Cut in Non-plan Expenditure and Impact on Defence Budget

On September 18, 2013, austerity measures were announced by the Department of Expenditure (DoE) to contain the non-developmental expenditure so that additional resources could be released for the unnamed priority schemes. These measures include a 10 per cent cut in the non-plan expenditure (excluding certain segments thereof).

It is not the first time that such a cut has been imposed. A cut of 5 per cent was imposed in 2006-07 and again in 2007-08. This was doubled to 10 per cent in 2008-09. Since then non-plan expenditure has been subjected to a cut of 10 per cent in 2009-10, 2012-13, and now during the current financial year. The regularity with which the cut is being imposed on the allocations points to a serious flaw in the process of budget formulation. It is hard not to draw the inference that the assessment of government’s receipts during those years was so unrealistic that it became clear within the first few months of the relevant years that the expenditure authorized by the parliament through the budgetary process would not be sustainable.

It makes little sense to go through the laborious budgetary process if it is known, even while the detailed demands for grants are being discussed by the standing committees of the parliament, that the expenditure for which parliamentary approval is being sought might be, in all probability, beyond the means of the government. It is not as if year after year there was an unexpected turn of events in the first couple of months after the budget was approved, making it necessary to announce austerity measures.

It will be more prudent to make budgetary allocations that are affordable rather than curtailing the allocations soon after these are made, throwing all expenditure plans out of gear. This might imply lesser allocation for defence – as for other sectors – and sharper criticism by the powerful strategic community about the inadequacy of the defence budget but such criticism is bound to be made anyway whenever the budget is subjected to a cut.

Be that as it may, the DoE instructions require every ministry and department to cut the non-plan expenditure have spared the interest payment, payment of debt, defence capital, salaries, pension and the grants to the states by 10 per cent. The defence establishment has not concerned with payment of interest and release of grants to the states. The defence pension budget is not a part of the defence budget, as we know it, and the capital budget has been exempted, which implies that the capital acquisitions will not be affected by the cut. (This, however, does not mean that the Ministry of Finance will not mop up any funds at a later stage which, in its opinion, the MoD will not be able to spend by 31st March 2014.) Consequently, the axe will inevitably fall on the revenue budget.

Within the revenue segment also, the cut will affect only the other-than-salary segment. But this is unlikely to be of any comfort to the managers of the defence budget as absorbing this cut could pose a serious challenge. Take, for example, Indian Army’s net revenue allocation of INR 81,833.93 (including the charged expenditure) for the current year. The allocation for pay, allowances and wages, scattered under various minor budget heads, collectively account for as much as INR 57,422.55 crore of this allocation. This leaves a balance of INR 24,411.38 crore for all other activities. This will be subject to the 10 per cent cut, which works out to INR 2,441 crore.

It is difficult to visualize how this will be done. The other-than-salary budget heads include transportation, stores, works and the other expenditure. The net allocation under the transportation budget head is marginally lower than the actual expenditure of 2011-12 and the revised estimates (RE) for 2012-13. This effectively rules out the possibility of any further reduction from this budget head.

The current year’s allocation under works, which caters for expenditure on maintenance of the infrastructure, is also less than the actual expenditure for 2011-12 and just about INR 100 crore more than the last year’s RE. Apparently, the allocation is grossly inadequate and certainly does not lend itself to any further cut.

The net increase under the stores, vis-á-vis the RE of the previous year, is approximately INR 1,400 crore. This is barely sufficient to pay for the increase in the price of rations, clothing, petrol, other petroleum products and the ordnance stores, to name just a few objects of expenditure funded from this budget head. Incidentally, the ordnance stores include ammunition, where the shortages have been chronic.

Under the other expenditure budget head, the net allocation for the current year is approximately INR 350 crore more than the RE for the last year. This budget head caters for expenditure on various training grants, unit allowances, amenities for the troops, op sadbhavna in the state of J&K and on counter-insurgency/internal security duties (under the Army Commanders’ Special Financial Powers). Whether the increase of INR 350 crore this year is adequate for these activities and whether there is any scope for reduction in this allocation is not too difficult a question to answer.

The non-salary segment of the revenue budget of organizations, such as the Military Farms, Inspection organization and the National cadet Corps, which form part of the Army’s budget, also does not provide much scope for reduction. One such organization is the Ex-servicemen Health Scheme, for which the current year’s allocation is approximately INR 500 crore less than the last year’s RE. In fact, the current year’s net allocation is less than even the actual expenditure for 2011-12. With the growing number of beneficiaries and increase in the cost of the medical treatment, it is difficult to visualise how the scheme will be managed within the existing allocation. This effectively rules out any possibility of reducing the allocation even by a rupee.

Forced back to the wall, the services will have no option but to reduce the allocation under the heads where the impact is not immediately visible: maintenance of infrastructure, purchase of spares for maintenance of equipment, procurement of ammunition, and the like. But even this might be an impossible feat to achieve, given the fact that the net increase in the current year’s allocation over the last year’s RE is just a little more than INR 750 crore. This has serious implications from the point of view of defence preparedness.

The foregoing analysis is based on rough calculations but a meticulous exercise is unlikely to throw up a picture very different from this, even in regard to other services, the department of defence research & development and the ordnance factories, which collectively make up the defence budget. It is time a serious thought is given to the feasibility of applying the ‘mandatory’ cut on the non-salary segment of the defence budget and the consequences of doing so.

Fiscal management in defence is too serious a responsibility to be passed on by everyone in the defence establishment to everyone else in the hope that someone will somehow manage it by invoking the numinous mantra of ‘reprioritization of expenditure’.

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