India will boost defence spending by 12 per cent in the coming year, it was announced in Prime Minister Narendra Modi's first budget yesterday.
And the country will further open the domestic weapons industry to foreign investment to help rebuild the military and narrow the gap with China.
Finance Minister Arun Jaitley also laid out ambitious deficit-cutting targets in the budget, which analysts and business leaders generally welcomed as realistic.
India has been the world's top arms buyer for the last three years, trying to replace an ageing Soviet-era military with modern weapons as a deterrent to a rising China, with which it fought a war more than half a century ago. Jaitley set the military budget at 2.29 trillion Indian rupees (HK$297 billion) for 2014-15, which is 50 billion rupees more than the previous government agreed in an interim budget earlier this year.
Defence spending for 2013/14 was kept at 2.04 trillion rupees.
"Modernisation of the armed forces is critical to enable them to play their role effectively in the defence of India's strategic interests," he said to the thumping of desks in the lower house of parliament.
Jaitley's Bharatiya Janata Party has long called for a militarily strong India to counter potential threats from both China and Pakistan and said it would speed up the pace of arms purchases for the military, the world's third-largest. Even at the elevated spending, India's military budget is still less than a third of China's US$145 billion expenditure last year, estimated by the Pentagon in its report to the US Congress this month.
New Delhi worries that China is building roads and other infrastructure along the disputed land border as well as bolstering its naval presence in the Indian Ocean.
Jaitley also increased the foreign investment limit in the domestic defence industry to 49 per cent from 26 per cent, hoping to draw greater interest from its main arms suppliers and help reshape the defence industrial base dominated by state firms.
"Companies controlled by foreign governments and the foreign private sector are supplying our defence requirements to us at considerable outflow of foreign exchange," he said.
Global arms firms are wooing India in the hope of landing multibillion-dollar and New Delhi is aiming to leverage some of that buying power to get transfer of technology and end the reliance on imports.
But Jaitley did not go as far in liberalising the sector as foreign manufacturers and even the government's own investment promotion department would have liked.
Jaitley told parliament the right-wing government, in office since May, inherited a challenging situation of low growth and high inflation from the previous Congress government.
He stressed that he wanted to lay out the broad directions in which the Modi administration aimed to travel - towards lower government borrowing, more privatisation and greater openness to foreign investment.
"It's a road map, it's a directional budget," Jaitley told state-run television afterwards.
Government overspending would be slashed in the next three years, with the fiscal deficit reduced from a targeted 4.1 per cent of GDP this year to 3 per cent in the 2016-17 financial year.
"The budget is very realistic" and "pro-business", Paras Adenwala, head of Mumbai-based Capital Portfolio Advisers, said.
"This is just the trailer and the real picture is just starting," he added.
Reuters, Agence France-Presse