Pakistan to raise military spending 17% after clashes with India

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Pakistan has announced plans to raise defence spending by 17 per cent in the fiscal year ending June 2026, while cutting overall government spending by seven per cent to Rs17.57tn ($62bn),

In a budget issued just a month after the worst fighting between Pakistan and arch-rival India in decades, finance minister Muhammad Aurangzeb on Tuesday earmarked Rs2.55tn for defence for the year starting July 1, up from Rs2.18tn in 2024-25.

The cash-strapped country, where the military wields broad influence over political and economic affairs, is set to embark on a defence spending spree to patch up holes in its armoury highlighted in clashes with India.

“After defeating India in a conventional war, we now have to surpass it in the economic field as well,” Prime Minister Shehbaz Sharif told his cabinet as he approved the budget. India has said last month’s clashes demonstrated its military superiority over its smaller neighbour.

The Pakistan government revealed in a post on X on Friday that China had offered it 40 J-35 fifth-generation stealth fighter jets, as well as advanced airborne early warning and anti-missile and anti-satellite systems. It did not say how much it might pay for the equipment. 

Pakistan and India last month traded waves of missiles and drones that struck deep into each other’s territories, killed civilians, and brought the two nuclear-armed countries to the brink of all-out war. 

The country of 240mn people has begun a fragile economic recovery buoyed by a stringent $7bn IMF programme. An official survey released on Monday said annual inflation was projected to have fallen to 4.7 per cent for fiscal 2024-25, from 26 per cent the previous year. It estimated economic growth for 2024-25 at around 2.7 per cent. 

The government has set an ambitious 4.2 per cent growth target for the next year. But the economic survey also revealed deep weaknesses plaguing what is one of Asia’s most troubled economies, two years after it teetered at the brink of default. Major crop production, including rice and wheat, is projected to have fallen by 13 per cent. Large-scale manufacturing, battered by inflation and a surge in power prices, contracted.

Even if Pakistan achieves its growth target, the economy would still lag the south Asia region, which the World Bank forecasts will grow 6.1 per cent in 2026. Trade tariffs of up to 29 per cent threatened by the US, Pakistan’s largest export partner, could also undermine the competitiveness of its garment producers in a market it relies on for foreign exchange. 

To fund the defence spending, as well as interest payments projected to eat up 46 per cent of total spending, the government said it would cut expenditure by 6.9 per cent and increase its tax take by 18 per cent to Rs14.1tn. However, tax revenues for 2024-25 were Rs1tn short of the government’s original Rs12.9tn target for the year.

The central bank has halved its benchmark interest rate to 11 per cent since June 2024, allowing the government to announce some tax cuts on Tuesday for salaried workers and corporations that bore the brunt of last year’s budget.

Pakistan’s parliament will vote on the proposed budget later this month.