The Global Defence Spending Surge: A 2025 Perspective with a Focus on India

In an era marked by escalating geopolitical tensions and economic recalibrations, global defence spending has reached unprecedented heights, hitting an estimated $3 trillion in 2025, or roughly 2.7% of the world’s $113 trillion GDP. This surge, the steepest since the Cold War, underscores a world grappling with conflicts in Ukraine, tensions in the Asia-Pacific, and instability in the Middle East. For business leaders and policymakers, understanding the dynamics of this spending—particularly for key players like India—offers critical insights into economic priorities, strategic imperatives, and global stability. 

A World on Edge: Global Defence Spending in 2025

Global military expenditure is expected to climb for a decade straight, with 2025 marking a 10.3% increase over 2024’s $2.7 trillion. This $3 trillion figure, representing 2.7% of global GDP, signals a shift from the post-Cold War era when defence budgets stabilised at around 2.3% of global economic output. While still below the Cold War peak of over 6% in the 1960s, today’s spending reflects a response to immediate threats: Russia’s ongoing conflict with Ukraine, China’s military expansion, and regional flashpoints in the Middle East and Indo-Pacific.

The concentration of spending remains stark. The top five countries—led by the United States and China—account for over 60% of global defence budgets. This allocation not only shapes global security but also influences economic flows, from defence contracts to supply chains for advanced technologies.

Top Defence Spending Leaders

The United States continues to dominate, with an estimated $1 trillion defence budget in 2025, comprising nearly 40% of global military expenditure. This reflects its role as a global superpower, investing heavily in advanced weaponry, cyber-defence, and NATO commitments. China follows with approximately $330 billion, a 59% increase since 2015, driven by its modernisation of naval, air, and missile capabilities. Russia, with $160 billion, ranks third, fuelled by its war in Ukraine, while Germany ($90 billion) and India ($86.1 billion) round out the top five. Other notable spenders include the United Kingdom ($85 billion), Saudi Arabia ($75 billion), France ($68 billion), Japan ($58 billion), and South Korea ($46 billion).

Spending as a Percentage of GDP

When measured relative to economic output, a different picture emerges. Ukraine leads with an extraordinary 34.5% of GDP allocated to defence, a necessity driven by its existential conflict with Russia. Saudi Arabia follows at 7.1%, reflecting Middle Eastern tensions, while Russia (6.5%), Israel (5.3%), and Poland (4.2%) prioritise defence due to regional insecurities. The United States (3.4%) and India (2.4%) fall lower, balancing military needs with broader economic goals. Algeria’s defence budget, doubling to ~8% of GDP since 2022, highlights emerging security concerns in North Africa.

Historical Context: A Return to Cold War Tensions?

The 2025 defence spending boom contrasts sharply with historical trends, in our view. During the Cold War, global military budgets consumed a far larger share of GDP, peaking above 6% in the 1960s amid the US-Soviet arms race and conflicts like Vietnam. The post-Cold War era saw a decline, with spending stabilising at 2.3% of GDP for much of the past two decades. Today’s 2.7% figure, while elevated, remains below those historical highs, reflecting the world’s larger economic base.

Europe’s 2025 budgeted spending is up 17% from 2024, surpasses Cold War levels for the region, driven by NATO’s response to Russia’s aggression. Eighteen of NATO’s 32 members now meet the 2% GDP defence spending target, a sharp increase from post-Cold War lows. Meanwhile, Asia-Pacific spending, led by China and India, reflects growing concerns over territorial disputes and regional power dynamics.

It’s quite clear that the global defence expenditure is on the rise.

India’s Defence Strategy: Balancing Power and Progress

India, the world’s fifth-largest defence spender, allocated ₹6.21 trillion (~$86.1 billion) to defence in its 2025–26 budget, representing ~2.4% of its GDP. This places India ahead of its peers like the United Kingdom but significantly behind China ($330 billion) and far ahead of Pakistan ($10 billion). For Indian businesses, this budget signals opportunities in defence manufacturing, technology, and supply chains, but it also highlights strategic and economic challenges.

Strategic Imperatives

India’s defence priorities are shaped by its unique geopolitical position, with unresolved border disputes with China and ongoing tensions with Pakistan. Investments in modernising conventional forces—tanks, aircraft, and naval assets—alongside emerging technologies like drones and cyber capabilities, aim to counter these threats. However, India’s reliance on arms imports, as the world’s second-largest importer, underscores a weak domestic defence-industrial base, a critical bottleneck for self-reliance. However, this is more a part of history. The government has been ensuring rising domestic procurement. Moreover, in the recent times and especially after the Operation Sindoor, India has demonstrated the quality of defence equipment it can make, and thereby seeing export opportunities too. From a sector that was predominantly import driven to producing at home and now exporting also, that too at a time when global defence expense is rising sharply – that’s a combination which paves the way for a longer runway of higher growth.

Economic Trade-Offs

At 2.4% of GDP, India’s defence spending is moderate compared to conflict-driven nations like Ukraine or Saudi Arabia but reflects a delicate balance. High personnel and pension costs for over 3.4 million ex-servicemen consume a significant portion of the budget, limiting funds for modernisation. Operational shortages in fighters, submarines, and air defence systems persist, even as India seeks to bolster capabilities against two nuclear-armed neighbours. However, things are changing for the better due to increased focus on the sector through import substitution and improving export capabilities.

Business Implications

For Indian businesses, the defence sector offers immense potential. Government initiatives like “Make in India” aim to boost domestic production, creating opportunities for private firms in aerospace, electronics, and advanced materials. However, challenges such as bureaucratic delays and technology gaps require strategic partnerships with global players. India’s defence budget growth signals sustained demand, but businesses must navigate a competitive landscape to capitalise on it.

Looking Ahead: Implications for Global Business

The $3 trillion global defence market in 2025 is more than a security metric - it’s a driver of economic activity. Defence spending fuels innovation in AI, cybersecurity, and advanced manufacturing, creating opportunities for businesses worldwide. However, it also diverts resources from socio-economic priorities, particularly in developing nations like India, where infrastructure and healthcare compete for funding.

For India, the path forward involves balancing defence modernisation with economic growth. Strengthening the domestic defence industry means reducing import dependency, boosting exports, and creating jobs, aligning with broader economic goals. Globally, the sustained rise in military budgets signals a world preparing for uncertainty, with implications for trade, investment, and supply chain stability.

As businesses navigate this landscape, understanding defence spending trends—both global and in key markets like India—will be critical. The $3 trillion question is not just about security but about how nations, and the businesses within them, adapt to a world where strategic priorities are reshaping economic realities.

From an investment perspective, we compare the sector to the auto sector of the 1990s – Once import-driven, the auto sector started manufacturing at home, encouraging a lot of ancillaries to also come up – and now driving an ecosystem that is one of the biggest employment sectors for India. We do see defence as a long-term opportunity, similar to the auto sector over the last few decades, where more players could emerge as the growth in the sector attracts more capital.

Sources: SIPRI Military Expenditure Database, IMF GDP Estimates, India Ministry of Defence, and Global Economic Projections.

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