment of modern weaponry as well as secure its strategic supply chains. To mitigate supply chain issues too the government has introduced policies to encourage local production, including stricter import restrictions and incentives for domestic manufacturers.
However, the private sector’s role in the defence industry remains limited, and state-run firms continue to dominate, slowing innovation and production timelines. India’s security concerns, from ongoing border tensions with China to long-standing territorial disputes with Pakistan, make military modernisation an urgent priority.
Yet, with limited capital investment the country risks lagging behind in crucial technological advancements. New Delhi still depends on foreign suppliers for key components, such as jet engines and advanced missile systems, complicating its ambition to become a global defence manufacturing hub.
Bridging this gap will require sustained investment, policy reforms, and greater collaboration between the government and the private sector to accelerate production and innovation.
Without a significant shift in how funds are allocated and how procurement is managed, India’s defence modernisation could remain sluggish, leaving its military struggling to match the rapid advancements of its regional adversaries.
