Despite rising defence budgets and ambitious acquisition plans, India still lacks an institutional framework to finance its long-term military capability goals. If the future of India’s defence sector depends on sustained capability building, it must first create the financial institutions to support it. A Defence Finance Corporation (DFC) could be the missing bridge between ambition and execution.
India spends heavily on defence but does not finance it. That distinction, subtle yet decisive, separates mature defence-industrial economies from those trapped in yearly budget cycles. Unlike agriculture, energy, or infrastructure, which have long-term credit institutions and development banks, India’s defence sector still relies on annual appropriations, a legacy of British-era fiscal systems designed for control, not capacity. What once served an empire’s need for accountability now constrains a nation’s need for preparedness.
The process follows a familiar ritual; the three Services submit demands, the Ministry of Defence consolidates them, and the Ministry of Finance sanctions what fiscal limits permit. The result is an economy that spends but does not invest. It pays salaries and pensions, sustains imports, and funds public-sector production, yet it lacks a credit ecosystem or institutional network to ensure steady, affordable, and long-term capital. Without such a framework, capability growth remains episodic rather than cumulative.
Fiscal policy to financial architecture
Other sectors in India were innovated out of necessity. Liquidity risk and delayed returns led to the creation of the Industrial Development Bank of India (IDBI) in 1964, the National Bank for Agriculture and Rural Development (NABARD) in 1982, and the India Infrastructure Finance Company Limited (IIFCL) in 2006, each turning fiscal policy into financial architecture.
Defence never had to. Its funds came directly from the Consolidated Fund of India, a sovereign, reliable, and politically untouchable source. Even when delayed, they eventually arrived, breeding dependence rather than discipline.
Projects such as the Light Combat Aircraft (LCA), the Arjun Main Battle Tank (MBT), and submarines under Project 75 were funded by the government of India through grants rather than structured loans, with no agency tasked with appraising their financial risk or return on capability. When funds fell short, projects were deferred instead of refinanced. Where other sectors used credit to accelerate outcomes, defence relied on annual rationing, a system that guaranteed delay and denied accountability.
The nuclear-submarine and strategic missile programmes are exceptions, following a sovereign model akin to India’s atomic energy and space sectors, which are funded directly under classified heads. Strategic secrecy gave it insulation but also isolated it from the broader defence-industrial base, which never developed auditable, structured financing. The result is a bifurcated system: classified programmes that are fully State-funded but opaque, and conventional projects that remain budget-bound and fiscally brittle.
Why the status quo hurts
Large-scale programmes such as the Advanced Medium Combat Aircraft (AMCA), the Twin Engine Deck-Based Fighter (TEDBF), next-generation destroyers, and Project-77 submarines each require sustained funding over 15–20 years. The scale of these programmes makes it impossible to fund them through annual capital allocations without crowding out other critical priorities.
Meanwhile, India’s private sector, including Tata, L&T, Adani, Bharat Forge, Data Patterns, Zen Technologies, and Astra Microwave Products, among others, has expanded into aerospace and defence manufacturing. These firms can raise capital for infrastructure and tooling, but not for platforms like aircraft or submarines, which remain sovereign assets.
Without a financial bridge between State, industry, and capital, India risks repeating a familiar pattern: projects sanctioned without structured funding, delayed execution, and emergency imports to plug operational gaps.
How mature powers fund defence
No significant military power finances its defence solely through annual budgets. Each has developed institutions that connect finance, industry, and national strategy.
Turkey’s Defence Industry Support Fund (SSDF), created in 1985 and managed by the Presidency of Defence Industries (SSB), channels tax revenues into a revolving corpus that funds research and production outside the annual budget. Fiscal autonomy enabled steady progress on the Bayraktar drones, Hurjet trainer, and TFX fighter, insulated from political or financial volatility.
Japan integrates credit and procurement through the Japan Development Bank and the Acquisition, Technology and Logistics Agency (ATLA). Post-war industrial groups, such as Mitsubishi, IHI, and NEC, are linked through keiretsu cross-shareholding, with a core bank at its centre, and long-term state contracts, ensuring that industrial depth and fiscal discipline advance together.
China perfected state-bank capitalism. The Aviation Industry Corporation of China (AVIC), backed by the China Development Bank and the Export–Import Bank of China, finances defence R&D and production through soft loans and State guarantees.
South Korea blends sovereign funding with development banking. The Korea Development Bank (KDB) and the Export–Import Bank of Korea provide long-term credit for the KF-21 Boramae fighter and other strategic programmes.
The United States operates through a vast web of military–industrial capital. Pentagon contracts serve as State-backed financial instruments, enabling Lockheed Martin, Boeing, and Northrop Grumman to raise billions on the bond market. Liquidity also flows through the Defense Production Act Fund and the US Export–Import Bank.
This US ecosystem was not organic but policy-driven. In July 1993, during the “Last Supper,” Secretary of Defense Les Aspin and Deputy Secretary William Perry gathered leading defence executives and told them to “merge or perish.” Facing post-Cold War cuts, the Pentagon engineered consolidation, reducing the number of prime contractors from 51 to five within a decade. The resulting giants – Lockheed Martin, Boeing, Northrop Grumman, Raytheon, and General Dynamics – still dominate global production. The lesson is clear: fiscal design and institutional architecture are as decisive as technology in sustaining long-term military capability.
Also read: India doesn’t want to rely solely on HAL for fighter jets. AMCA project is the first step
The bullet train and the AMCA
There is a fiscal parallel between the Mumbai-Ahmedabad bullet train and the AMCA (including its indigenous jet-engine programme). Both are large-scale national investments exceeding Rs 1 lakh crore that combine indigenous effort with foreign collaboration. The critical difference lies in their modes of financing.
The bullet train is primarily funded through soft loans from the Japan International Cooperation Agency (JICA), covering approximately 80 per cent of the costs and repayable over several decades. As a civilian infrastructure project, it benefits from a clear revenue model that supports debt financing.
As discussed in my earlier article in ThePrint, the AMCA faces a more profound fiscal dilemma, a strategic programme financed almost entirely from the defence budget. It competes for funds against the Tejas Mk1A/2 and the Multi-Role Fighter Aircraft (MRFA) programme, which may include the manufacture of Rafale in India.
Civil projects, such as the bullet train, access international development finance and repayment models. But defence projects like the AMCA depend solely on defence budgets. The contrast highlights the need to move from budgetary to financial planning if India is to sustain long-term capability programmes.
India’s financial reality
India has taken tentative steps toward market integration. Defence public-sector firms, such as Hindustan Aeronautics (HAL), Bharat Electronics (BEL), Bharat Dynamics (BDL), Mazagaon Dock (MDL), and Garden Reach (GRSE), are listed on national stock exchanges, collectively valued at over Rs 3.5 lakh crore. Yet listing has not brought autonomy.
These enterprises remain tethered to the exchequer: profitable but fiscally captive. Dividend rules requiring payouts of 30 per cent of profits or 4 per cent of net worth ensure steady fiscal inflows but restrict reinvestment. Even HAL, India’s first defence Maharatna, faces additional constraints; its Rs 5,000-crore investment autonomy is largely symbolic for global-scale projects. Navratnas and Miniratnas alike need the freedom to lay more “golden eggs” — and grow their nests, in the process.
By contrast, China’s AVIC and shipbuilding conglomerates use listed subsidiaries on the Shanghai, Shenzhen, and Hong Kong exchanges to tap domestic and foreign capital, reinvest profits, and issue debt under state-bank guarantees, aligning markets with policy. Yet AVIC’s scale comes with opacity. Recent purges of senior officers and executives, including those within the People’s Liberation Army (PLA) Rocket Force, demonstrate how unchecked financial ecosystems can foster corruption. India’s challenge is the opposite: excessive control rather than excessive freedom, running counter to promoting innovation in complex defence and aerospace sectors. A DFC must therefore balance autonomy with oversight, embedding transparency and auditability from inception.
India’s model remains appropriation-led, not credit-led. A DFC could finally convert rising allocations into structured capital, linking public investment with industrial autonomy.
Case for a Defence Finance Corporation
India now needs a dedicated Defence Finance Corporation (DFC) to convert fiscal allocations into structured, auditable capital investment, bringing to defence what IDBI once brought to industry and NABARD to agriculture. It would not replace the Defence Ministry or the Defence Accounts Department but would professionalise the financing of military projects, introducing rigour, predictability, and accountability into long-term planning.
Drawing on global models, a DFC would provide structured sovereign credit, milestone-linked disbursements, vendor financing, defence infrastructure bonds, and a strategic sovereign fund. Together, these instruments would bring discipline, continuity, and predictability to India’s defence financing, making structured credit as integral to capability-building as human resources or technology.
The DFC could serve as a specialised development finance institution under a National Defence Industrial Board (NDIB), a high-level body that aligns finance, industry, and capability planning. The NDIB could include representatives from the MoD, MoF, Ministry of Commerce and Industry, the RBI, and independent directors from the banking and defence industry, balancing government oversight with professional autonomy.
The DFC could begin with an equity infusion of approximately Rs 25,000 crore from the Consolidated Fund of India, a figure comparable to the government’s initial support for National Bank for Financing Infrastructure and Development (NaBFID) and India Infrastructure Finance Company Limited (IIFCL). The fund infusion would serve as core equity, enabling the DFC to raise five to ten times that amount through sovereign-backed bonds or co-lending arrangements subscribed to by LIC, SBI, and other institutional investors.
It could extend ten to twenty-year loans to DRDO, HAL, BEL, private vendors, etc., linked to procurement schedules. A Rs 10,000-crore revolving credit line could finance MSMEs in defence manufacturing backed by confirmed orders. Tax-incentivised Defence Infrastructure Bonds could attract pension and insurance funds, while co-lending with banks and sovereign guarantees could support major projects, such as fighter engine development or shipyard expansion.
Lessons from the Past
The post-purchase refit of INS Vikramaditya, initially conceived as a limited overhaul, evolved into a near-total reconstruction of a Soviet-era carrier hull. When hidden deficiencies emerged, the absence of a risk-sharing mechanism led to costs spiralling from under $1 billion to over $2.3 billion.
Similarly, the MiG-29K acquisition nearly stalled when the Indian PSU bank had to face up to financing Russian suppliers without a sovereign guarantee. The MoD improvised by authorising a “letter of comfort,” reportedly issued by a bureaucratic cog within the Russian system rather than by the Russian sovereign, offering little assurance to either lender or exchequer.
Both episodes reveal a systemic flaw: India lacks an institutional mechanism to appraise, finance, and monitor long-cycle defence projects. A DFC could have pre-empted both by acting as a single-window capital agency empowered to raise long-term bonds, co-lend with banks, and guarantee vendor credit.
The aim would not be to add another institution or bureaucratic layers but to transform fiscal culture.
A DFC would ensure project appraisal before sanction, funds released against deliverables, and continuity maintained beyond political or annual budget cycles. It would also provide the industry with predictable, sovereign-backed payment streams, encouraging investment in tooling, plants, and R&D.
In effect, it would turn Atmanirbharta from a slogan to a fiscal structure. India’s defence spending, however large, will yield limited outcomes without such reform. The goal must be not just to spend more, but to spend better, turning budgets into bankable investments in capability.
Banking on strength
India’s growing economic fundamentals make reform feasible. The 2025 Union Budget set aside Rs 6.2 lakh crore to defence (Rs 6.81 lakh crore including pensions), of which Rs 1.72 lakh crore was for capital outlay. Such outlays require converting rising allocations into structure. A significant portion of this growth, however, is likely to be offset by ‘defence inflation’, an area that warrants deeper policy analysis.
Without reform, higher budgets will expand inefficiency. With a DFC, they can create durable capacity and disciplined capability.
Defence economics is ultimately about predictability and complexity. Great powers build credit, not just arsenals. A DFC will not be a cure-all, but it will mark a decisive shift, from annual rationing to strategic investment, from grants to governance, from slogans to systems.
As Thucydides observed of Athens, “The strength of a city lies not in its walls, but in the resources that sustain them”. For India, the Kautilian truth needs to be reiterated. Military strength ultimately rests on the strength of the treasury, and on the institutions that sustain it.
The author is a former Flag Officer Naval Aviation, Chief of Staff at the integrated HQ Andaman and Nicobar Command, and Chief Instructor (Navy) at DSSC Wellington. He tweets @sudhirpillai__Views are personal.
(Edited by Ratan Priya)