Higher defence spends won't stretch India's finances: Economists

The Hindu

17-05-2025

The Central Government has enough fiscal space to absorb a jump in defence expenditure without deviating from its fiscal deficit target of 4.4% for this financial year, according to economists.
This is largely in keeping with India's past performance, where the fiscal deficit has been under control during periods of heightened tensions with Pakistan, unless it has escalated into a full-blown war, or if global crises have taken place.
The Ministry of Defence is reportedly going to ask for an increase in its Budget to the tune of ₹50,000 crore this year, in the Supplementary Demand for Grants in December. This extra spending, however, is manageable for the government as it is expecting higher revenue, and has the flexibility to cut some other expenditure.
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'While additional defence outlays may initially appear to pressure the deficit target, the actual impact of -0.14% of the Gross Domestic Product (GDP) may be offset by multiple factors throughout the year,' Rishi Shah, Partner at Grant Thornton Bharat told The Hindu. 'The current macroeconomic tailwinds — notably softening global oil prices and stable tax revenue growth — provide a favourable buffer for this reprioritisation.'
Dr. Radhika Pandey, Associate Professor at the National Institute of Public Finance and Policy, agrees with this assessment.
'Even if the government does expedite defence deals to ramp up their defence infrastructure and logistics, the fiscal deficit target of 4.4% will likely not be deviated from,' she explained.
'If there are to be cuts in expenditure due to higher defence spending, then those would more likely be from the revenue expenditure side,' Dr. Pandey added. 'Even here, it won't be concentrated on any one item or sector, but would be spread across various schemes and outlays.'
A major factor that could work in the government's favour is a higher-than-expected dividend transfer from the Reserve Bank of India. The Hindu had reported on Saturday (May 17, 2025) that the Ministry of Finance was — in parallel to the RBI — examining how it could increase dividend transfers from the Central bank.
The RBI had transferred a record dividend of ₹2.1 lakh crore last year for the financial year 2023-24, a whopping 141% higher than the previous year's transfer.
'The government has enough fiscal space to do it, and it is expecting higher transfers of RBI dividends,' Madan Sabnavis, Chief Economist at the Bank of Baroda said. 'There is likely additional revenue coming in for the government. If nothing else changes and only defence spending goes up, that can be absorbed.'
An analysis by The Hindu shows that the Central Government's fiscal deficit has remained reasonably in control during heightened tensions with Pakistan — except during times of outright war or global crises.
The fiscal deficit rose from 3% in 1970-71 to 3.45% in 1971-72 — coinciding with the 1971 war with Pakistan — and further to 3.9% in 1972-73 before dropping again. Similarly, it rose from 5.3% in 2000-01 to 6.1% in 2001-02 following the Kargil War.
However, the fiscal deficit fell following the 2001 Parliament attack and the subsequent heightened tensions with Pakistan, as it did following the 2016 Uri attack.
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The 26/11 Mumbai terror attack in 2008 was during the Global Financial Crisis, when India, along with several other countries, had significantly loosened its purse strings to stabilise the economy — thereby raising deficit levels significantly.
Similarly, the fiscal deficit ballooned in 2019-20 and 2020-21 — soon after the 2019 Pulwama attack — on account of the government's COVID-19 pandemic response rather than due to the border tensions.