Continuing its drive to modernise the armed forces, the government on Wednesday hiked the defence budget for 2007-08 to Rs 96,000 crore (Rs 960 billion), an increase of 7.8 per cent over the current fiscal outlay.

The increase was Rs 10,000 crore (Rs 100 billion) more in actual terms, as the defence ministry spent Rs 86,000 crore (Rs 860 billion) as against its outlay of Rs 89,000 crore (Rs 890 billion) for 2006-07.

Presenting the Budget in Parliament, Finance Minister P Chidambaram said the allocation of Rs 96,000 crore would include a whopping Rs 41,922 crore (Rs 419.22 billion) for capital expenditure or acquisition of new hardware, signalling that the armed forces would go ahead with some big-ticket weapons deals.

He also promised to provide more funds to the defence ministry if the need arose.

"Needless to say, any additional requirement for the security of the nation will be provided," he said.

Defence Minister A K Antony said the continued hike in defence expenditure signalled the UPA government's "resolve to go full steam ahead with the modernisation" of the military.

"I am satisfied with the commitment of providing extra funds made by the finance minister," he said.

Antony, however, said there had been some laxity in certain fields during the modernisation drive, and efforts would now focus on ensuring the upgradation of the arsenal of all three services.

Though Prime Minister Manmohan Singh had said that efforts would be made to meet the demands of defence planners for taking defence spending to around three per cent of the GDP to push the modernisation process, the proposed outlay was only 2.1 per cent of the GDP.

For the past few years, defence spending has been hovering around 2.5 per cent of GDP, much below China's whopping 7.2 per cent and Pakistan's about four to 4.5 per cent of GDP.

It was only in 2004-05 that India made an unprecedented hike of 28 per cent in the capital outlay to become the world largest arms purchaser, pushing China to the second spot.

In a break with tradition, the government made a bold move to hike the outlay on capital expenditure to almost 45 per cent of the total defence Budget.

This is part of a new effort launched by the defence ministry to balance defence budgeting equally between recurring expenditure on items like salaries and the outlay for hardware and arms purchases -- a growing concept in the Western military powers.

The idea to strike a 50-50 per cent ratio between expenditure and outlay was the brainchild of External Affairs Minister Pranab Mukherjee, who held the defence portfolio till last year.