By Harsh V Pant & Sayantan Haldar, Respectively Vice President and Associate Fellow, Maritime Studies, ORF
India’s foreign policy finds itself at a critical juncture. While much of the country’s external engagements remain deeply intertwined with its economic policy, looming challenges continue to demand vital strategic attention to its security calculus. The recently concluded India-European Union (EU) free trade agreement (FTA), the seeming consensus over a trade deal with Washington, and an overall focus on economic diplomacy to fuel its regional and global prowess underscore that a resilient economic backbone is an essential element of India’s foreign policy.
Similarly, the challenges to India’s national security and the emergence of a serious, systematic reset in New Delhi’s security preparedness, as evidenced during and in the aftermath of Operation Sindoor in 2025, highlight the need for a robust budgetary allocation. The Union Budget 2026-27, and the budgetary allocations to the ministry of external affairs (MEA), and the ministry of defence (MoD), serve as a guiding framework that outlines New Delhi’s priorities at this moment of flux.
India’s budgetary allocation towards the MEA has seen a marginal increase since 2025-26. For the upcoming financial year, Rs 22,118 crore has been earmarked for the ministry, against that of the current year which was pegged at Rs 20,516 crore. An overview of the fine print in the allocation reveals a host of realignments that are likely to guide India’s external engagements. The largest allocation within the budget for the ministry has been directed towards the Overseas Development Partnership (ODP) vertical—at Rs 6,997 crore, accounting for over 31% of the total allocation. Given India’s sustained focus on strengthening developmental partnerships with various like-minded countries, especially in the Global South, the sizeable budget for the ODP signals a vital continuity in New Delhi’s efforts to foster cooperation in this domain.
Importantly, allocation towards India’s neighbourhood has continued to remain a top priority, giving greater heft to New Delhi’s commitment to act as a catalyst of a secure and stable region spanning South Asian and Indian Ocean geographies, capped by the discursive framework of the “neighborhood first” policy. Among India’s neighbours, Bhutan (Rs 2,288.56 crore), Nepal (Rs 800 crore), and Maldives and Mauritius (both at Rs 550 crore) received the highest allocation. Interestingly, Bhutan has yet again emerged as the recipient of the highest share in India’s budgetary allocation to the MEA, accounting for over 10%.
Among other neighbours, an increase of Rs 100 crore is seen in the budgetary allocations to Sri Lanka (Rs 400 crore) and Afghanistan (`150 crore). Given New Delhi’s active engagement with Colombo, and a slow reset in ties with the current regime in Kabul, the hike in budgetary allocations appears to suggest that India continues to undergird its diplomatic outreach with an economic muscle. The strain in India-Bangladesh ties is also acutely visible in the reduced budgetary allocation towards Dhaka, which has been halved for fiscal year 2026-27, at Rs 60 crore, from the preceding year’s Rs 120 crore.
The MoD’s share in the Budget remains the highest among all other ministries. For 2026-27, it has received an allocation of `784,678 crore, which accounts for 14.68% of the total budget of the government. 2025 tested India’s security calculus acutely. Given that the looming threats of terrorism and border conflict persist in India’s national security outlook, the rise in the share of the budget allocated to the MoD outlines the priority being accorded to enhance preparedness. The 14% hike from the budgetary estimate allocation to the MoD signals a continuity and an upgrade in efforts to enhance the financial bandwidth required to fuel modernisation and reforms in security preparedness. At a time of strains in defence supply chains across the world, and mounting challenges to India’s security calculations, New Delhi continues to emphasise the need for self-reliance in defence, more specifically defence production. This Budget earmarks `219,000 crore for capital expenditure of the armed forces, and `365,478 crore for revenue expenditure. Considering that India’s has been emphasising on research and development of new technologies, overall reform, modernisation, and streamlining of domestic production, the increase in budgetary allocation for the MoD bodes well for its ambitions and the compulsions of India’s security preparedness.
Over the last year, India has taken a quantum leap in its economic diplomacy efforts. India successfully secured FTAs with the UK and the EU to traverse these markets seeking new opportunities. However, India’s efforts to secure a trade deal with the US over the past year has been marked by a critical test of resilience for New Delhi to balance its national interest, while continuing to engage with Washington. For New Delhi, securing and safeguarding the interest of each sector within the vast spectrum of US-India trade relations has remained a key priority. The fresh announcement of consensus between New Delhi and Washington, as well as Commerce Minister Piyush Goyal’s confirmation of the exclusion of sensitive sectors such as agriculture and dairy from the trade deal suggests it will have a positive bearing on India’s domestic market economy. In today’s era of integration of global markets, the imposition of tariffs is a critical barrier to realising the full potential of economic interdependencies. As the upheaval in US-India ties over the past year appears to have been left behind with the conclusion of negotiations, new opportunities abound for both sides.
As India transitions to become the third-largest economy in the world, persistent gaps in the MEA and the MoD need to be addressed. The need to recruit personnel to better manage its growing diplomatic prowess and continued investment in defence production are two such critical challenges. The trends of budgetary allocations to both the ministries exhibit New Delhi’s willingness to add fiscal muscles to efforts to mitigate these challenges.