India should allocate 3% of its GDP to military expenditure and establish a permanent defence modernisation fund, according to EY's latest Economy Watch report. The recommendation aims to strengthen domestic manufacturing capabilities and build a more resilient defence framework. This proposal comes as India's military spending has declined from 3% to just over 2% of GDP since the early 2000s.
India's military expenditure as a percentage of GDP has gradually decreased over two decades, dropping from nearly 3% in the early 2000s to approximately 2% today. This decline contrasts sharply with major global powers like the United States and Russia, which continue allocating significantly higher proportions of their GDP to defence.
The EY report emphasizes that this spending gap undermines India's ability to address evolving geopolitical and technological challenges effectively, highlighting the urgent need for increased defence budget allocations.
EY recommends benchmarking defence allocations at 3% of GDP while creating a non-lapsable defence modernisation fund to provide fiscal predictability. The proposal includes incentivizing domestic manufacturing to unlock long-term economic growth multipliers.
DK Srivastava, EY India Chief Policy Advisor, stated that this approach would enable investments in advanced technology and strengthen domestic defence manufacturing ecosystems. The report also emphasizes increasing the capital component of defence budgets and streamlining procurement processes.
The proposal aligns with the 15th Finance Commission's earlier recommendation for a Modernisation Fund for Defence and Internal Security (MFDIS). This permanent corpus would be financed through disinvestment receipts, defence land monetisation, and voluntary contributions.
While the government has accepted the MFDIS proposal in principle, the fund remains non-operational. The EY report suggests reactivating this initiative to ensure stable capital support and protect critical defence investments from annual budget allocation fluctuations.
The EY report's recommendations represent a comprehensive approach to modernizing India's defence spending framework. By establishing a 3% GDP benchmark and operationalizing a permanent modernisation fund, India could enhance its defence capabilities while boosting domestic manufacturing.
Implementation of these measures would provide the fiscal stability needed for long-term strategic planning and technological advancement in the defence sector.