IMF: India's Defence Push to Boost Growth via Local Manufacturing

"Defence buildups can boost economic activity in the short term-lifting consumption and investment," the IMF said in its latest analysis of global defence trends.

The report comes as defence spending rises worldwide amid growing geopolitical tensions. About half of all countries increased military budgets in recent years, reversing a post-Cold War decline.

For India, the IMF's findings point to a clear economic upside. Gains are stronger when defence spending is anchored in domestic production rather than imports.

"Defence spending multipliers are close to 1, on average," the IMF said, meaning each increase in spending broadly translates into a similar rise in economic output.

But the impact varies sharply across countries. "Defence spending multipliers are smaller in countries that rely heavily on arms imports, reflecting demand leakages abroad," it added.

That distinction favours India. New Delhi has stepped up efforts to reduce dependence on foreign arms and build a domestic defence base. A larger share of spending is now directed toward local manufacturing, private firms and joint ventures.

The IMF said import-heavy spending can weaken external balances. "External balances deteriorate as demand is geared toward imported equipment," the report noted.

India's focus on indigenisation could help limit such pressures. It also allows more of the demand stimulus to stay within the economy, supporting jobs and investment.

The report said defence spending acts as a targeted demand shock. It raises government consumption and can crowd in private spending, especially in defence-linked sectors.

Over time, it can also support productivity. "A buildup that makes public investment a priority... could support long-term productivity growth," the IMF said.

However, the IMF flagged risks if spending rises too fast. "Fiscal deficits worsen by about 2.6 percentage points of GDP, and public debt increases by about 7 percentage points within three years," it said.

These pressures are sharper during conflicts, when debt rises faster and social spending can fall.

Global defence spending has been climbing since the mid-2010s. Nearly 40 per cent of countries now spend more than 2 per cent of GDP on defence.

NATO members have pledged to raise defence and security-related spending to 5 per cent of GDP by 2035, pointing to sustained growth in military outlays.

India spends about 2 per cent of its GDP on defence. It has in recent years expanded domestic production through policy reforms and incentives.

The IMF analysis suggests countries with stronger local defence industries are better placed to turn higher military spending into growth while limiting external risks.

- IANS