The Indian Defence Budget 2007-08

On February 28, 2007, Finance Minister P. Chidambaram presented the Union Budget for the fiscal Year 2007-08 (April 1, 2007 – March 31, 2008). Out of a total budgeted expenditure of Rs. 6,80,521 crore, Rs. 96,000 crore was earmarked for national Defence, which includes allocations to the three Services – Army, Navy and Air Force – Defence Ordnance Factories, and the Defence Research and Development Organisation. This is besides the allocation of Rs. 16, 695.83 crore for Defence Civil Estimates, including Rs. 14,649 crore for Defence Pensions. Adding Defence Civil Estimates to the Defence budget, the total Indian military budget now stands at Rs. 1,12,695.8 crore. However, by convention, the Civil Estimates are not included in the calculations of the Defence budget in India.

In nominal terms, the Defence budget of Rs. 96,000 crore is an increase of 7.87 per cent over the budget estimates (Rs. 89,000 crore), and 11.63 per cent over the revised budget (Rs. 86,000 crore) for the year 2006-07. There is thus an immediate net loss of Rs. 3,000 crore (3.4 per cent of the original budget) to the Defence establishment, owing to the Services’ inability to spend funds meant for capital expenditure during the previous financial year. The Services’ inability to spend funds has probably cost them another Rs. 4,000 crore in the new budget, which could have taken the new budget to the figure of Rs. 100,000 crore. In the new budget, revenue expenditure accounts for 56.3 per cent (Rs. 54,078 crore), and capital expenditure accounts for 43.7 per cent (Rs. 41,922 crore) of the total budget. While the revenue budget has declined by 0.58 percentage points, that of capital expenditure has increased by 1.58 percentage points over the budgeted estimates for the previous year. Compared to the revised estimates for 2006-07, in the latest allocations, the share of revenue expenditure has decreased by 3.6 percentage points while that for capital expenditure has gone up by the same percentage points.

The recent trend of declining revenue allocations and rising capital allocations can be traced back to 2004-05, when the capital budget was suddenly increased by nearly one and a half times, while the revenue budget was cut by nearly 14 percentage points. In the revenue side of the budget, pay and allowances, including those of personnel, civilians and reservists account for the second largest expenditure (after Stores which receives Rs. 25,668.22 crore), at Rs. 21,020.81 crore, which is nearly 40 per cent of the revenue budget and 22 per cent of the total Defence budget. When the recommendations of the 6th Pay Commission get implemented, the revenue budget will inflate significantly. The 5th Pay Commission inflated the revenue budget by nearly 16 per cent. A similar situation this time will raise the revenue budget by at least eight to nine thousand crore, because of increases in just Pay and Allowances.

On the capital side, this year’s allocations for procurement purposes stands at nearly Rs. 27,000 crore, 3000 crore more than was allotted in the previous year. Though the major portion of the procurement budget will go towards meeting ‘committed liabilities’, the remainder could be utilised by the Services for a new set of modernisation programmes.

Service wise, the Army has the lead with a budget of Rs. 45,684.51 crore (47.59 per cent of total budget), followed by the Air Force at Rs. 27,021.74 crore (28.15 per cent) and the Navy bringing up the rear at Rs. 17,529.44 crores (18.25 per cent). Compared to the budgeted estimates for 2006-07, the Army’s share has gone up by 0.1 percentage point, while those for the Air force and Navy have gone up by 0.2 percentage points each. The allocation for Defence Research and Development has gone up by Rs. 433.49 crore, and it now stands at Rs. 5887.22 crore, representing 6.13 per cent of the total budget. Though the present allocations reinforce the fact that the Indian military is Army-centric, yet, some components of the Army budget – National Cadet Corps (NCC) and Military Farms – need a revision in the budget making process to better reflect their true character and for easy understanding. Similarly, the Coast Guard and Jammu & Kashmir Light Infantry (JAKLI) are also excluded from the defence budget. This is done for the purpose of under-valuation, but it is unnecessary given that information in this regard is easily available in the public domain.

The Defence budget for 2007-08 is only 2.10 per cent of the expected GDP for the coming fiscal year, as against 2.17 per cent in the previous year. In the last four fiscal years since 2004-05, Defence expenditure as a percentage of GDP has been continuously declining. Similarly, Defence expenditure as a percentage of total Central government expenditure has this time around come down to 14.11 per cent from 14.79 per cent in the previous year. In the last four years, there has been a more than two percentage point decline on this front. These declining trends are in contrast to the commitment made by the Prime Minister to push the Defence budget towards the three per cent of GDP mark in the backdrop of strong economic growth. In nominal terms, though the economy is all set to grow by more than 45 per cent between 2004-05 and 2007-08, the Defence budget has actually gone up by only 26 per cent in the same period.

This mismatch between the growth of the economy and that of defence allocations raises the question as to whether it is the government that is not willing to provide sufficient funds to the armed forces, or whether the Armed Forces are unable to utilise allotted funds in a timely manner. A perusal of the Defence Services Estimates (DSE) reveals that the Armed Forces have surrendered nearly Rs, 40,000 crore in the past decade, forgetting the consequences of two important underlying principles of the Fiscal Responsibility and Budget Management Act (FRBM Act): each rupee surrendered from the present budget is one rupee lost in the next budget; and the more that is spent from the present budget, the more will be allotted in the next budget. As the Services’ record of spending allotted funds is not displaying any improvement, the Ministry of Finance did not grant more funds, possibly because of the understanding that the surrendered funds could have earned better returns if they had been allocated for other productive purposes. Perhaps, this aspect is the most crucial factor that justifies the mismatch between robust economic growth and a relatively lower growth in the defence budget. In this regard, the demand for higher allocations from GDP or Central Government expenditure has to be compatible with the improved spending habits of the Services, which in turn depends on rational decision-making. At present, most of decisions pertaining to equipment or platforms do not conform to the simple economic principle of competition, leading to compromise on time, cost and quality. As long as these aspects are not taken care of, no amount of increased allocation would be adequate, considering that allotted funds will be used at a sub-optimal level