India is closely monitoring Pakistan’s FY26 federal budget, set to be presented by Finance Minister Muhammad Aurangzeb, with a particular focus on defence allocations and the origin of funds amid ongoing IMF assistance.

This scrutiny is driven by concerns that international aid, intended for economic reforms and climate resilience, could be diverted to military expenditure rather than its stated purposes.

The backdrop to this vigilance is the $2.4 billion in financial support recently approved for Pakistan by the International Monetary Fund (IMF), which comes with stringent conditions. Notably, Islamabad has committed to preparing its FY26 budget in close consultation with the IMF—a requirement typically reserved for countries facing acute financial crises, but now applied to Pakistan due to persistent concerns about fiscal discipline and transparency.

IMF staff recently concluded a mission to Pakistan, focusing on economic developments, programme implementation, and budget strategy for FY26. The IMF has insisted on fiscal consolidation, prioritisation of social and development expenditure, and a primary surplus target of 1.6% of GDP for FY26.

The Fund has also imposed 11 new conditions—raising the total to 50—which include reforms targeting elite taxation, energy subsidies, military-linked enterprises, and anti-money laundering measures. These conditions are designed to enforce transparency and limit the potential for funds to be redirected towards military or covert activities.

India’s apprehensions are heightened by Pakistan’s historical pattern of increasing defence spending despite economic distress. IMF and Pakistani data indicate that defence allocations have risen from ₹1.2 trillion Pakistani rupees in FY20 to over ₹2.1 trillion in FY25, although as a share of GDP, this has declined from 2.6% to 1.9% over the same period. India has repeatedly flagged the risk that international financial assistance may be misused to bolster Pakistan’s military, which continues to import the majority of its hardware from China.

Indian officials have expressed their concerns directly to the IMF, emphasising that repeated bailouts risk enabling state-sponsored cross-border terrorism and undermining global financial integrity. India’s influence at the IMF is limited—holding just 2.6% of the vote—but it has formally registered its dissent and called for stricter conditionality, including international monitoring and transparency measures.

The IMF’s latest programme for Pakistan includes the most extensive governance benchmarks to date, such as mandatory transparency reforms, curbs on covert spending, and requirements for public disclosure of fiscal data. Oversight mechanisms now involve IMF staff reviews, parliamentary reporting, and public online portals. Any detected discrepancies or breaches—such as inflated defence spending—could prompt the IMF Board to freeze further disbursements.

India’s stance has found some resonance among international experts and even some Pakistani analysts, who acknowledge the country’s poor track record in implementing reforms and the risks associated with repeated bailouts. Despite these concerns, the IMF and other multilateral lenders like the Asian Development Bank have continued to extend support, arguing that Pakistan has made “significant progress in stabilising the economy” and needs resources for macroeconomic stability and climate resilience.

India’s close watch on Pakistan’s FY26 budget reflects deep-seated concerns over the potential misuse of international aid for military purposes. The unprecedented conditionality attached to the latest IMF package underscores the international community’s recognition of these risks and signals a new era of multilateral oversight of Pakistan’s fiscal management.

Based On A Mint Report