Indian Prime Minister Manmohan Singh said on Thursday the government can allocate about three percent of the GDP for defence needs provided the economy grows at an annual eight percent.
"This should provide for a handsome defence budget," Singh told an annual meeting of the nation's armed forces commanders. "Our priority is to pursue policies to generate faster economic growth and mobilise more resources."
India's $700 billion economy is forecast to grow seven percent in the financial year to March 2006.
Asia's third-largest economy raised defence spending to 830 billion rupees ($18.48 billion) or 2.64 percent of GDP for 2005/06 from 770 billion last year.
Military experts and analysts have been asking the government to increase its defence outlay.
"I think it's a very, very welcome development that for the first time a prime minister has made a commitment of giving three percent of GDP to defence, even if it is linked to eight percent economic growth," senior defence analyst Uday Bhaskar told Reuters.
India has fought three wars with arch-rival Pakistan and one with China. It came close to a fourth war with Pakistan in 2002.
While ties have improved significantly with China, an ongoing peace process with Pakistan is making slow progress.
Defence experts say India's aging military - the world's fourth largest - is badly in need of modernisation.
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