India’s defence budget outlook: EY report calls for 3% GDP benchmark; permanent fund, R&D push recommended

India may consider setting a military expenditure benchmark at 3 per cent of GDP, creating a permanent defence modernisation fund, and boosting domestic manufacturing, according to the June edition of EY’s Economy Watch report released on Monday. The report, quoted by news agency PTI, highlights the need for forward-looking defence budget planning to build a more resilient and agile defence framework that can respond effectively to evolving geopolitical and technological challenges. “Over the years, India’s military expenditure as a share of GDP has gradually declined — from close to 3 per cent in the early 2000s to just over 2 per cent today, whereas countries like the US and Russia continue to allocate significantly higher proportions,” the report noted. To address this gap, EY suggested “benchmarking defence allocations at 3 per cent of GDP, supplemented by the creation of a non-lapsable defence modernisation fund, and incentivising domestic manufacturing to unlock long-term economic growth multipliers.” The report also underlined the importance of increasing the capital component of the defence budget, streamlining procurement processes, and giving greater priority to research and development in the defence sector. EY India Chief Policy Advisor DK Srivastava said, “Benchmarking defence spending at 3 per cent of GDP and operationalising a dedicated non-lapsable modernisation fund can provide the fiscal predictability required for investing in advanced technology, strengthening domestic defence manufacturing ecosystems, and driving innovation-led procurement.” The proposal aligns with an earlier recommendation by the 15th Finance Commission, which called for the creation of a Modernisation Fund for Defence and Internal Security (MFDIS) — a permanent corpus within the Public Account of India. This fund was envisioned to be financed through disinvestment receipts, defence land monetisation, and voluntary contributions. Although the government has accepted the MFDIS proposal in principle, the EY report noted that the fund has yet to be operationalised. Reactivating this proposal, it said, could ensure stable capital support and shield critical defence investments from fluctuations in annual budget allocations.