The increase to $36.5 billion for 2011-12, from $32.74 billion this year, includes a 12 percent boost in capital spending for equipment and services.
From next month, capital spending will rise from $13.33 billion this year to nearly $15.4 billion, Indian Finance Minister Pranab Mukherjee said in his presentation of the budget to the country's Parliament, the Lok Sabha.
"More than 40 percent of the Indian defense budget for 2011 will be spent on capital expenditure, while the rest will go toward maintaining its armed forces," he said.
Among the big-ticket purchases likely to be finalized next year is that of the $11 billion deal for 126 multi-role combat aircraft as well as 197 light helicopters and 145 ultra-light howitzers for the army.
The "substantial" increase in the budget will go a long way to paying for these, Defense Minister M.M. Pallam Raju said after the budget was presented.
But the "hefty-hike" double-digit budget increase could go more toward offsetting high inflation and an annual 3 percent pay increase for civil servants, including defense personnel, Laxman Kumar Behera, a research fellow at the Institute of Defense Studies in New Delhi, said.
The defense increase comes as India's fiscal deficit is expected to fall from 5.1 percent of gross domestic product this year ending March 31 to 4.6 percent for 2011-12, Mukherjee said.
But he warned the money is available on condition that India doesn't suffer any natural calamity as has happened to many countries in the past several years. In his presentation he appealed to the Hindu god Indra, the god of rains, and Saraswati, the goddess of learning, as assurances against ecological disasters.
"I had to place the budget in a situation where there is uncertainty in the international world (and) high food inflation," he said.
"The economy has shown remarkable resilience to both external and domestic shocks," Mukherjee told Parliament. "Our primary concern this year has been continued high food prices."
The defense budget comes as India's economy is expected to grow at 9 percent next fiscal year, up 0.5 percent from the current fiscal year.
The annual budget is a balancing act for the Congress Party-led coalition that is grappling with soaring prices and a series of corruption scandals. The inflation forecast is for it to ease up on the current 8 percent.
But food inflation is at more than 16 percent, a major concern for the government and the general population. To head off unrest that could spill into angry street demonstrations, the budget is weighted in favor of agriculture, the rural economy and welfare programs.
"Overall, the budget is a growth-oriented and a good one and it has not taken the last year's growth for granted," Hari Bhartia, president of the Confederation of India Industry, said.