India's Defence Budget Explained — Where ₹6.8 Lakh Crore Actually Goes

India's defence allocation crossed ₹6.8 lakh crore (about US$78 billion) in FY2025-26, roughly 13 percent of central government expenditure and just under 2 percent of GDP. The figure is the world's third or fourth largest in dollar terms, but its composition is what determines how much new equipment the forces can actually buy.

The four buckets

1. Capital outlay (modernisation) — about ₹1.8 lakh crore. This funds new aircraft, ships, missiles, tanks and infrastructure. It is the number industry watches.
2. Revenue expenditure (operations) — about ₹3.1 lakh crore. Salaries, fuel, spares, training, ammunition consumption and maintenance.
3. Defence pensions — about ₹1.6 lakh crore. One Rank One Pension (OROP) revisions push this up every year.
4. MoD civil and Border Roads — the remainder, including the Border Roads Organisation, DRDO's revenue budget and the Coast Guard.

The uncomfortable ratio: pensions plus salaries consume more than half the total. Agnipath was designed in part to bend that curve over the coming decades.

Why capital outlay is smaller than it looks

Of the capital budget, roughly 65 to 70 percent is committed liabilities — instalments on contracts already signed (Rafale, S-400, Scorpène, Tejas Mk1A). Only about a third is available for new schemes each year. That is why a single big-ticket decision such as the 114-fighter MRFA competition can crowd out a dozen smaller programmes.

The Make in India lever

The Department of Defence Production earmarks about 75 percent of the capital procurement budget for domestic sourcing, up from 58 percent in 2020-21. Defence production crossed ₹1.27 lakh crore in FY2023-24 and exports touched ₹21,083 crore, with a stated target of ₹50,000 crore in exports by 2029. Private industry's share of production has climbed past 20 percent.

What to watch each February

• The capital-to-revenue ratio — anything above 30:70 signals real modernisation intent.
• Unspent capital — the services surrendered funds in several past years due to procurement delays; DAP 2020 and emergency procurement powers were meant to fix this.
• DRDO's allocation — around ₹26,000 crore, of which R&D is a fraction, remains the structural weakness in indigenous design.
• iDEX and ADITI — small in rupee terms (a few hundred crore) but the fastest-growing line, funding 400-plus start-ups.

For companies looking to enter the supply chain, the Industry Hub tracks contracts, the vendor directory and open iDEX challenges.