India’s defence policy must gear up for a 3.5-front security challenge
The risk of geo-economic confrontation is on the rise. A rough neighbourhood means it’s time for India to raise its defence budget to at least 2.5% of GDP and focus on R&D, space capabilities, AI and private participation.
Tensions between India and Pakistan have reached a potential flashpoint with the horrific attack on civilians in Pahalgam in Kashmir. Bangladesh has also emerged as a point of concern lately, while China has been making aggressive border moves over the past 8-10 years. These have raised the spectre of a 3.5-front security nightmare for India (Pakistan plus Pakistan Occupied Kashmir-Jammu and Kashmir, China and Bangladesh).
Moreover, today’s global geopolitical landscape is fraught with growing divisions and rising uncertainty. The ongoing Russia-Ukraine war and the Israel-Hamas conflict in Gaza have far-reaching implications for the global geopolitical order.
Several European countries have begun raising their defence spending after decades. A 176-year-old train factory in Gorlitz, Eastern Germany, for example, is slated to begin making Sherman tanks, signalling the country’s intent to rearm itself. Japan too is looking to amend its pacifist constitution to give its military more teeth. These trends mark a sharp departure from the post-World War II era and post-Berlin Wall global order, and could continue for decades into the future.
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Is it any surprise that ‘State-based Armed Conflict’ was ranked as the top risk for 2025 in a recent global survey, with nearly a quarter of respondents anticipating a material global crisis? The risk of geo-economic confrontation is on the rise with increased tensions between major powers over sanctions, trade tariffs and investment screening, among other issues, all of which have worsened global economic instability.
US President Donald Trump’s foreign policy emphasizes nationalism. This means we are squarely in a world where each country prioritizes its interests and sovereignty, with larger ones carving out their own ‘sphere of influence’ in which they expect to operate with some degree of impunity.
Thus, we need to re-evaluate India’s security framework, reforms and expenditure patterns based on the military threats and capabilities of our neighbours. Here’s a to-do list.
First, India must urgently review its defence spending and expenditure priorities. The country currently spends about 2% of GDP on defence. However, this defence allocation has been lagging nominal GDP growth. It grew 6.3% in 2023-24, 5.2% in 2024-25 and is budgeted to expand at 6.2% in 2025-26. This is slower than our nominal economic growth rate of about 10-12% in these years. But China’s military spending at about 7% has outpaced its GDP growth rate of 4-5% in recent years, and that too at a much higher absolute level of over $300 billion, compared to India’s under $90 billion.
The other important issue concerns the quality and mix of India’s defence outlay. The 2025-26 budget allocated ₹6.8 trillion for defence, versus ₹6.21 trillion the previous year. However, of this total, only about 26% is for capital expenditure, with the rest earmarked for routine expenses such as salaries, pensions, maintenance, repairs, etc.
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Notably, the pension bill has been in excess of 20% of the total defence revenue expenditure for many years. The 8th Pay Commission will soon commence work and likely submit its report by early 2027. This may entail large arrear payments as the revised salaries and pensions would be effective from January 2026. The eventual pay award could skew our defence spending further in favour of salaries and pensions.
True, the Agniveer scheme, if successfully implemented, could help reduce these expenses. But we cannot escape the fact that our overall defence budget, especially its capex component, must be raised. A minimum addition of 10 basis points per annum in defence spending as a percentage of GDP over the next few years should be committed and adhered to, taking overall defence spending to at least 2.5% of GDP.
Second, India’s space budget should be raised manifold, along with next-generation reforms in this sector. Space could become a new theatre of warfare, although the Outer Space Treaty of 1967 bans nuclear weapons in orbit or on celestial bodies.
As China is expanding its space capabilities at an alarming pace, India’s space strategy should be harmonized with its military imperatives. We must invest in strengthening and protecting our assets in orbit and spend more on ground infrastructure. Satellite surveillance and space situational awareness capabilities must be augmented. We must leverage a wide range of technologies to enhance India’s security. Even the US is pivoting towards such changes.
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Third, research and development (R&D) must get a place of pride in defence reforms. Just as the government spruced up India’s physical border infrastructure, it must focus on leapfrogging digital infrastructure and deploying artificial intelligence (AI) for defence purposes. We also need advanced cryptographic capabilities.
Lastly, public-private partnerships hold the key to speeding up India’s defence indigenization programme. The private sector, comprising the country’s indigenous startup ecosystem and vast industrial base, should be co-opted more purposefully for this. Leveraging the resources of the private sector could accelerate innovation and enhance national security.
The author is group chief economist at Larsen & Toubro.
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