Union Budget 2026: Major hike in defence capex on the cards after Operation Sindoor

India’s geopolitical and strategic realities post-Operation Sindoor are likely to lead to a substantial increase in the defence budget, and especially capital expenditure outlay for the sector, in the upcoming Union Budget for 2026-27, informed sources have told Business Today.

The defence budget, which has hovered below 2% of nominal GDP in recent years, is likely to jump comfortably above that mark, while the capex component, which is budgeted at Rs 1.8 lakh crore in the current financial year, could be closer to Rs 2.5-3 lakh crore for FY27, it is learnt.

“There could be a notable increase. The political leadership is concerned about a shortfall in arms, equipment, etc,” said an official involved in the budget process.

A second official explained that the aim is to realistically have a two-front war doctrine, and while the Defence Ministry and the service arms will decide how and where to spend the increased outlay, the budget will provide for it. “The reality post-Sindoor is that many nations who we thought were our natural allies did not express unequivocal support for India. The biggest example being the United States. China unconditionally supported Pakistan’s unproven narratives,” the second person said.

During the flare-up between India and Pakistan in 2025, satellite imagery showed that India’s cruise missiles, ballistic missiles, and drones had successfully hit many Pakistani terror camps and military bases. However, there are concerns on the Indian side, the biggest being the glaring shortfall in the fighter aircraft fleet.

For the Indian Air Force to effectively defend the airspace in case of a two-front war, it has sought an optimum fighter strength of 42 squadrons (18-20 fighter planes each squadron). Since the retirement of MiG-21s last year, the fighter fleet has dwindled to 29 squadrons. This is now the biggest priority for policymakers, with reports suggesting that India and France will soon sign an agreement to acquire 114 Dassault Rafales.

There are also shortfalls in capabilities in other service arms, including drone and counter drone systems, future infantry fighting vehicles, air defence, new submarines including nuclear ballistic missile submarines, naval fighters, etc.

Policymakers are acutely aware that India cannot count on erstwhile partners in an increasingly fragmented post-Trump world, especially due to the United States’ President’s erratic decisions, including imposing heavy tariffs on India for purchasing Russian crude.

Fiscal to be maintained

Sources said that any increase in the defence budget will not come at the cost of the Centre’s fiscal glide path. Finance Minister Nirmala Sitharaman is set to meet her fiscal deficit target of 4.4% of GDP for the current financial year (FY26) primarily due to better-than-expected projected nominal GDP.

“Sans any major macro-economic disruptive exogenous shock(s), and while keeping in mind potential growth trends and emergent development needs, the Government would endeavour to keep fiscal deficit in each year (from FY 2026-27 till FY 2030-31) such that the Central Government debt is on declining path to attain a debt to GDP level of about 50±1 per cent by 31st March 2031,” the Finance Ministry had said in its outlook statement last budget, under the FRBM Act.

Morgan Stanley has forecast that Sitharaman may target fiscal deficit for FY2026-27 at 4.2% of GDP, while ratings agency Icra Ltd pegs it at 4.3%. Sitharaman will present the Union Budget on February 1.