India on Thursday hiked its defence spending by 21 percent to $42.7 billion and promised that strains on the public finances would not hamper moves to modernise the million-plus military.

The government, one of the world's largest arms buyers, will raise defence spending to 2.3 trillion rupees ($42.7 billion) for the financial year to March 31, 2014, Finance Minister P. Chidambaram said in his budget.

The figure is up a fifth from 2012-13 when the defence budget stood at 1.9 trillion rupees.

"I assure the house that constraints will not come in the way of providing any additional requirement for the security of the nation," Chidambaram told parliament.

The minister earmarked $16 billion as "capital expenditure" in line with India's ambitious moves to acquire the latest hardware.

The latest increase is likely to upset nuclear-armed neighbour Pakistan which has fought three wars with India since independence in 1947.

India is on the brink of buying 126 French Rafale fighter jets for $12 billion and is shopping for some 400 combat helicopters worth tens of millions of dollars, as well as artillery, drones and electronic warfare systems.

India and Russia in 2010 agreed to jointly build 250 advanced stealth fighter jets worth $25 billion.

New Delhi is also locally building a nuclear-powered submarine as well as a range of nuclear-tipped ballistic missiles which can strike deep inside China.

The two Asian giants fought a brief but a bitter border war in 1962 and despite several rounds of talks the two sides have failed to resolve their territorial disputes.