Though increased, the budget falls short of previous increments and the government is hoping it will be enough to rationalise and streamline its defence procurements.
As part of a modernisation programme, India has increased its defence spending to US$37 billion, a modest hike of five percent over the 2012-13 budget and an increase of 14 percent in real terms.
New contracts will be signed but a significant part of the budget will be used to procure new defence equipment from deals already signed in previous years.
The minister earmarked US$16 billion as "capital expenditure" - meaning spending on hardware.
Among the major defence contracts in the pipeline is the order for 126 Rafale fighter jets from France.
Finance Minister P. Chidambaram said: "I propose to increase the allocation for defence to Rs 203,672 crore. This will include 86,741 crore for capital expenditure. The Minister of Defence has been most understanding, and I assure him and the House that constraints will not come in the way of providing any additional requirement for the security of the nation."
And with India currently negotiating a series of huge defence contracts, analysts feel that even with the slight increase to US$37 billion, the budget is still not sufficient.
Defence expert Bharat Verma said: "First, the Indian defence budget is becoming a big joke in this country because it cannot meet the requirement of the modernisation of the Indian armed forces. There has been no modernisation in the last three decades and it has fallen now to the lowest since 1996."
Despite being criticised for a string of scandals involving defence contracts in the past, the Indian government has taken a bold step of increasing the military spending in the next fiscal year.
It is expected that the subdued increase of 5.3 percent compared to last year's double-digit hike will oblige the Defence Ministry to rationalise its defence procurements with greater rigour in future.