India’s Defence Budget 2013-14: A Bumpy Road Ahead

While presenting the Union Budget 2013-14 to Parliament on 28 February, the Finance Minister hiked the defence allocation by 5.3 per cent to Rs. 2,03,672.1 crore (US$ 37.4 billion) and made the customary promise that “constraints will not come in the way of providing any additional requirement for the security of the nation.” This nominal increase in the latest defence allocation – which is quite modest in comparison to the growth rates of 17.6 per cent and 11.6 per cent in the previous two budgets – has been caused by a depressing economic environment and the government’s austerity drive to combat the fiscal deficit. However, the defence ministry, which is already battling a high inflationary regime and an adverse rupee-dollar exchange rate, may find the new allocation inadequate to sustain both the running and modernisation requirements of the armed forces.

Defence Budget Comes under Economic and Fiscal Stress

The prime reason for the modest increase in the defence budget is economic slowdown and the government’s determination to contain the fiscal deficit. As the Economic Survey 2012-13, presented to the Parliament a day before the Union Budget’s presentation, shows, the Indian economy is expected to grow at a decadal low of five per cent in the current fiscal year (down from the peak of 9.3 per cent in 2010-11), before increasing to 6.1 to 6.7 per cent in the coming fiscal. At this growth rate, the government’s revenue receipts have come under sharp pressure, forcing it to tighten its purse. The austerity drive has further been necessitated by a widening fiscal deficit, which has fuelled concerns among investors with rating agencies seemingly inclined to reduce India to junk status. The fear of the downgrade was so intense that the Finance Minister has not only downwardly revised the current year’s expenditure to contain the fiscal deficit at 5.2 per cent of GDP but has gone a step further to reduce the deficit level to 4.8 per cent in the coming fiscal year. Moreover, he has also laid down a fiscal consolidation path whereby the fiscal deficit is to be reduced by 0.6 percentage point every year till it becomes three per cent of the GDP in 2016-17.

However, the larger question is how much burden the defence budget has taken to accommodate the government’s austerity drive. From a macro point of view, it is reasonable to assume that the fiscal burden, in terms of controlled growth of total government expenditure, is shared more or less equally by each and every sector. But as the statistics would show, the defence budget has taken a larger burden than would probably be reasonable. This is evident from the growth rate of both the union budget and the defence budget. While the former has increased by 11.7 per cent, the increase in the latter is less than half of that. In other words, the defence budget has been harshly controlled not only in the interest of the larger fiscal deficit, but to accommodate the relatively larger shares of other government expenditure heads.

Downward Revision of Budget 2012-13

Although the defence budget 2013-14 has been increased by a modest 5.3 per cent, the growth rate is a hefty 14.1 per cent over the revised estimate of 2012-13. The difference in these growth rates is due to the cut of Rs. 14,903.8 crore (or 7.7 per cent) from the budget of 2012-13. Of the total reduction, 67 per cent is accounted for by capital expenditure, which has been reduced by Rs. 10,000 crore (12.6 per cent) from the original allocation. Of the total cut in capital expenditure, around 87 per cent is due to what is generally known as ‘under-spending’ of the modernisation budget, which has been reduced by Rs. 8,663.2 crore (13 per cent) to Rs. 57,796.3 crore. Around 75 per cent of this is accounted for by the Navy whose modernization budget has been reduced by Rs. 6,500 crore (26.9 per cent) to Rs. 17,651.5 crore, partly due to slippage of delivery of the aircraft carrier INS Vikramaditya by almost one year to late 2013. For its part, the revenue expenditure was revised downward by Rs. 4,903.8 crore (4.3 per cent). Around 53 per cent of this reduction is due to cut in the pay and allowances of the armed forces.

Defence Budget 2013-14: Negative Real Growth

The modest increase in the defence budget comes in the wake of high inflationary and unfavourable exchange rate regimes. As the Economic Survey brings out, the average inflation rate during the first nine months of 2012-13 was high at 7.6 per cent and 10 per cent, measured in terms of Whole Sale Price Index (WPI) and Consumer Price Index-New Series (CPI-NS), respectively. Even assuming a one percentage reduction in annual inflation in 2013-14, which is quite optimistic, the real growth of the new defence budget is still in the negative – by 1.3 per cent and 3.7 per cent in terms of WPI and CPI-NS, respectively. The negative real growth in the defence budget is further worsened by a high exchange rate, particularly with respect to the US dollar which at Rs. 54.5 per unit is still 14 per cent higher than in 2012-13.

The negative growth in the latest defence budget would not necessary affect all its elements in the same way. The salary portion of the budget, a significant portion of revenue expenditure, is more or less insulated with suitable periodic increase in dearness allowance. The most affected elements of the budget would be revenue works, transportation, and most importantly revenue stores and capital acquisition, which are critical for modernisation and preparedness.

Defence Budget 2013-14: Key Statistics

With the modest growth in the new defence budget, its key indicators show a downward revision except for the percentage share of the capital expenditure in the total defence budget (see Table I). Of note is the further decline of the share of the defence budget in GDP, which is now the lowest over the past five decades since 1961-62 when it was only 1.66.

Note: Rs. 1.0 crore = Rs. 10 million = US$ 183,637.4 (as per the average exchange rate for the first 11 months of 2012-13)

Share of Defence Services

The Army with an approximate budget of Rs. 99,707.8 crore accounts for 49 per cent of the latest defence budget, followed by the Air Force (Rs. 57,502.9 crore), Navy (Rs. 36,343.5 crore), Defence Research and Development Organisation (Rs. 10,610.2 crore) and Ordnance Factories (- Rs. 508.7 crore) (see Figure I). It is noteworthy that compared to the previous budget, the Air Force is the only service which has increased its share in the total defence allocation (from 24.9 per cent to 28.2 per cent). The Navy’s share has decreased the most (by 1.4 percentage points), whereas the Army’s and DRDO’s shares have declined by 1.3 and 0.3 percentage points, respectively. It is also noteworthy that except for the Air Force, which has seen an increase in both the revenue expenditure and capital expenditure, the others have a decline in one of these heads.

Note: Share of services is exclusive of the Rs. 16.5 crore allocated under the heads of ‘Inspection’, ‘Prototype development under Make Procedure’ and ‘Others’.

Impact on Modernisation

The Indian armed forces are on a massive modernisation process, although the intensity varies from one service to another. Besides the existing ones, contracts worth several billions of dollars are expected to be signed in 2013-14. Among the services, the Air Force, the most capital intensive service, is expected to sign the $15-20 billion contract for 126 French Rafale fighters early in the next financial year. Besides, it has already selected the prospective suppliers for at least three more big contracts – 22 Boeing AH-64D Apache Longbow attack helicopters ($1.2 billion); 15 Boeing CH-47F Chinook heavy lift helicopters ($1.4 billion), and six Airbus A330 Multi Role Tanker Transport ($1.0 billion) – which are expected to be signed in the near future. The Navy is also expected to sign a $1.0 billion contract for 16 multi-role helicopters, which is at an advance stage of vendor selection. The Army on its part is hoping that its much delayed artillery programme finally gets going in 2013, with the procurement of 145 ultra-light howitzers ($647 million).

Given the long list of new acquisition proposals, the question is how much the new defence budget supports it. It is most noteworthy that the modernisation budget is earmarked for committed liabilities, with little money available for new schemes. For instance, for the years 2011-12 and 2012-13, the overall ratio between these stands at roughly 85:15, although there exists a significant variation among the services and between the years. Nonetheless, assuming the same ratio in the new allocation, total available funds for new schemes would be little over Rs. 11,000 crore, which is probably enough for the first stage payment towards the Rafale deal. This means that there is very little money available for other new schemes including of the Air Force, which, despite having a 30 per cent hike in its modernisation budget, would still need more money to sustain its modernisation drive. For the Army and Navy, the resource constraint is more severe, with negative growth in their respective modernisation budgets (Table II).

Note: In columns 4 and 5, plus figures denote under-utilization and minus figures over-utilization

Lip Service to Indigenisation

In the wake of the current debate surrounding the €556.3 million deal for the procurement of 12 VVIP helicopters, one argument that has bee reiterated again is that indigenisation is a viable alternative to avoid controversy. However, the focus on indigenisation is somehow missing in the defence ministry’s budget document. This is evident from the utilisation and allocation of resources for the ‘Make’ projects under which domestic industry, particularly the private sector, is required to design and produce advanced platforms for the armed forces. Of the total allocation of Rs. 89.2 crore made in 2012-13, not a single rupee has been utilised so far. Moreover, the allocation has been further reduced to a mere Rs. 1.0 core in the new budget, implying that no major work can be undertaken for the two army projects – Tactical Communication System (TCS) and Future Infantry Combat System (FICV) – which have been identified for development by the domestic players.

Conclusion: Bumpy Road Ahead

This is not the first time that the defence budget has been subject to a modest growth. In 2010-11 also, the budget was hiked by a mere four per cent. However, in that year, the actual expenditure surpassed the budgetary allocation by five per cent, and the next year saw a hefty 12 per cent increase in allocation. Going by this, the defence ministry would not only eye for additional resources over the budgetary allocation of 2013-14 but also expect a double-digit hike in 2014-15. However, this expectation may bump into one crucial hurdle. Unlike the previous years in which the Indian economy was on a high growth trajectory, reaching a GDP growth of 9.3 per cent in 2010-11, growth in the coming years is not that encouraging although some improvement is expected. As the International Monetary Fund in its October 2012 report predicts, the best that the Indian economy can achieve in the years up to 2017 is 6.9 per cent. A GDP growth of less than seven per cent combined with the fiscal consolidation path that the Finance Minister has articulated in his budget speech means a lot of pressure on the defence ministry whose plan for current and future expenditure up to 2017 is based on past GDP growth rate of 8 to 9 per cent. Given this, a mismatch of huge proportions is expected in the coming years between the allocation to and expectation by the defence ministry. One of the paths that the Ministry of Defence is now expected to take is to rework its future expenditure based on the current reality. This would mean a bit of reprioritisation of its main items of expenditure.

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

Errata: The minus before Rs. 508.7 crore as the allocation for Ordnance Factories was inadvertently deleted during the editing process; this error has been rectified.