India's defence modernisation and indigenisation efforts rooted in 'Make in India' got priority in Union Budget 2025-26, as annual capital allocation has seen an increase of 4.65% at ₹1.80 lakh crore, when compared to a budget allocation of ₹1.72 lakh crore in 2024-25.

As in the previous year, 75% of this allocation (₹1,35,000 crore) is earmarked for procuring from domestic manufacturers in the public and private sectors. The total modernisation budget is ₹2,66,168 crore for FY 2025-26, which includes capital outlay and stores, repairs, refits and works of revenue expenditure.

Union Finance Minister Nirmala Sitharaman's 8th budget allotted ₹6,81,210 crore (a 9.5% increase from the previous year) to the Ministry of Defense, which is 13.44% of the total budget and 1.9% of the GDP. The total defence budget (excluding defence pensions) was ₹5,20,415 crore, which included revenue expenditure allocation of ₹3,11,732 crore, an increase of 10.24% over the previous year.

A breakdown of capital expenditure allotted in the FY26 budget shows ₹1,021 crore earmarked for land systems, ₹48,614 crore for aircraft and aero engines, ₹3,651 crore for heavy and medium vehicles and ₹14,924 crore for Research and Development.

''A closer examination of capital expenditure shows an increase of 21% and 74% for aircraft and aero-engines and joint staff requirements over FY 2024-25. This reflects a strong signal towards modernisation and Indigenous production of light combat aircraft and helicopters, advanced military equipment, including drones, and next-gen weaponry'', says Pawan Khatter, Partner and National Leader, Aerospace and Defense of EY in his analysis of the budget.

However, the allocation for heavy and medium vehicles was ₹3,650 crore, a decrease of 21% over FY 2024-25.

The significant increase of 21% for aircraft and aero-engines indicates the likely acquisition of 97 Light Combat Aircraft (LCA) Tejas for IAF in the upcoming FY. Contracts for 156 Light Combat Helicopters (LCH) for Indian Air Force (IAF) and Indian Army, maritime fighter aircraft, artillery guns and submarines are also expected to be finalised, says EY.

Assistance for prototype development under 'Make' procedure has witnessed a 13.27% increase over FY 2024-25 and total R&D budget this year is ₹26,816.82 crore, 5.15% of the total budget (less pensions). Of this, the capital R&D budget is ₹14,923.82 crore, an increase of 13% over the previous year budget allocation. About 25% or ₹3,730 crores of this is likely to be reserved for industry, startups and academia.

Light Combat Aircraft

'Make in India' gets priority in defence budget allocation