Union Budget 2026–27: Defence, Technology and Fiscal Prudence Take Centre Stage
Budget 2026–27 is set to draw intense attention across sectors, but none more so than the defence and strategic technology space, alongside broader fiscal management priorities. Given an emerging geopolitical scenario in the post-Operation Sindoor, changing world order and technological disruption of warfare, decision makers are likely to reassess agendas. The Budget to come is expected to crystallise a decisive new turn towards national security as the corridors of power push for really opening up for manpower and material by way of enhanced defence expenditure, faster capital acquisitions and prudent investments in next-generation defence technologies without compromising on fiscal profligacy.
A New Geopolitical Reality Shapes Budget Thinking
The strategic space around India has drastically changed over the last year. The post-Operation Sindoor terrain has brought home that diplomatic assumptions can no longer be the norm. During the India-Pakistan flare-up in 2025, while India demonstrated operational superiority through precision missile and drone strikes, the global response revealed uncomfortable truths. Several countries considered natural partners stopped short of unequivocal support, while China openly backed Pakistan’s narratives.
This power shift on a global alignment front has further strengthened the resolve of the government to lean more towards dependence on indigenous rather than externals fulfillment. Budget 2026–27 is consequently likely to mirror these thoughts, according to informed sources, displaying a huge rise in defence allocations so as to address past capability voids and be prepared for an increasingly uncertain global environment.
A Permanent Increase in Defence Spending on the Cards
Defence spending, below 2% of nominal output over the past few years, is likely to sail easily above that level in the next budget. More critically, capital spending, a driver of modernisation, could see a sharp rise. Defence capex is expected to inch closer to the ₹2.5–3 lakh crore band by FY27 compared with the current level of roughly ₹1.8 lakh crore.
Those working on the budget process have raised worries about gaps in arms, equipment and platforms within the services’ weapons ranges. India does not target standalone improvements, but aims at pragmatically readying for a hypothetical 2-theatre scenario. The Defence Ministry and armed forces would define priorities in deployments, while the budget would give the necessary financial freedom for vital action.
Shortfall in Fighter Aircraft an Issue of Prime Importance
Among the most pressing concerns is the Indian Air Force’s dwindling fighter strength. With the retirement of MiG-21 aircraft, the IAF’s fleet has fallen to around 29 squadrons, well below the sanctioned requirement of 42 squadrons needed to defend Indian airspace in a two-front war scenario.
That gap has now moved to the top of policymakers’ agenda. India and France are reportedly close to concluding a major deal for 114 Dassault Rafale fighter aircraft that would considerably reinforce air power. Funding for these acquisitions should be key in the capital allocation scheme.
Defence Modernisation: More Than Just Guns and Tanks
While legacy platforms continue to be crucial, Budget 2026–27 is likely to see India take a strategic shift towards technology-driven warfare too. Defence industry leaders and experts alike have long argued that future wars will be fought as much by algorithms as by artillery.
AI, autonomous systems, cyber war-faring, space assets and advanced ISR (intelligence surveillance and reconnaissance) platforms are transitioning from high-end concepts to operational imperatives. The upcoming budget is likely to increase funding for AI-enabled drones, counter-drone systems, secure data infrastructure, and defence cybersecurity frameworks.
Focus on public-private partnership and startup-led innovation in the defence ecosystem is also increasing. Through backing the country’s defence technology firms, the government also wants to cut down reliance on imports and quicken development cycles in certain critical areas such as electronic warfare to battlefield decision systems.
Strengthening Capabilities Across Service Arms
There are capability gaps in the Army and, more broadly, with the Navy beyond air power and new technologies as well. Policy makers are examining standards for future infantry combat vehicles, advanced air defence systems, next generation submarines, both nuclear ballistic missiles, as well as new age subs and modern naval fighters.
Drone and counter-drone capabilities have gained particular urgency following recent conflicts globally, where unmanned systems have proven decisive. The budget is expected to address these gaps through targeted capital outlays, ensuring that India’s armed forces remain agile and technologically relevant.
Fiscal Discipline Remains a Non-Negotiable
With defence spending set to rise, the government is eager for signs of continuity on fiscal consolidation. Sources said the additional allocations would not derail the Centre’s fiscal glide path. Nirmala Sitharaman, FM, is on the road to attain 4.4% of GDP fiscal deficit in FY26 with better than anticipated nominal GDP growth.
Meanwhile, the Finance Ministry has reiterated its commitment to ensuring that central government debt remains on a declining trajectory, targeting a debt-to-GDP ratio of around 50% by March 2031 under the FRBM framework. Market expectations reflect this balance: Morgan Stanley projects a fiscal deficit of 4.2% for FY27, while ICRA estimates it at 4.3%.
Balancing Security and Economic Imperatives
The issue for the government is balancing increases in security imperatives with macroeconomic stability. The problem is that defence modernisation requires sustained financial commitment, challenging in a scenario where the government’s priority is economic growth, spending on the social sector and infrastructure development.
As such, Budget 2026–27 will likely focus on efficiency, spending its money on capacity rather than capability, rather than big numbers for the front page. Deeper indigenisation, swifter acquisition and technology-based solutions are expected to be some of the central themes that would help maximise strategic returns without unduly overstretching fiscal resources.
Outlook: A Budget For Strategic Maturity
The Pre-Union Budget 2026–27 indicates that India has arrived at tortuous pillions of strategic maturity. The focus is moving from ‘dead-end’ defence procurement to readiness and a culture of innovation, based on fiscal sobriety and technological aspiration.
Although immediate geopolitical considerations have contributed to a speedy decision-making process, the broader approach is born of a long-term vision of our country enhancing its defence preparedness further and also leaping in terms of embracing advanced technology, which enhances economic credibility. For investors, policy-makers and strategic thinkers alike, the next budget could offer a salient window into how India intends to pilot an ever more complicated global landscape.
