Budget puts defence modernization in jeopardy
by Ashok B Sharma on 23 Mar 2015 0 Comment

The defence of a country is vital, particularly when surrounding countries claim parts of its territory. The situation is aggravated when an immediate neighbour engages in proxy war by facilitating infiltration of terrorists with the sole intention of carrying out acts for destabilization of the destination country. India faces such a situation and the need to build up its defence is critical. Union Finance Minister Arun Jaitley while presenting his annual Budget acknowledged this saying “defence of every inch of our motherland comes before anything else.” But has he done sufficient justice in allocation of funds for the country’s defence?


True, the Union Budget has raised its allocation for defence spending to Rs 2,46,727 crore, an increase of 7.74% over previous year’s budgetary estimate. This allocation, however, does not include Rs 54,500 crore for pensions and Rs 8,852.6 crore towards civil expenditure. At face value the figure of allocation may look astronomical, but in relative terms it is only 1.75% of the GDP, marginally lower than 1.81% of the GDP in the previous year. The defence expenditure in relation to the GDP is has been declining for the last 30 years and the 14th Finance Commission, the recommendations of which has been accepted by the government in full, raised serious concerns over this declining trend.


The GDP figure represents the growth in the economy and does not reflect the resources available to the government. Therefore, defence allocation vis-à-vis the GDP may not be best indicator for judgement. Rather it would be more rational to compare defence allocation with the total government expenditure. The share of defence allocation in central government’s total expenditure has marginally increased from 12.8% in the previous year to 13.9%.


Now considering the year-on-year growth rate in defence allocation, the figures show that it has declined from 12.4% in the previous year when an allocation of Rs 2,29,000 crore was made to 7.74% in the current year.


The most important agenda before the government is modernization and indigenization in defence production. Hence capital expenditure in the defence budget assumes importance as it is used for acquisition and production of defence platforms and equipment. But unfortunately the share of capital expenditure in the defence budget is on a declining trend. Last year, the share of capital expenditure was 41.3% as compared the share of revenue expenditure at 58.7%. This year the share of capital expenditure has fallen to 38.3% while that of revenue expenditure has shot up to 61.7%. This is the second time in the recent past that the share of capital expenditure in the defence budget has fallen to below 40%. It last occurred in 2009-10 when the hike in pay and allowances was effected on the recommendations of the 6th Pay Commission. Even allocation for “stores”, which is key to maintenance, is only 17% of the growth in defence budget.


It is noteworthy that in the current year’s defence budget, out of the hike of 7.74% (Rs 17,727 crore), Rs 8,855 crore or 50% is due to the increase in pay and allowances of the armed forces. Thus the total revenue expenditure has been hiked from Rs 1,34,412.05 crore in the previous year to Rs 1,52,139 crore while the capital expenditure has remained stagnant at Rs 94,588 crore.


The stagnation in allocation for capital expenditure is likely to place the programme for modernization under acute stress. Already there is a huge amount of committed liabilities on account of contracts already signed. Further there are new plans. The downward revision of capital acquisition budget in 2014-15 had already caused a difficult situation and its continued stagnation in 2015-16 has aggravated the problem. One can easily gauge the magnitude of the problem when mega deals are in the pipeline for signing, such as the tanker aircraft deal with Airbus, two helicopter contracts with Boeing and Rafale fighter deal with Dassault Aviation, to name a few. The deals alone will eat into nearly half of the Air Force acquisition budget as its initial payment is estimated at Rs 15,000 crore. 


The Union Finance Minister should realise the situation and take adequate steps to increase the acquisition budget in the course of the year. He should act if he really means what he has said about “both transparency and quick decision making” in purchase of defence platforms and equipment with the intention of “thus keeping our defence forces ready for any eventuality.”


Despite the 14th Finance Commission expressing concerns over the declining trend in defence capital expenditure, it has said that estimating it is “beyond the scope of our assessment.” It now rests with the government to effect adequate increases in times of need. Mr Jaitley has acknowledged in his Budget speech that interest, subsidies and defence expenditure together make up nearly 75% of the non-Plan expenditure, but the reality is that the share of defence expenditure is gradually declining. Over the years the ratio between Plan and non-Plan expenditure has remained skewed.


There is an inherent problem in preparation of defence budget over the years. The projections of the Defence Ministry are usually scaled down in settling the final allocation. The gap between the resource needs projected by the Defence Ministry and what is finally settled is ever widening. The Defence Ministry, therefore, needs to do adequate homework in consultation with the three services before preparing the demand for allocations under specific heads so as to convince the Finance Ministry. Hopefully Defence Minister Manohar Parrikar will address the problem in the near future.


A problem which Mr Parrikar needs to address is to be cautious in spending the allocations made and not to leave unspent balance, particularly regarding modernization and indigenization programmes. There are instances when funds from capital allocations were shifted to meet revenue expenditure. At the revised estimate stage, only in four out of the last 20 years the Defence Ministry got additional funds and only in one year did it fully utilize the allocated budgetary estimate. In the remaining 15 years, the ministry failed to fully utilize the funds meant for modernization.


Particularly in relation to capital acquisition budget, there should be elbow space for accommodating fluctuations in foreign exchange rate. While committed liabilities are reckoned at the prevailing exchange rate when contracts are signed, the actual expenditure is incurred at the foreign exchange rate prevalent at the time of making payment.


The problems before the Union government should also be kept in mind. It is facing resource crunch following the implementation of the recommendations of the14th Finance Commission whereby 62% of the total tax receipts, including the divisible pool of taxes, grants and plan transfers, would be devolved to the States. Also the current scheme of transparent coal auctioning will accrue more benefits to coal-bearing States. Therefore Prime Minister Modi has adopted the route of inviting more domestic private sector participation, encouraging inflow of foreign direct investments (FDIs), co-designing, co-development and co-production under ‘Make in India’ campaign. The Budget has made a humble beginning in promoting ‘ease of doing business’ in the country, but it needs to be seen how much of it will actually fructify in the near future.

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