Addressing the Combined Commanders' Conference, he said the last two years have seen slow growth and the Services, while taking into account the capabilities of adversaries, will have to "plan our long-term acquisition on the assumption of limited resource availability".
"For most of the past decade, we have had the benefit of average annual growth rates of 8 per cent. But the last two years have seen slow growth and we continue to face an uncertain international economic climate marked by volatile exchange rate fluctuations and the possibility of fragmenting trade regimes.
"I have no doubt that we will overcome our current economic slowdown, but we will have to exercise prudence in our defence acquisition plans and cut our coat according to our cloth," the prime minister said.
Terming the economic slowdown a "looming and serious challenge", he said, "We need to match our investment in military equipment and forces to our national resources."
The exercise will have to be done "with a high degree of priority and urgency", the prime minister added.
Because of the economic slowdown, the government had last year cut Rs 14,000 crore from the defence budget. This year, the armed forces have been allocated Rs 2.06 lakh crore but there are possibilities of a further cut in that budget.
The armed forces have embarked on a major modernisation drive and were looking to spend Rs 6 lakh crore on military purchases in the next five to 10 years.