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The 35-year-old man is accused of passing on details of the exercises held by the Indian Air Force on Friday in the western desert state of Rajasthan, senior state police officer D.S. Dinkar told AFP.
Dinkar identified the man as an Indian national called Sumaar Khan and said he was allegedly spying for Pakistan's Inter-Services Intelligence, "passing information related to Indian defence installations and military activities".
Police alleged the man used mobile phones and Internet to transmit information but did not say when he was arrested.
Both India's President Pranab Mukherjee and Prime Minister Manmohan Singh attended the drill, codenamed "Iron Fist".
Nuclear-armed rivals India and Pakistan frequently accuse each other of spying on each other's military activities.
The two South Asian neighbours have fought three wars, two over the disputed Himalayan territory of Kashmir, since their partition at independence in 1947.