"Our current defense spending is lower than 2% [of GDP]...and it should be at least 3%," A. K. Antony said at a meeting with top military commanders on Tuesday, without specifying a timeframe.
India raised its defense spending in February by 10% to $26.5 billion for the fiscal year 2008-2009, but it still fell below 2% of GDP for the first time in at least a decade.
India's neighbors and long-term rivals, Pakistan and China, allocate around 3.5% and 4.3% of GDP to defense, respectively.
The minister said top priority must be given to the modernization of the Indian Armed Forces and half of the defense budget should be allocated for the purchase of new military equipment.
"The modernization of armed forces has become a global trend," he said. "We must also assume a new approach taking into account a variety of threats to our national security."
The Associated Chambers of Commerce and Industry of India said in a report last year that over the past three years, India had spent as much as $10.5 billion on military imports, making it amongst the largest arms importers in the developing world.
India's military imports are expected to reach $30 billion by 2012 with its armed forces expected to ink defense deals for at least 126 multirole fighters, 155-mm howitzers, a variety of helicopters and long-range maritime reconnaissance aircraft.