Budgeting for India’s Defence: An Analysis of Defence Budget 2010-11 and the Likely Impact of the 13th Finance Commission on Future Defence Spending

The Union Budget 2010-11 has raised the defence outlays to Rs. 1,47,344 crore (US $31.9 billion). This represents a growth rate of a mere 3.98 per cent, in nominal terms (or 0.3 per cent in real terms) over the previous years’ allocation of Rs. 1,41,703 crore, and far below the 34 per cent nominal increase witnessed in the budget for 2009-10. The sudden dip in the defence budget’s growth rate follows two related steps taken by the government. While the first one is related to the government’s resolve about fiscal consolidation, the second is on account of the acceptance by the government of the recommendation of the Thirteenth Finance Commission (TFC). This commentary analyses the latest defence budget as well as the likely impact of TFC’s recommendation on India’s future defence spending.

Defence Budget 2010-11: Key Statistics

Although the defence budget for 2010-11 has been increased by less than four per cent over the previous year’s allocation, it has nonetheless been increased by a modest 8.13 per cent over the revised estimate for 2009-10. In other words, the Ministry of Defence (MoD) has surrendered (at the time of revised estimate) Rs. 5,439 crore from the original allocations made in 2009-10. The surrendered amount could have been more if the Revenue Expenditure – which accounts for running expenses of the defence services – had not been revised upwards by Rs 1,561 crore over the original estimates. On the other hand, the Capital Expenditure – most of which is accounted for acquisition of defence hardware – has been revised downward by Rs. 7,000 crore.

The marginal increase in the defence budget has a negative impact on almost all key components (see Table-I). On the positive side, however, the ratio between Revenue Expenditure and Capital Expenditure has been improved towards the latter. The improvement is largely due to the marginal increase in Revenue Expenditure, which itself was inflated in last year’s budget by salary increases and one-time arrears due to implementation of Sixth Central Pay Commission recommendations.

Among the defence services, the Army with a budget of approximately Rs. 74,582 crore in 2010-11 has the largest share, distantly followed by the Air Force (Rs. 40,462 crore), Navy (Rs. 21,467 crore), DRDO (Rs. 9,809 crore), and Ordnance Factories (Rs. 1,015 crore). However, in terms of Capital Expenditure, the Air Force with a budget of Rs. 25,251 crore holds the largest share (42 per cent) among the three services, followed by the Army (Rs. 17,255 crore; 29 per cent) and the Navy (Rs. 12,138; 20 per cent).

From the modernization point of view, out of Rs. 60,000 crore, nearly 78 per cent (Rs. 46,521) crore will be available to the three services for procurement of Aircraft and Aero-Engine, Heavy and Medium Vehicles, Naval Ships, and Other Equipments (Armaments, Electronics, Ammunition, Missiles, etc.) among others. Within each service’s acquisition budget, the Air Force will have Rs. 15,206 crore for procurement of Air Craft and Aero-Engine; while Rs. 10,464 crore have been provisioned for procurement of Other Equipments for the Army. The Navy will get Rs. 6,950 crore for procurement of Naval Fleet.

Figure: Shares of Defence Services in Defence Budget 2010-11

Note: Figure is based on total Capital Outlay for Defence Services (Rs. 60,000 crore) minus Rs. 7.50 crore, which is allocated under the “Others” head.
Source: Ministry of Finance, Union Budget 2010-11

Why Meagre Growth in Defence Budget?

While presenting the Union Budget, the Finance Minister (FM) emphasised that “Secure border and security of life and prosperity fosters development.” The 3.8 per cent increase in the defence budget (in comparison to the 8.6 per cent increase in total central government expenditure) does not however seem to be fully in sync with the above emphasis. This is more so when India’s more troubling neighbours have increased their defence spending at a sharp pace. Of particular interest is China, whose double digit increase in defence spending over the past twenty years and resultant military modernisation in both qualitative and quantitative terms has been taken ‘note’ of by the Ministry of Defence. (China’s 2009 official defence budget of $70.37 billion is 2.2 times that of India’s 2010 budget.) However the above ‘note’ does not seem to be backed by adequate growth in India’s defence budget. In fact, in the last 10 years, India’s defence budget has grown by 10 per cent and more only in three years.

Notwithstanding the seemingly ‘direction-less’ growth in India’s defence budget, the reasons for the small increase in the latest defence budget is not so difficult to fathom. There are in fact two clear reasons for it. The first is related to the government’s resolve to “come back to the path of fiscal consolidation at the earliest.” It is noteworthy that the central government had announced several stimulus packages to fight the economic crisis which was harsher in 2008-09. As a result the fiscal deficit had increased to an unsustainable level. Now with the crisis less severe, the government has made an attempt to bring down the fiscal deficit for 2010-11 to 5.5 per cent of GDP, as against 6 per cent in 2008-09 and 6.7 per cent in 2009-10 (revised estimate). The fiscal tightening means limited the scope for accommodating more resource demands from the MoD which accounts for over 13 per cent of total central government expenditure. The scope has been further limited by the government’s focus on ‘inclusive growth’, by way of increased agricultural, social and infrastructural spending. For instance, in the Union Budget, the Finance Minister has increased the Central Plan Outlay on Agriculture, Rural Development, Transport and Social Sector by 14 per cent to Rs. 2,97,065 crore.

If the imperatives of fiscal consolidation and ‘inclusive growth’ have limited government spending capacity, the MoD’s inability to spend the resources allocated in the previous year’s budget has also not helped its cause. As mentioned earlier, the MoD has so far surrendered. Rs. 5,439 crore from its 2009-10 budget. This inability to spend has no doubt strengthened the Finance Ministry’s justification for a smaller increase with the customary promise that “any additional requirement for the security of the nation will be provided for.” The Finance Ministry is fully aware that the MoD has difficulties in spending the allocated resources, especially the amount given in the capital account.

Impact of Thirteenth Finance Commission (TFC) Recommendations on Future Defence Spending up to 2014-15

If the Finance Ministry’s emphasis on fiscal prudence and inclusive growth has resulted in a smaller increase in the latest defence budget, the Report of the Thirteenth Finance Commission, tabled in Parliament on February 25, 2010, also does not paint a very optimistic scenario for India’s future defence spending. The Constitutional Commission, which has recommended on specific aspects of Centre-State fiscal relations, has also proposed a roadmap for defence spending for the period 2010/11-2014/15. As per the roadmap, defence spending is to grow by an annual average of 8.33 per cent during this period, with the revenue and capital components slated to increase by an annual average of seven per cent and ten per cent, respectively. As a percentage of GDP, defence spending is to be progressively decreased to 1.76 per cent in 2014-15 (see Table-II).

The significance of the above figures is that they are in sync with the fiscal consolidation part outlined by the Commission. More importantly, the Finance Ministry, which is in charge of implementing the Commission’s recommendations, is not only in agreement with the path but also tries to better the fiscal roadmap suggested by the Commission. This means that MoD’s future spending as outlined in the TFC could come under further stress in coming years.

The Road Ahead

While projecting the MoD’s budget through 2014-15, the TFC took into account the projections made by both the Finance Ministry and the MoD. The final projection by the TFC however turned out to be the same as made by the Finance Ministry – possibly to the dissatisfaction of the MoD, which argued for “the need to provide adequately for enhanced force multipliers.” The TFC however stuck to its guns, saying “the Finance Ministry’s projections address these needs [of the MoD]” and further added that:

“we [the Thirteenth Finance Commission] are of the view that there exists considerable scope to improve the quality and efficiency of defence expenditure through increased private sector engagement, import substitution and indigenisation; improvements in procedures and practices and better project management, within the parameters of Government of India’s policy. Efforts in this direction will further expand the fiscal space available for defence spending.”

The above assessment made by the Finance Commission needs careful consideration, given the indication that India’s future defence budget may not grow as desired by the MoD. In this regard, the Defence Ministry needs to carve out a plan as to where it can bring efficiency in its spending.

At present, the defence budget is broadly divided into Revenue and Capital expenditures, with the former accounting for nearly 60 per cent of total budget. However, given the cost-intensive nature of capital acquisition, the MoD, as argued rightly before the Finance Commission, needs more resources for ‘enhanced force multipliers’. This makes a case for rationalisation of revenue expenditure, if the overall budget is to grow by a fixed 10 per cent annually. The MoD has therefore to revisit its spending on major revenue components such as Pay and Allowance; Stores and Equipment; and Transportation, among others. Of particular focus should be Pay and Allowances, which has increased significantly from Rs. 24,690 crore in 2007-08 (budget estimate) to approximately Rs. 46,767 crore in 2010-11.

The way defence Capital budget is spent has been major a source of major concern, expressed by various authorities, particularly the Comptroller and Auditor General of India (C&AG). Besides, the repeated surrender of capital funds and India’s heavy import dependency have probably attracted the maximum attention for remedial measures.

Although the MoD has taken a keen interest in alleviating the problems by way of revising the Defence (Capital) Procurement Procedure (DPP), some lacunae still persist. The biggest problem perhaps is the lack of an integrated acquisition structure, as brought out by the Reports of Group of Ministers (2001) and C&AG (2007). In the absence of accountability at one place, various acquisition functions, carried out by different agencies, lack a mission-oriented approach, often at the cost of optimum time-cost trade offs and indigenisation/self-reliance. This not only raises the acquisition cost but also delays or hampers defence preparedness. It is high time the MoD looks deep into this issue.