Union Budget 2025: What’s In Store For India’s Defence Sector?

India's defence sector, a crucial pillar of national security and indigenous manufacturing, has high hopes for Finance Minister Nirmala Sitharaman's upcoming Union Budget 2025, scheduled for February 1. With growing global security concerns and rapid advancements in military technology, experts emphasize the need for increased modernisation, self-reliance, and innovation to strengthen India's defence capabilities.
Defence Budget Growth Over the Years

India's defence budget has witnessed a steady increase over the last decade. In 2014, the allocation stood at ₹2.53 lakh crore, which has since risen to ₹6.22 lakh crore for FY 2024-25-nearly 2.5 times higher. The 2024-25 budget, excluding pensions, grew by 8.6% over the previous year, and with pensions included, the increase stood at 7.1%.

A report by PricewaterhouseCoopers highlights that India's defence expenditure accounts for approximately 12.9% of the total Union Budget, making it the highest allocation among all government departments. A key focus has been on capital expenditure, which grew by 15% last year, outpacing revenue expenditure growth (5.1%). This reflects a strong commitment to modernising the armed forces, improving their equipment, and advancing defence technology.

Key Defence Budget Expectations for 2025

Experts believe that the upcoming budget has the potential to reshape India's defence sector through strategic investments in modernisation, R&D, and self-reliance. The government's emphasis on 'Atmanirbhar Bharat' (self-reliant India) is expected to drive further investments in domestic manufacturing, bolstering India's position as a global defence player.

Increased Capital Allocation: The capital budget has grown at an average annual rate of 11% over the past five years, and it is projected to reach ₹1.90 lakh crore in FY 2025-26. Around 75% of this allocation (₹1.43 lakh crore) is expected to be directed toward domestic procurements, supporting indigenous manufacturing.

Major Defence Procurements: Upcoming deals include contracts for six submarines under Project P75(I) and 26 maritime aircraft. Additionally, approvals for systems such as short-range air defence systems, light machine guns, and armoured multipurpose vehicles are expected to translate into contracts, boosting the domestic industry.

Enhanced R&D Investments: At present, R&D funding accounts for only 3.8% of the total defence budget. This is expected to rise in FY 2025-26, particularly for key projects such as the Advanced Medium Combat Aircraft (AMCA) and Project P75(I). The government's ADITI scheme under the Innovations for Defence Excellence (iDEX) initiative is also likely to receive increased funding to promote indigenous technological innovations.

Boost for Defence Exports: India's defence exports have grown significantly, reaching $2.6 billion in FY 2024, a 32.5% increase from the previous year. The government aims for an annual turnover of $35 billion and $6 billion in exports by FY 2028. Achieving these targets will require increased budgetary support and policy measures to facilitate international collaborations.

Industry Perspectives and Sector-Specific Expectations

1. Aerospace & Defence: Industry leaders expect a strong push for capital expenditure to enhance infrastructure and manufacturing capabilities. Last year, ₹1,000 crore was allocated to venture capital funds for space-tech startups. A similar or increased allocation is anticipated to further strengthen India's aerospace sector.

2. Drone Infrastructure: With growing investments by state governments in drone technology, experts emphasize the need for a well-established infrastructure to support large-scale drone operations. Strengthening home-grown drone capabilities will be crucial for military and civilian applications.

3. Shipbuilding & Maritime Security: India currently holds only 0.05% of the global shipbuilding market compared to China (47%), South Korea (30%), and Japan (17%). New budgetary initiatives, including the Maritime Development Fund (MDF) and an anticipated Shipbuilding Subsidy (SBS) Policy 2.0, could help enhance India's shipbuilding infrastructure and promote indigenous manufacturing.

Strengthening National Security Through Smart Investments

Ensuring that India's armed forces are well-equipped remains a top priority. This involves acquiring new aircraft, ships, and military vehicles while maintaining operational readiness through training and exercises.

To foster domestic manufacturing, industry leaders anticipate tax incentives such as extending the 15% concessional corporate tax rate and introducing tax holidays for defence production. These measures will attract private sector participation and create a robust defence ecosystem.

With 2025 designated as the 'Year of Reforms' by the Ministry of Defence, the 2025 budget is expected to introduce significant policy enhancements. The focus on modernisation, self-reliance, and technology-driven solutions will not only strengthen India's national security but also position the country as a formidable force in the global defence industry.