A new report by EY (Ernst & Young), released in June 2025, suggests that India should increase its defence budget to 3% of its GDP. The report also recommends creating a permanent fund for defence modernisation and promoting domestic manufacturing in the defence sector.
Over the years, India’s defence spending has dropped from nearly 3% of its GDP in the early 2000s to just over 2% today. In comparison, countries like the US and Russia spend a much larger share of their GDP on defence.
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What EY Recommends:
- Set a 3% GDP target for defence spending to strengthen national security.
- Create a permanent, non-lapsable defence fund—meaning the money will not expire each year and can be used for long-term planning.
- Support domestic defence manufacturing to boost the economy and reduce reliance on imports.
- Increase spending on capital goods (weapons, equipment, technology).
- Simplify defence procurement processes.
- Encourage more investment in research and development (R&D) in defence.
Expert Opinion:
DK Srivastava, EY India’s Chief Policy Advisor, said that a clear and stable defence budget will help India invest in advanced technology, support local defence industries, and modernise the armed forces more effectively.
Link to Past Recommendations:
This idea supports an earlier plan by the 15th Finance Commission, which had suggested creating a Modernisation Fund for Defence and Internal Security (MFDIS). This fund would be a permanent resource for defence and would get money from sources like:
- Selling government stakes in public companies (disinvestment)
- Monetising defence land
- Voluntary donations
Although the Indian government has agreed to this plan in principle, the fund has not yet been made active. The EY report says that starting this fund could protect defence investments from yearly budget changes and provide stable long-term funding.
