India’s defence sector, which is a pillar of national security and a significant driver of indigenous manufacturing, has high expectations from Finance Minister Nirmala Sitharaman’s upcoming Union Budget 2025 on February 1. Amid a volatile security environment, both in the world and in neighbourhood, with fast-paced technological advancements in warfare, experts opine that the government must focus on modernisation, self-reliance and pushing innovation to share India’s defence capabilities.
“The government’s focus on defence expenditure will be critical to addressing modernisation requirements of the armed forces whilst boosting defence production under Atmanirbhar Bharat,” Pawan Khatter, Tax Partner and Sector Leader for Aerospace & Defence, EY India, told CNBC-TV18.
Experts are of the view that the upcoming budget holds the potential to shape India’s defence landscape by prioritising modernisation, self-reliance, and technological advancements. A well-structured capital outlay, enhanced R&D investments, and strategic policy incentives will not only boost national security but also drive India’s emergence as a key player in the global defence market.
India’s defence budget has historically averaged around 2.5% of the gross domestic product for more than a decade now, with a steady rise in capital expenditure. The July 2024 Union Budget allocated ₹1.72 lakh crore for capital acquisition by the Defence Ministry. In all, the budget set aside ₹6.22 lakh crore for the ministry.
Over the last five years, capital budget allocations have grown at an average annual rate of 11%, and for FY2025-26, it is projected to reach approximately ₹1,90,920 crore. Continuing the emphasis on self-reliance, it is expected that 75% of this budget or around ₹1,43,000 crore will be allocated to domestic procurements.
Khatter added that among the major procurements, contracts for six submarines under Project P75(I) and 26 maritime aircraft are expected to be signed shortly. Additionally, approvals for systems such as very short range air defence systems, light machine guns, and light armoured multipurpose vehicles could materialise into contracts, providing a significant boost to the domestic defence industry.
India’s vision for an advanced and self-reliant defence ecosystem hinges on greater investments in research and development (R&D), Gaurav Mehndiratta, Partner and Head of Aerospace and Defence at KPMG in India, told CNBC-TV18.
At present, R&D allocation accounts for only 3.8% of the total defence budget, which is expected to increase in FY2025-26 to support critical projects like the advanced medium combat aircraft (AMCA) and Project P75(I), he added. The ADITI scheme under the Innovations for Defence Excellence (iDEX) initiative is likely to see enhanced funding, promoting indigenous technological innovations.
“With 2025 designated as the ‘Year of Reforms’ by the Ministry of Defence (MoD), the sector anticipates significant policy enhancements. Defence exports surged to $2.6 billion in FY2024, marking a 32.5% growth from the previous year. The government aims to reach an annual turnover of $35 billion and exports worth $6 billion by FY2028, necessitating increased budgetary support,” Mehndiratta explained.
To fuel growth in domestic manufacturing and maintenance, repair, and overhaul (MRO) operations, the defence industry expects the government to extend the 15% concessional corporate tax rate and introduce tax holidays for defence manufacturing. These measures will strengthen the domestic industrial base and attract private sector participation.
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India’s long-term strategic preparedness requires investments in next-generation technologies, including AI-driven security solutions, drone infrastructure, and advanced shipbuilding, said Priyabrata Pramanik, former IRS official and Asia Chairman, US Asia Business Forum (USABF), speaking at the Conference of India’s Economic Growth in New Delhi on Wednesday (January 29). Budget 2025 presents a crucial opportunity to accelerate these developments, strengthen public-private partnerships, and position India as a global leader in the aerospace and defence sector, he added.
