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Business Standard
30-06-2025
- Business
- Business Standard
India should benchmark military spending at 3% of GDP, says EY report
India should consider setting defence expenditure at 3 per cent of gross domestic product (GDP), establishing a non-lapsable defence modernisation fund, and promoting domestic manufacturing, according to a report released by EY on Monday. The June edition of EY's Economy Watch stressed the importance of a forward-looking approach to defence budgeting. Such a strategy, it argued, would help India develop a more resilient and responsive defence infrastructure, better positioning the country to respond to changing geopolitical and technological challenges. Recommendations to strengthen defence readiness The report specifically recommended "benchmarking defence allocations at 3 per cent of GDP", supplemented by the creation of a "non-lapsable defence modernisation fund, and incentivising domestic manufacturing to unlock long-term economic growth multipliers". It also called for improving the efficiency of procurement processes and placing greater focus on defence-related research and development. Decline in defence spending share over time EY noted that India's defence spending as a proportion of GDP has steadily declined from nearly 3 per cent in the early 2000s to just over 2 per cent today. In contrast, the United States and Russia continue to allocate substantially higher shares of their GDP to military expenditure. Modernisation fund could offer fiscal predictability DK Srivastava, chief policy advisor at EY India, said that benchmarking defence spending at 3 per cent of GDP and establishing a dedicated non-lapsable modernisation fund could offer the fiscal predictability needed to invest in advanced technology and bolster domestic defence manufacturing ecosystems. The report referenced the 15th Finance Commission's proposal to create a Modernisation Fund for Defence and Internal Security (MFDIS) — a non-lapsable corpus under the Public Account of India. The fund was intended to be financed through disinvestment proceeds, monetisation of surplus defence land, and voluntary contributions. Although the Indian government had accepted this idea "in principle", the fund has not yet been implemented. The EY report stated that reviving the proposal could provide consistent capital support and insulate critical defence investments from year-to-year fluctuations. According to data released by the Stockholm International Peace Research Institute (SIPRI), India is on course to spend $86 billion in 2025–26. Just around 22 per cent of the annual defence budget for 2025–26 is earmarked for capital procurements of new weapon systems. India's defence spending as a percentage of GDP has decreased from 2.25 per cent in 2014–15 to 1.91 per cent in 2024–25.
Time of India
30-06-2025
- Business
- Time of India
India's defence budget outlook: EY report calls for 3% GDP benchmark; permanent fund, R&D push recommended
AI-generated image India may consider setting a military expenditure benchmark at 3 per cent of GDP, creating a permanent defence modernisation fund, and boosting domestic manufacturing, according to the June edition of EY's Economy Watch report released on Monday. The report, quoted by news agency PTI, highlights the need for forward-looking defence budget planning to build a more resilient and agile defence framework that can respond effectively to evolving geopolitical and technological challenges. 'Over the years, India's military expenditure as a share of GDP has gradually declined — from close to 3 per cent in the early 2000s to just over 2 per cent today, whereas countries like the US and Russia continue to allocate significantly higher proportions,' the report noted. To address this gap, EY suggested "benchmarking defence allocations at 3 per cent of GDP, supplemented by the creation of a non-lapsable defence modernisation fund, and incentivising domestic manufacturing to unlock long-term economic growth multipliers." The report also underlined the importance of increasing the capital component of the defence budget, streamlining procurement processes, and giving greater priority to research and development in the defence sector. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like BLI TANI NE +355683329609 | Përjeto luksin në çdo rreze dielli. Reklame nga | Enzo Attini Undo EY India Chief Policy Advisor DK Srivastava said, "Benchmarking defence spending at 3 per cent of GDP and operationalising a dedicated non-lapsable modernisation fund can provide the fiscal predictability required for investing in advanced technology, strengthening domestic defence manufacturing ecosystems, and driving innovation-led procurement." The proposal aligns with an earlier recommendation by the 15th Finance Commission, which called for the creation of a Modernisation Fund for Defence and Internal Security (MFDIS) — a permanent corpus within the Public Account of India. This fund was envisioned to be financed through disinvestment receipts, defence land monetisation, and voluntary contributions. Although the government has accepted the MFDIS proposal in principle, the EY report noted that the fund has yet to be operationalised. Reactivating this proposal, it said, could ensure stable capital support and shield critical defence investments from fluctuations in annual budget allocations. Stay informed with the latest business news, updates on bank holidays and public holidays . AI Masterclass for Students. Upskill Young Ones Today!– Join Now
Time of India
30-06-2025
- Business
- Time of India
Benchmark military spending at 3% of GDP, create non-lapsable modernisation fund: EY report
India should consider benchmarking military spending at 3 per cent of GDP, creating a non-lapsable defence modernisation fund , besides incentivising domestic manufacturing , an EY report said on Monday. The June edition of EY Economy Watch highlighted the need for a forward-looking defence budgeting strategy, saying this would build a more resilient and responsive defence infrastructure, and make India better equipped to address evolving geopolitical and technological challenges. "Over the years, India's military expenditure as a share of GDP has gradually declined - from close to 3 per cent in the early 2000s to just over 2 per cent today, whereas countries like the US and Russia continue to allocate significantly higher proportions," it said. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Remember Him? Sit Down Before You See What He Looks Like Now 33 Bridges Undo The EY report recommended "benchmarking defence allocations at 3 per cent of GDP, supplemented by the creation of a non-lapsable defence modernisation fund, and incentivising domestic manufacturing to unlock long-term economic growth multipliers". Going forward, there is a need to enhance the capital component of the defence budget , streamline procurement processes, and emphasise defence-related research and development. Live Events EY India Chief Policy Advisor, D K Srivastava , said, "Benchmarking defence spending at 3 per cent of GDP and operationalising a dedicated non-lapsable modernisation fund can provide the fiscal predictability required for investing in advanced technology, strengthening domestic defence manufacturing ecosystems, and driving innovation-led procurement." The 15th Finance Commission had proposed the creation of a Modernisation Fund for Defence and Internal Security (MFDIS), a non-lapsable corpus under the Public Account of India, to be financed through disinvestment proceeds, monetisation of surplus defence land, and voluntary contributions. "Although accepted in principle by the government, this fund is yet to be implemented. Reviving the proposal could provide consistent capital support, insulating critical defence investments from year-to-year fluctuations," the EY Economy Watch report said.
Time of India
16-06-2025
- Business
- Time of India
Significant dent? How an escalating Iran-Israel conflict can threaten India's growth story
India's economy ay grow by 6.3–6.5% in 2025-26, despite these global pressures. (AI image) As the world's fastest growing major economy, India has a lot of things going right for it - demand is picking up, inflation is down to a 6-year low, and the RBI has reduced repo rate by 1%, which means lower borrowing costs for businesses. This environment supports higher demand, improved capacity utilisation, and a potential pickup in private investment. Yet this economic strength is threatened by trade tensions and possibility of spiking crude oil prices if the Iran-Israel conflict spirals out of control. Escalating tensions in West Asia, particularly between Israel and Iran, pose a significant risk. A major conflict could spike oil prices, triggering inflation and weakening demand, thereby threatening growth. Oil price outcomes depend on the conflict's severity, ranging from $65 to over $120 per barrel. For India Inc, surging oil prices would inflate production costs, shrink consumer spending, and disrupt exports—especially if Red Sea routes are compromised, forcing longer and costlier shipping alternatives. DK Srivastava, Chief Policy Advisor, EY India tells TOI, 'The global economy is facing tough times due to ongoing conflicts like Russia-Ukraine and Israel-Hamas. Israel-Hamas now risks turning into a wider Israel-Iran war. On top of that, the US has hinted at raising tariffs, adding more uncertainty. These global issues are slowing down the world economy. In fact, the World Bank has lowered its global growth forecast for 2025-26 to just 2.3%, down from 2.7%. ' 'India could feel the impact of these global developments, through the contribution of net exports which has been, on average, negative in recent years. From 2022-23 to 2024-25, net exports marginally pulled down our real GDP growth by (-)0.1% points of GDP. If trade-related tensions continue, this could worsen,' he says. Oil Price Spike & India's Energy Security JP Morgan has cautioned that oil prices could rise to $120 per barrel should the situation in the Middle East deteriorate further. According to the bank's analysis, present prices already incorporate a 7% probability of a severe geopolitical scenario, where Iranian oil production faces significant disruption, leading to a dramatic increase in prices rather than a gradual rise. However, despite ongoing regional tensions, JP Morgan maintains a conservative outlook, keeping its primary forecast for Brent crude at the lower to middle $60s range through 2025, followed by $60 in 2026. The bank's projection of $60 per barrel for 2026 is based on the assumption that regional authorities will take necessary steps to avoid an all-encompassing conflict. Also Read | Big win! China companies now exporting 'Made in India' smartphones & electronics to US, West Asia; notable shift for Chinese brands The cost of benchmark US oil per barrel declined by 3.3% to $70.59 on Monday, reflecting optimism that the conflict might stay limited in scope. This followed Friday's surge of slightly above 7% after the initial strikes. The downward price movement gained momentum after The Wall Street Journal reported that Iran had indicated its desire to cease hostilities and return to discussions regarding its nuclear programmes. DK Srivastava notes that crude oil is cheaper now — averaging $64.3 per barrel during April-May 2025-26, down from a high of $85.3 per barrel in 2Q of 2023-24, its recent peak. But if tensions in the Middle East grow, crude prices could rise again, which would hurt both growth and inflation in India, he says. 'A past RBI study showed that a US$10 per barrel rise in the price of India's crude basket could reduce India's real GDP growth by 0.3% points and increase its CPI inflation by 0.4% points,' he adds. According to the Global Trade Research Initiative (GTRI), India needs to assess energy security risks, expand its crude oil sources and maintain adequate strategic petroleum reserves. GTRI is of the view that the escalating situation in West Asia poses significant risks to India's energy security, maritime trade routes and business relationships. Its analysis indicates that the growing conflict between Israel and Iran could significantly impact India's economic interests. Also Read | Magnet mayhem! Number of Indian companies awaiting licences from China for rare earths doubles; industry supplies hit hard The nation's heavy reliance on the Strait of Hormuz for importing approximately two-thirds of its crude oil and half of its LNG has become critical due to Iranian threats. This crucial maritime passage, spanning merely 21 miles at its most constricted point, facilitates roughly one-fifth of the world's oil trade. With India's dependence on foreign sources exceeding 80% of its energy requirements, any interference in this route would trigger increased oil prices, elevated shipping expenses and higher insurance costs. According to GTRI, these disruptions could potentially drive up inflation rates, cause rupee depreciation and pose significant obstacles to governmental fiscal planning. However, Oil Minister Hardeep Singh Puri has said that India, being the third-largest oil importer and fourth-largest gas purchaser globally, maintains sufficient energy reserves for the coming months. "India's energy strategy is shaped by successfully navigating the trilemma of energy availability, affordability and sustainability," he said. "We have adequate energy supplies for the coming months." Adverse Impact on Trade India maintains substantial trade relationships with both Israel and Iran. During FY2025, India's exports to Iran reached $1.24 billion, whilst imports stood at $441.9 million. The trade volume with Israel is higher, with $2.15 billion in exports and $1.61 billion in imports. The ongoing conflict is expected to have adverse effects on trade. While there were signs of recovery, trade activities will now face renewed disruptions. According to Federation of Indian Export Organisations (FIEO) President S C Ralhan, exports to European nations and Russia could be affected, with anticipated increases in freight charges and insurance costs. Although Indian export shipments had resumed their transit through the Red Sea corridor, these operations are likely to face fresh disruptions, as noted by Ralhan. Also Read | 'No basis to seek…': US disagrees to India asking for WTO consultations on auto tariffs; calls it 'essential security exception' The immediate consequences of the conflict include elevated freight and insurance rates, following a period of stability when Red Sea routes were returning to regular operations, according to Mumbai-based exporter and Technocraft Industries Ltd Founder Chairman S K Saraf. GTRI says that approximately 30% of India's exports heading west towards Europe, North Africa, and America's Eastern seaboard use the Bab el-Mandeb Strait. The current situation poses risks to this vital maritime route. Should vessels need to navigate around the Cape of Good Hope, journey durations would increase by a fortnight, which would cause substantial hikes in shipping expenses. Such disruptions would impact Indian export sectors, including engineering products, textile goods, and chemical shipments, whilst simultaneously increasing import expenditure. Should India be worried? Officials from the government are planning to conduct discussions with export sector representatives in the upcoming days to address recent developments. The current tensions between Israel and Iran are not expected to significantly affect India's economy, unless the situation expands into a wider and sustained regional conflict, according to a senior official who said that authorities are monitoring developments closely. The situation could lead to temporary fluctuations in international oil prices, affect capital movements, cause currency variations and increase shipping expenses in the near term, the official acknowledged. The official told ET that whilst it remains premature to determine the exact consequences for India, the finance ministry and regulatory bodies will maintain enhanced surveillance due to market instability. India's robust macroeconomic indicators position it well to weather any such international crisis with minimal adverse effects, the official stated. The official also indicated that the situation is unlikely to cause any significant or lasting effect on global non-energy commodity prices in the medium-term perspective. EY's DK Srivastava also strikes an optimistic note about India's strong economic fundamentals. 'On the positive side, India's central bank has started cutting the policy interest rate, which has been reduced by 1% points since January 2025, to 5.5% in June 2025. This should continue, ideally bringing the rate to 5% or below.' 'The government is also spending more on infrastructure, with capital spending growing strongly in March and April 2025. These two steps—lower interest rates and larger public investment—should help mitigate the negative effects of global challenges. We expect India's economy to grow by 6.3–6.5% in 2025-26, despite these global pressures,' he concludes. Stay informed with the latest business news, updates on bank holidays and public holidays . AI Masterclass for Students. Upskill Young Ones Today!– Join Now
Time of India
13-06-2025
- Business
- Time of India
Iran-Israel Conflict: A Middle East flashpoint that Indian economy can't ignore
The year 2025 has been a rollercoaster ride for India and its economy so far, starting with Maha Kumbh giving a Rs 2.8-lakh-crore push to conflict with Pakistan. Now, another factor has been added - the Israel-Iran war - a development that may have an impact on India's economic outlook for 2025. A sudden military escalation between Israel and Iran has pushed global crude oil prices sharply higher, threatening to weaken the Indian rupee, fan inflation, and strain the country's finances. Brent crude today surged over 12%, nearing $78 per barrel, after Israel launched airstrikes on Iranian military facilities. The global market response was immediate, and for India, the world's third-largest crude importer, the stakes are high. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like If You Eat Ginger Everyday for 1 Month This is What Happens Tips and Tricks Undo Also Read: Rs 1 lakh gold, $78 oil, 1,300 point Sensex crash: Israel's Friday the 13th bombshell How oil shapes the macro economy The Strait of Hormuz, where much of the world's oil passes through, has emerged as a flashpoint. Any risk to its safe passage instantly affects oil markets. For India, which imports over 80% of its crude requirements, such events have a large impact from inflation risks to trade balances. Live Events The rupee reacted swiftly. On Friday, it opened at 86.14 per US dollar, weakening 54 paise from the previous day's close of 85.60. The link here is direct - as oil prices rise, Indian refiners need more dollars to pay for shipments. This raises dollar demand, weakens the rupee, and further inflates the cost of oil imports creating a feedback loop that widens the current account deficit. Also Read: Crude oil prices could spike to $120, warns J.P. Morgan. Explained in 6 key points JP Morgan warned on Friday that oil may surge to $120 per barrel if the conflict escalates. The bank said this scenario, though currently reflecting only a 7% probability, could result in 'exponential' price increases driven by panic and regional spillover. DK Srivastava, Chief Policy Advisor at EY India, said, 'The global economy was already beset with supply side disruptions due to the ongoing Russia-Ukraine and Israel-Hamas conflicts. The latter is expanding into an Israel-Iran conflict. The threatened tariff hike by US and related policy uncertainties have further added to economic headwinds, holding global growth down.' He added, 'India may also be affected by these global trends mainly through the impact on the contribution of net exports to real GDP growth. If tariff-related uncertainties do not get resolved in the near future, this negative contribution of net exports may gather further momentum.' Srivastava also noted that India's crude oil basket, which had averaged $64.3 per barrel in early 2025-26, could reverse its trend if prices spike again. 'A $10/bbl increase in oil price can reduce real GDP growth by 0.3 percentage points and raise CPI inflation by 0.4 points,' he said. The Reserve Bank of India (RBI), which has reduced the repo rate by 100 basis points since January, may need to reconsider its policy stance if inflation pressures persist. With oil already up over 12% in a single session, will the impact be visible on the household budgets, too? Inflation monster back in focus India's headline inflation had recently eased to 2.82% in May, the lowest since February 2019, all thanks to a favourable monsoon and relatively calm food prices. But with the heatwave back in action in June and the geopolitical situation taking a dramatic turn, that relief may face some risks. Energy prices, especially fuel, play a hidden but crucial role in the pricing of goods and services. Even if petrol and diesel rates remain steady in the short term due to government intervention, the rising cost of transporting goods and services might slowly feed into the inflation cycle. Also Read: Nuclear leak in Iran? Israeli attack on Tehran's nuke sites fuels global anxiety If global crude continues to trend upward, the Reserve Bank of India may find itself under pressure to postpone rate cuts or maintain a tight policy stance. The bond market is already reacting, with yields moving higher in anticipation. For borrowers, this spells higher EMIs and limited refinancing options. Spotlight on excise duties India's excise duties on fuel is about Rs 18–20 per litre (for diesel, petrol) and are a major source of government revenue. Past oil shocks have often led the government to reduce these duties temporarily to provide a cushion to the consumers. This step might be politically popular, however, it comes at a cost. Lower duties mean less tax income, even as the import bill rises because of expensive oil. This could push the fiscal deficit higher. Wider economic impact The current spike in energy prices is not limited to crude oil. India's energy import basket also includes LPG, natural gas, petrochemicals, and fertilisers, all of which could face shipping risks and price increases if Middle East tensions worsen. A disruption in the LPG or fertiliser supply chain could hurt rural households and farm productivity. Fertilisers are essential for agriculture, and any increase in their cost would be passed on to food prices, affecting overall inflation. This could negate the recent price stability observed in food commodities. Also Read: Iran-Israel War: Why Israel bombed Iran's nuclear sites and what it means for global security, oil, and trade Several manufacturing sectors including aviation, chemicals, paints, tyres, cement, and logistics use petroleum-based inputs and fuels. A significant increase in the price of raw materials such as jet fuel, gasoil, or naphtha will result in reduction of profit margins. Crisil Ratings' Senior Director, Anuj Sethi also affirmed that the recent escalation in the Israel- Iran conflict is likely to have repercussions on margins. 'The recent escalation in the Israel- Iran conflict has impacted global oil markets, with crude oil prices surging to over $75/bbl. from the softened levels of $65/bbl. seen during May 2025. The repercussions of this price hike are likely to vary across sectors that are directly or indirectly dependent on crude oil." Also Read: Iran-Israel conflict: How secret friends turned bitter enemies "While a surge in oil prices tends to benefit upstream oil exploration and production companies, the reverse effect may be felt by downstream refiners, whose margins could be squeezed due to higher input costs. Similarly, sectors indirectly linked to crude oil – such as petrochemical-based industries (including packaging films, plastic pipes), man-made yarns, paints, specialty chemicals, and tyres could face margin pressures, in case of further increase in crude oil prices, in the event of escalation of the conflict," he added. Hence, the producers may pass on these costs to consumers or absorb them, both of which have consequences including either reduced affordability for customers or shrink in corporate profits. Ripple effects on consumers The economic stress will be felt on the ground too if the situation worsens. With Iran's warning about paying 'heavy price' to Israel, the transporters might be preparing to revise fares upward. Grocery suppliers and wholesalers expect higher logistics bills. Small business owners, especially MSMEs, may face the shrinking margin problem as their input costs rise while consumer demand stays flat. Gold prices have also reacted to the heightened geopolitical risk. On June 13, domestic gold futures crossed the Rs 1 lakh per 10 grams mark, while global spot prices hovered near $3,383 per ounce. This surge, driven by a weakening rupee and investor flight to safe assets, may take a toll on jewellery sales. Gold jewellery sales in India during April and early May remained subdued, except on the day of Akshaya Tritiya, due to high and volatile gold prices coupled with broader economic uncertainties, according to a World Gold Council (WGC) report. The recent tensions might add to it. While retail jewellery demand may soften, investment demand is expected to remain intact. In this evolving situation, the role of India's policy-makers becomes critical. The RBI may intervene in the currency market to prevent excessive rupee depreciation. It also has to weigh the impact of oil-driven inflation against the risk of a growth slowdown. The central government will have to take a call on whether to cut excise duties, offer targeted subsidies, or rework spending priorities to accommodate rising energy costs. The challenge lies in protecting households from the oil shock without losing control over the fiscal deficit. Key uncertainties ahead Several variables will shape the eventual economic fallout: The geopolitical trajectory : If the Israel-Iran conflict expands, oil could climb further higher. Global shipping lanes : Any disruption, especially through the Strait of Hormuz, would worsen energy costs. Domestic policy : Excise duty adjustments and RBI's rate decisions will determine how deeply inflation spreads. Capital movement : Continued foreign inflows can stabilise the rupee, while outflows could worsen currency pressures. Global interest rates : A strong dollar and high US yields could drive capital away from emerging markets like India. The Israel-Iran conflict may have erupted thousands of kilometres away, but its tremors might be felt across India's economy, from refinery floors to rural kitchens. Oil, often called the lifeblood of the modern economy, carries with it complex consequences when prices spike.
