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INDIAN DEFENCE BUDGET 2017-18: AN ANALYSIS

Modernization of the Armed Forces is a continuous process based on threat perception, operational necessity, technological changes etc. however, the resources allocation has been inadequate over the years to address the needs of the Armed Forces.

The Budget proposal for 2017-18 maintained a 'small' hike of about 6.2 percent in defence spending and announced an allocation of Rs 2,74,114 Crores against last year  Rs 2,58,589 Crores. The increase is about Rs 15,525 Crores over the budgetary allocation for the year 2016-17. It does not include the pensions bill of about Rs 85,000 Crores. The Budget increase is in consistent with past increases and is likely to be less than 1.62% of GDP.

The increase in the share of the revenue expenditure is primarily due to the hike in the manpower cost of the Armed Forces.

The comparative increase in the defence budget of 2017-18 as against last 4 years is as under:-

Comparative Key Statistics of Defence Budgets 2013-2017

Particulars2013-142014-152015-162016-17 (BE)2017-18
Defence Budget (Rs. in Crores) 203449222370230125 2585892,74,114
Growth of Defence Budget (%) 129 3.4912.37 6.2
Revenue Expenditure (Rs. in Crores)  124799140404 148561 172401      187626
Growth of Revenue Expenditure (%) 12.15  7.75.81 16.05 8.83
Share of Revenue Expenditure in Defence Budget (%)   61.2760.01 64.56 66.67 68.44
Capital Expenditure (Rs. in Crores)78872.2381965.2 81564.17 86188.09 86488.01
Growth of Capital Expenditure (%) 11.884 -0.49 5.67 0.3
Share of Capital Expenditure in Defence Budget (%)38.7339.99 35.44 33.33 31.56

 

The YoY increase in overall, capital and revenue segment is shown in Fig below.

Sub Allocations

Out of the Rs 2,74,114 Crores earmarked towards defence spending this year, the comparative sub allocation in the defence budget 2017-18 to the three defence services is as given in the Table above. This time the Government has categorized R&D, Defence Ordinance Factories, DGQA and the three services under the heading 'Centers'. Another category of Technology Development - Assistance for prototype development under make procedure has been added and a capital of Rs. 44.63 crores has been allocated for it.

As previous years, this year also the Army's over all share has been highest amongst the three services; however it was increased by 6.18% as compared to last year. On the other hand, the share of Air Force witnessed a increase by one percent which definitely is not justifiable keeping in mind the various deals in pipeline while that of Navy has declined by one percent. Also there has been an 8% increase in the share of Research & Development (R&D) and that of Ordnance Factories in this year's budget compared to last year.

The pie diagrams depicted above gives the percentage shared by defence services in Defence Budget 2016-17 and 2017-18.

The Capital and Revenue Expenditure

The Capital and Revenue Expenditure are the two main components of the defence budget with the Revenue heading taking the giant share in the budgetary allocations year on year. Out of the total budget, Rs 182534.42 crores has been allocated for Revenue expenditure and Rs 91579.7 crores has been earmarked for Capital expenditure. The share of percentage of capital allocation in defence budget as compared to revenue allocation has been same this time. As compared with revised estimates of last year's defence budget, it is seen that the revenue budget has witnessed an increase of 20 percent from the previous year comprising 67 percent of the total budget this time. On the other hand, the capital expenditure has witnessed an increase of 20.624 percent and comprises 33 percent of the entire budget for the fiscal 2017-18.

Capital Budget

The Capital Budget is divided into two notional categories: 'Capital Acquisition and 'Other-Than-Capital Acquisition'. While the capital acquisition budget is spent on acquiring new weapon systems and platforms required for modernization of the Armed Forces, the other than capital acquisition segment of the capital budget caters for expenditure on acquisition of land, development of civil infrastructure and the entire capital expenditure of the Research and Development (R&D) and the Ordnance Factories. In the budget for 2017-18, the capital outlay has been scaled up to Rs 86488.01 Crores up from the revised capital expenditure of Rs 71700.00 crores allocated in 2016-17 witnessing a hike of 20.624 percent from last year which is still not substantial considering the number of billion dollar deals in the pipeline to be signed.

Amongst the three services, the Air Force has been allocated the largest share of the capital budget about Rs 33555.62 crores though witnessing a increase of last year's allocation of Rs 28210.76 crores, followed by the Army's budget which stands at Rs 25175.63 crores and then Navy's who has been allocated Rs 19348.16 crores. The below given pie chart depicts the share of the defence services in the capital budget.

The capital allocation has increased from last year but a closer examination suggests that there has been an increment in the Air Force acquisition of land, construction, other equipment and special project. For the Army also there is scope for H&MV and for Navy for acquiring new fleet which has resulted in this increment in the year but is still minimal.

Unspent Funds and Committed Liabilities

The real tragedy is that MoD has been surrendering about 10 percent of the allotment almost every year as a result the Ministry of Finance has not been allocating the projected amount. This year witnessed the same trend with the Defence Ministry likely to surrender Rs. 6886 Croes (around 8.76 percent) of the capital expenditure budget earmarked for acquisitions since several projects could not proceed in time by the three defence services. Amongst all the defence forces, the Army is seen to be struggling the most having spent only 45-50% of its capital allocation. The unspent money normally goes back to the centre or some of it is adjusted in revenue expenditure. (Refer Fig. "Indian Defence Capital Budget - over & unspend)

The underutilization of Capital budget allotted is reflective of a serious need to review our existing Defence Procurement Policy and also the inability of the MoD to spend the budget allotted for modernization.

In the year 2016-17, there were committed liabilities of nearly Rs 62609.63 cores which left only Rs 8,590.37 crores for new acquisitions. As for the 2017-18, considering the moderate increase in the capital budget this year (considering revised estimates on FY 2016-17), it is understood that not much amount will be left for new procurements. Rather the present allocation is not sufficient enough for the already contracted defence deals. (Refer Fig below).

Impact Analysis                                                    

Incidentally America's defence budget this year is proposed at about $654 billion, the highest in the world, a 10 per cent increase over last year. China with $152 billion defence budget, growth of about 7 per cent increase over last year and 1.3 per cent of the country's GDP. China defence spending is about three times higher and US is about 13 times of Indian budget.

The increase of mere Rs 15,525 crores in the overall defence allocation seems to be inadequate and not in tune with the military modernization as the amount sanctioned generally gets partially neutralized by the annual inflation rate that still hovers between 3.7 and 4.8 per cent, the steep fall in the value of the rupee against the US dollar coupled with the traditional rise in the global prices of arms (10-15 per cent annual inflation in defence equipment costs) and thus will be insufficient to give a major boost to the military modernization that has been languishing for over a decade. Further, defence wages and pensions have also risen this year, making even less money available for modernization.

The trend of budget allocation increases vis-a-vis the inflation and net resultant increase is shown in Fig.

The budget as it pertains to defence salaries, pensions, expenditure and military modernization programmes and has top-line growth and diminished spending for procurement, reveals an over-manned, poorly equipped, early twentieth century force, with constraints that impede significant capacity-creation and inventory modernization, under which operational preparedness will deteriorate further even as the threats and challenges continue to increase.

The meager amount that is allocated for military acquisition and modernization is often underutilized. The ministry of defence returned more than Rs 13,000 crore from the capital head in 2015-16, and another Rs 7,000 crore in 2016-17, which was unspent. This reflects on poor financial planning and procurement management within the MoD.

The need of the hour is long-term planning for modernization and to supplement it with committed funding. In mid eighties the defence plan with matching resource allocation were formulated, resultantly achievement of planned targets was to the desired level. Since then the five-year plans had no assured funding but allocations based on annual budgets, due to long lead times in projects from concept to delivery and most failed to fructify in time. If the plans continue to be made on the basis of unrealistic assumptions about the resources likely to be available for defence and little attention is paid to financial management in defence, the country will forever remain entwine in a simple equation mismatch between projection and allocation. At the same time surrendering of unspent capital budget and transferring a part of it to Revenue expenditure has been a practice in the past and highlights the need to have a detailed planning.

Parliamentary Standing Committee on Defence in its recent report has made a strong pitch for boosting the allocation for defence for next fiscal as it is woefully inadequate to even fulfill the basic requirements of the armed forces. The committee has also commented adversely on ‘Ad-hocism’, and the ‘casual and lackadaisical’ approach on budget allocation and acquisition process.

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