India’s Defence Budget 2017-18: Should Alarm Bells Ring?

Until 2015-16, the budgetary allocations of the Ministry of Defence (MoD) fell under eight Demands for Grants: the five revenue budgetary demands for the Army, Navy, Air Force, Ordnance Factories, Defence Research and Development Organisation (DRDO); the Capital Budget for all five demands put together; Civil Expenditure of the MoD Secretariat, Defence Accounts Department, Canteen Stores Department (CSD), Defence Estates Organisation (DEO), Coast Guard and Jammu & Kashmir Light Infantry (JAKLI); and, finally, Defence Pensions. While the first six demands comprising the revenue and capital allocations are commonly known as Defence Expenditure, the latter two (civil expenditure and defence pensions) are not formally included in the Defence Budget.

In the 2016-17 budget, these Demands for Grants were rationalised to four demands (Demand Nos. 20 to 23) with the stated aim of providing “a clear and consolidated depiction of defence expenditures.” As part of this rationalisation, the revenue budget of Military Farms (MFs), Ex-servicemen Contributory Health Scheme (ECHS), Inspection Organisation (IO), Rashtriya Rifles (RR), National Cadet Corps (NCC), DRDO and Ordnance Factories were all moved to MoD (Civil Estimates) under the new Demand No. 20 (MoD (Miscellaneous), which, in addition, caters for Border Roads, Coast Guard, DEO, JAKLI, Armed Forces Tribunal, CSD, and Housing (DAD/DEO/CSD). Similarly, the capital budget requirements of all these entities were also moved to the new Demand No. 20. Defence Pensions was renumbered as Demand No. 21. And, finally, the revenue budget demands of the services and joint staff were consolidated into a single demand (new Demand No. 22) while their capital budget demands became Demand No. 23).

Surprisingly, however, in the 2017-18 budget presented a few days ago, all except ECHS and Military Farms have come back to be part of Demand No. 22. Be that as it may, in all this, the definition of what constitutes ‘Defence Expenditure’ or ‘Defence Budget’ has not changed. Was this a ‘red herring’ so that people lose sight of past recommendations and promises?

Ignored Promises and Recommendations

In its recommendations, the 14th Finance commission had stated the following: “Recognizing that revenue expenditure is critical for defence preparedness and maintenance, we have kept the defence revenue expenditure-GDP ratio constant during our projection period, instead of allowing growth to decelerate as was the case in the past. In other words, the rate of defence revenue expenditure has been allowed to increase at the same rate as the GDP, which is substantially higher than the past growth of defence revenue expenditure.”1 For its part, the Medium Term Fiscal Policy Statement 2016-17 stated that while the revenue component of defence expenditure is estimated at Rs. 1,62,759 crore in Budgetary Estimate (BE) 2016-17, during the projection period of 2017-18 and 2018-19, it is estimated to increase by 10 per cent over the previous years. And according to the budget presented recently, the GDP for BE 2017-18 is projected to grow at 11.75 per cent over RE 2016-17.2

In the light of all this, it is indeed surprising that the increase in the revenue budget for all the services in the budget presented on February 1 is about four per cent. Further, the increases in the total revenue budgets of the Army and Air Force are less than the increase in the allocation for Pay & Allowances. Only in the case of Navy has the increase in revenue budget been marginally positive. This implies that the allocation under all the other revenue heads of expenditure, which caters for operations and maintenance, has been reduced. In the case of the Navy (other than Pay & Allowances), the allocation has remained constant from BE 2016-17 to BE 2017-18.

Source: “Union Budget 2017-18”, at http://indiabudget.gov.in/vol2.asp?pageid=2 (accessed February 01, 2017).

Further, even the increase in allocations under the Pay & Allowances head of about seven per cent would not be sufficient in view of the following:

• Service personnel are being paid an ad-hoc amount of 10 per cent of their reckonable pay as on January 1, 2016 over their 6th Central Pay Commission (CPC) pay scales, pending final orders for implementation of the 7th CPC recommendations to be issued after resolution of anomalies.
• The government is yet to approve the 7th CPC recommendations on allowances for all employees.
• Annual increment and two instalments of dearness allowance (DA) that would become due in the financial year 2017-18.

Fuel (High Speed Diesel, Aviation Turbine Fuel and Petrol) constitute a major portion of the stores expenditure. The entire training activity of the platform based weapon systems of the defence services is fuel intensive. Fuel prices had come down in 2015-16 on the back of a reduction in global crude prices. But they have been steadily rising as seen in the figure below:

Reduced revenue allocations in the face of rising fuel prices is likely to cause a reduction in the training effort, which, in turn, will have a direct impact on preparedness levels.

The Medium Term Fiscal Policy Statement 2017-18 contains further bad news: “The revenue component of Defence services is projected to increase by about 8 per cent and 11 per cent respectively in 2018-19 and 2019-20, over the previous year’s estimates.”3

The situation in the capital budget, which contributes to infrastructure building and acquisition of new weapon systems and platforms, their upgrade and replacement of legacy systems, is even worse. Table 2 indicates that capital expenditure in the last four years has been near constant at around Rs. 80,000 crore. This stagnation needs to be seen in the light of the following:

• Since 2007, the shortfall in revenue allocations is being met by dipping into the capital budget. This is being done as per a policy called ‘Capital Budget Revenue Procedure’ (CBRP). This has put the system in a vicious circle. Slowing the pace of replacement of legacy systems means sustaining the same at higher maintenance costs. Higher maintenance costs result in greater amounts being pinched from the capital budget under CBRP, thus leaving a lower budget for modernisation. Committed liabilities towards stage payments of existing contracts being the first charge means fewer contracts of new schemes. This has slowed down defence capability building.
• Capital acquisitions, whether directly procured from foreign original equipment manufacturers (OEMs) or through licence production routed through Defence Public Sector Undertakings (DPSUs) are import dependent.
• Reduction in the purchasing power of the rupee because of an adverse exchange rate (see Figure 2) and the withdrawal from 2016-17 of the exemption from custom duties of defence imports select programmes undertaken by DPSUs, which has added an additional burden on the capital and revenue budgets.

Note: Annual average dollar exchange rate as per Reserve Bank of India (RBI). Rate for 2016-17 is the 10 month average from 01 April 2016 till 31 January 2017.

Should Alarm Bells Ring?

The parliament Standing Committee on Defence of the 16th Lok Sabha has been severely critical of allocations being substantially lower than projections and the implications thereof. It has stated that it finds the entire scenario very discouraging and that it has not been given any reason by the Ministry of Defence and Ministry of Finance for curtailing the defence budget.4 Examining the Demand for Grants for 2016-17, the Committee has noted the following:

• The decline in the allocation for capital acquisition will definitely affect several procurement contracts.
• All pending procurement projects would not go through unless the government increases allocations at the Revised Estimate stage.
• A close examination of previous defence budgets reveals that the government’s ability to spend has come under repeated pressure with the MoD surrendering in the past four years over Rs. 35,000 crore from its capital allocations.
• This state of affairs does not bode well for national security and there is a need to examine in detail the causes that have brought the defence budget and the accretion in the capability of the armed forces to such a pass.5

The reason for the Committee voicing such a concern is evident from the table below. As may be seen, defence expenditure as a percentage of GDP has been declining every year since 2013-14.

A shortfall in funds in the revenue budget impacts the serviceability level of platforms and thus training, which ultimately lowers the preparedness level. And a shortfall of funds in the capital budget creates gaps in infrastructure and retards the capability building process. The share of defence expenditure in 2016-17 has gone below the levels it was in 1955-56. In 2017-18 it will go down to 1.557 per cent of GDP. Alarm bells should indeed be ringing.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. “Report of the Fourteenth Finance Commission,” Finance Commission India, Vol. 1, Chapter 6, Para 6.36, February 2015, p. 70
• 2. Budget at a glance 2017-18
• 3. Union Budget – Medium term fiscal statement (accessed February 01, 2017)
• 4. P 42, 3rd report of the Parliament Standing Committee on Defence of the 16th Lok Sabha
• 5. Para 1.4 of the 22nd report of the Parliament Standing Committee on Defence 16th Lok Sabha