Defence expenditure and economic growth in India: a revisit

Presently, India ranked fourth globally in defence spending, followed by the USA, China, and Russia. In the fiscal year 2025-26, allocation to defence was eight per cent of the total government spending, the highest among all the sectors. During the period 1987–2022, defence expenditure grew at an average annual growth rate of 10.75 per cent. These dynamics make India a compelling case for re-investigating the impact of defence expenditure on economic growth. In this context, the paper revisits how defence expenditure affects India’s economic growth using an updated data set (1987–2022) and a different set of control variables. We incorporate three key growth determinants, namely gross capital formation, foreign direct investment, and labour force, in the model as control variables to prevent model misspecification and omitted variables bias. The research attempted to address the following question: (a) Does increasing defence expenditure impede or promote economic growth in India? (b) What is the impact of gross capital formation and foreign direct investment on economic growth in India? Given the data specification, we use the autoregressive distributed lag model to estimate both the short-run and long-run growth impacts of defence expenditure and other regressors. The findings, based on the bounds cointegration test, confirm the existence of a long-run relationship among the selected variables. Empirical evidence suggests that defence expenditure has a significantly negative impact on economic growth both in the short and long run. In contrast, gross capital formation and foreign direct investment contribute positively and significantly to economic growth both in the short and long run. Based on these insights, the study recommends that reducing defence expenditure and increasing gross capital formation would enhance economic growth in the future. A reallocation of funds from defence to more productive sectors like gross capital formation would enable India to achieve its ambitious target of becoming the world’s third-largest economy by 2030 and attain the status of a developed nation by 2047. The analysis also underscores the need for prioritizing foreign direct investment inflows for promoting long-term economic growth.