Budget 2026: 7-12% increase in budget, capex spending on modernisation -- Defence sector's checklist for Nirmala Sitharaman

Finance Minister Nirmala Sitharaman is set to present the Union Budget 2026 on Feb 1, 2026. All eyes are on one of the most geopolitically sensitive portfolios - defence. After back-to-back increases in defence allocations in recent years, expectations are high for bold announcements that could reshape India’s military and industrial landscape.

Over the past few years, India has steadily increased defence spending to modernise its forces and strengthen self-reliance.

In FY 2024-25, the government earmarked ₹6.22 lakh crore for defence budget, a substantial increase of around 18 per cent compared to FY23 as border tensions persisted. A year later, in FY 2025-26, the defence budget went up by roughly 9.5 per cent to ₹6.81 lakh crore, making it the largest allocation among ministries.

Former Defence Secretary Giridhar Aramane suggests a potential overall hike of 20%-25% in capital outlay, a significant acceleration from the typical ~10% annual rise. He added that many large orders placed off late are reaching the payment stage whereas emergency purchases and investments in new technologies is also likely to shore up spending.

The same was echoed LT Gen SL Narasimhan (Retd), Adjunct Distinguished Fellow for China and National Security Studies. "The increase in the defence budget will be somewhere between 7% to 12%. That has generally been the trend in recent years," said Lt Gen SL Narasimhan (Retd).

Capital expenditure spending on equipment, modernisation and new systems is expected to receive a healthy jump of 10% or more in 2026-27, even as the government debates raising defence spending closer to 2.5% of GDP over the coming years.

In May 2025, India’s swift military response to escalating cross-border threats during Operation Sindoor sharpened focus on rapid mobilisation and readiness. This has strengthened calls within the MoD for larger budgetary allocations, especially for emergency procurements of frontline weapons, enhanced border surveillance and quick-reaction capabilities, drones and counter-UAV systems.

Future battlefields will be shaped by speed, data, and automation. Due to this, experts expect Budget 2026 to highlight artificial intelligence for command, control and analytics, drone warfare and counter-drone systems, enhanced cyber and electronic warfare capabilities.

Defence analyst Sanket Kulkarni says, "A sustained momentum in R&D spending will safeguard India from geopolitical uncertainties and its impact on defence technology partnerships". He added.

Besides this, a major theme is expected to be self-reliance (Atmanirbhar Bharat), boosting India's domestic defence industry. Defence production has grown threefold over the past decade, reaching significant highs in indigenous output and exports. Defence export targets are ambitious, aiming at ₹50,000 crore by 2028-29.

Capital outlay may be rebalanced to increase the share earmarked for indigenous procurement.