NEW DELHI - India boosted defence spending by 12 percent in 2014-15 over the previous year in a budget presented on Thursday and further opened the domestic weapons industry to foreign investment to help rebuild the military and narrow the gap with China.
India has been the world's top arms buyer for the last three years, trying to replace an ageing Soviet-era military with modern weapons as a deterrent to a rising China, with which it fought a war more than half a century ago.
Finance Minister Arun Jaitley set the military budget at 2.29 trillion Indian rupees ($38.35 billion) for 2014-15, 50 billion rupees more than what the previous government agreed in an interim budget earlier this year.
Defence expenditure for 2013/14 was kept at 2.04 trillion rupees.
"Modernisation of the armed forces is critical to enable them to play their role effectively in the defence of India's strategic interests," he said to the thumping of desks in the lower house of parliament, where he presented the new government's first budget.
Jaitley's Bharatiya Janata Party has long called for a militarily-strong India to counter potential threats from both China and Pakistan and said it would speed up the pace of arms purchases for the military, the world's third largest.
Even at the elevated spending, India's military budget is still less than a third of China's $145 billion expenditure last year estimated by the Pentagon in its report to the US Congress this month.
New Delhi worries that China is building roads and other infrastructure along the disputed land border as well as bolstering its naval presence in the Indian Ocean that it considers its zone of influence.
The rise in India's military spending comes as Western governments are rushing to visit the new administration in New Delhi in the hope of landing multi-billion deals.
Politicians from France and Britain have held talks in New Delhi, while the United States, which has built close military ties, is also pushing for faster decisions on arms contracts.
Jaitley also increased the foreign investment limit in the domestic defence industry to 49 percent from 26 percent, hoping to draw greater interest from its main arms suppliers and help reshape the defence industrial base dominated by state firms.
"Companies controlled by foreign governments and foreign private sector are supplying our defence requirements to us at considerable outflow of foreign exchange," he said.
Global arms firms are wooing India in the hope of landing multi-billion dollars and New Delhi is aiming to leverage some of that buying power to get transfer of technology and end the overwhelming reliance on imports.
The government is in the midst of finalising an estimated $15 billion contract with Dassault Aviation for the sale of 126 Rafale fighter jets.
US government officials are separately pushing hard for $2.8 billion in delayed sales of Boeing's Apache attack and Chinook military transport helicopters.
In another move, the Indian government announced $16.7 million in funding to modernise traditional Islamic religious schools in its maiden budget which also included projects targeting its core Hindu nationalist base.
Finance Minister Arun Jaitley announced one billion rupees ($16.7 million) "for the modernisation of madrasas" in his two-hour budget speech to parliament.
India is home to an estimated 140 million Muslims, a group that has fallen behind in education, employment and economic status, according to a 2006 landmark government report.
Madrasas, which are based on Quranic teachings, use Urdu or Arabic as the language of instruction and are mostly funded by Islamic charities.
Critics say they lack trained teachers and fail to equip their students to compete in the modern world when most middle-class Indian families are trying to get their children into English-medium schools.
The Bharatiya Janata Party (BJP) led by Prime Minister Narendra Modi was voted to power in May on a promise to improve India's flagging economy and clean up corruption.
Jaitley also announced a fund of 20 billion rupees to clean up the polluted river Ganges, which is considered holy by Hindus, as well as one billion rupees for the development of steps they use to pray at sacred waterways.
A rehabilitation fund for Hindus driven out of Muslim-majority Kashmir after the start of an anti-India insurgency there in 1989 was allotted five billion rupees, while a statue of Hindu nationalist hero Sardar Patel got two billion rupees.