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#5238, 20 February 2017
Inadequate Budgetary Allotment and India's Defence Preparedness
Gurmeet Kanwal
Distinguished Fellow, Institute of Defence Studies and Analyses (IDSA)

In the budget for the Financial Year (FY) 2017-18, presented in the Indian parliament on 1 February 2017, the Indian Ministry of Defence (MoD) has been allotted INR 2,74,114 crore, excluding the provision for pensions.

The nominal increase of 5.7 per cent over the revised estimates (RE) for FY 2016-17 is barely adequate to provide for domestic inflation. The increase is insufficient to cater to the increase in the pay and allowances of the armed forces and the civilian employees of the MoD consequent to the implementation of the recommendations of the Seventh Pay Commission.

The additional expenditure that needs to be incurred on account of the upward revision in pay and allowances has resulted in an increase in the share of expenditure planned on the revenue account in the defence budget and a corresponding decrease in the share of the expenditure on the capital account.

While revenue expenditure has increased from 65.3 per cent of the total budget in FY 2016-17 to 67.0 per cent, expenditure planned on the capital account has gone down from 34.7 to 33.0 per cent.

The total capital outlay for the next financial year – meant mainly for the acquisition of new weapons systems and defence equipment – is pegged at INR 86,488.01 crore. Though the government has been making efforts to encourage the acquisition of weapons systems and defence equipment through the “make in India” route, about 70 per cent of the requirements are still imported.

The 10.05 per cent increase in the capital budget over the budgetary estimates (BE) for FY 2016-17 (INR 78,586.68 crore) is barely adequate to compensate for the 10 to 15 per cent inflation per annum in the prices of weapons and defence equipment procured through imports. The amount actually spent on the capital account in FY 2016-17 is INR 71,700.00 crore (RE). A sum of INR 6,886 crore was transferred to the revenue account.

The customs duty now being imposed on defence imports and the drop in the value of the Indian Rupee against the US Dollar also make the import of weapons and equipment comparatively more expensive. The Rupee had dropped to 68.71 to one US Dollar on 24 November 2016 – its lowest level during the year.

Despite low levels of funding on the capital account, allocations continue to be surrendered almost every year or transferred to the revenue budget. All of these systemic weaknesses work in tandem and, consequently, the modernisation plans of the armed forces are adversely affected.

As a ratio of the country’s GDP, the defence expenditure planned for FY 2017-18 stands reduced to 1.62 per cent. This is the lowest level since the disastrous 1962 war with China when it was 1.59 per cent of the GDP and is grossly inadequate to meet India's growing threats and challenges and the need for military modernisation.

The allocation for defence must go up to at least 2.0 per cent of the GDP in the supplementary demands for FY 2017-18. It should be raised gradually to 3.0 per cent of the GDP as recommended repeatedly by the Standing Committee on Defence in Parliament if another military debacle is to be avoided.

According to a press release issued by the MoD, the Defence Acquisition Council chaired by India's Defence Minister Manohar Parrikar had accorded initial approval – referred to as acceptance of necessity (AON) – to defence procurement projects worth INR 2,39,000 crore till July 2016. Of this, contracts worth INR 1,13,995 crore had been signed. At a DAC meeting held in November 2016, AON was given for new procurement projects worth INR 82,117 crore.

The new projects include the purchase of 83 Tejas Mark 1A Light Combat Aircraft (LCA) for the Indian Air Force at a cost of INR 50,025 crore; 15 helicopters for the IAF and the Indian Army at a cost of INR 2,911 crore; 598 mini-UAVs for the army at a cost of INR 1,100 crore; and 464 T-90 Russian tanks at a cost of INR 13,448 crore.

Given the low availability of funds on the capital account and the ‘committed liabilities’ of previous years – previously negotiated contracts with a fixed annual outgo, It will be difficult for the MoD to find the funds that will be required to sign contracts to acquire even half the weapons and equipment for which AON has been accorded in November 2016.

In FY 2017-18, funds amounting to only about INR 5,000 crore are likely to be available for new weapons and equipment acquisitions. Assuming the first year’s payment to be 10 per cent of the total, contracts worth about INR 50,000 crore may be concluded.

A workable method needs to be found to overcome the inability of the MoD bureaucracy and the armed forces to spend the funds allotted on the capital account fully and to curb the tendency of India's Ministry of Finance to allow part of the allotted funds to lapse as a tool to manage the burgeoning fiscal deficit.

In the interim budget that he presented for FY 2004-05, the then Indian Finance Minister Jaswant Singh had made an excellent recommendation. He had proposed to introduce a non-lapsable, rolling defence modernisation fund worth INR 25,000 crore. It was an innovative measure that did not find favour with the then Congress-led UPA government that presented the full budget after it came to power.

The reason given then was that the ‘rules of business’ do not permit a non-lapsable fund as all unspent funds compulsorily lapse at midnight on 31 March at the end of the financial year.

Such a roll-on fund is known to have been in vogue during the British rule. Since then, the rules of business have not changed substantially. And, even if the rules of business need to be amended now, surely a constitutional amendment is not necessary to do so.

It is an inescapable national security imperative that a roll-on, non-lapsable defence modernisation fund be instituted with a corpus of INR 1,00,000 crore. It should be linked with the Consolidated Fund of India.

Besides being a statement of account, the defence budget is a tool for demonstrating the country’s resolve and for enhancing deterrence through signalling. Infirmity in the approach to the formulation of the defence budget creates the impression that the management of national security does not rate a very high priority. That is not a worthy message to send out from the premises of the Indian parliament.

Overall, with the present defence budget, operational preparedness will deteriorate further even as the threats and challenges continue to increase. And, military modernisation, which had just about begun to pick up steam, will stagnate once again.


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