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Indian Defence Resource Allocation Trends

The rising inflation, exchange Rate Variation (ERV) and sharp devaluation of Rupee against US Dollar have resulted in marginal hike in this year's Interim Indian Defence Budget. This in turn would impediment the modernization of Indian Armed Forces.

In the recently tabled Indian interim budget 2014-15, the Indian Government has allocated Rs 224000 crore ($40.72 Billion) for the defence spending, marking an  modest increase of 10 per cent over the last year's budget of 2013-14 pegged at Rs 203672.12 crore ($37.03 Billion).

Defence Budget 2014-15: The Sub-Allocation

Out of the Rs 224000 crore ($40.72 Billion) earmarked towards defence spending this year, the sub allocations to the different services are as follows:

ServicesCapitalRevenue% in total budget 2013-14
Army 25116.08 ($4.56 Billion)  92601.32 ($16.83 Billion) 53% 
Indian Air Force 33355.39 (6.06 Billion)  20506.84 ($3.72 Billion) 24% 
 Indian Navy 22821.30 ($4.14 Billion)  13975.79  ($2.54 Billion) 16% 
R&D 5975.25 ($1.08 Billion)  5984.67 ($1.08 Billion) 5% 
Ordnance Factories 529.56 ($0.096 Billion)  1343.43 ($0.244 Billion) 1% 
Misc. 1790.37 ($0.325 Billion)  --- 1% 
Total 89587.95 ($16.28 Billion)  134412.05 ($24.43 Billion) 100% 

This year the Army's share of budget at 53 percent remains the highest amongst the three services and an increase from previous year's share of 50 percent. However, the share of Air Force has witnessed a decline by 4 percent while that of Navy remains the same. Also there has been no change in the share of Research & development (R&D) and that of Ordnance Factories in this year's budget. The pie diagram depicted below gives us the percentage shared by defence services in Defence Budget 2014-2015.

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Allocation of Total Defence Budget - Service Wise

 

The Capital and Revenue expenditure

Out of the total budget, Rs 89587.95 crore ($16.28 Billion) has been allocated for capital procurements and Rs 134412.05 crore ($24.13 Billion) has been earmarked for revenue expenditure. This year the share of capital budget has witnessed a nominal increase of 1 percent from the previous year and comprises 40 percent of the total budget. On the other hand, the revenue budget has seen a decline this year.

Particulars2012-132013-142014-15
 Defence Budget (Rs. in Crore)  181775.77 ($33.05 Billion)1 203672.12 $37.01 Billion  224000.00 ($40.72 Billion) 
Growth of Defence Budget (%)  6.36  12.05 9.98
Revenue Expenditure (Rs. in Crore) 111276.65 ($20.23 Billion)   124799.89 ($2.69 Billion) 134412.05 ($24.43 Billion)
Growth of Revenue Expenditure (%) 6.22  12.15  7.70
Share of Revenue Expenditure in Defence Budget (%)
61.22  61.27 60.01
Capital Expenditure (Rs. in Crore)  70499.12 ($12.81 Billion) 78872.23 ($14.34 Billion) 89587.95 ($16.28 Billion)
Growth of Capital Expenditure (%) 6.58  11.88  13.59
Share of Capital Expenditure in Defence Budget (%) 38.78  38.73  39.99

Share of  Capital Vs Revenue 

In the budget for 2014-15, the capital outlay, largely meant for acquiring new weapon systems and platforms has been scaled up to Rs 89587.95 crore ($16.28 Billion), up from the revised capital expenditure of Rs 86740.71 crore ($15.77 Billion) allocated in 2013-14 witnessing a hike of meager 3.27 percent from last year which does not seem substantial considering the number of billion dollar deals in the pipeline to be signed keeping in sync with their respective modernization plans.

Revenue Vs Capital

 

 In year 2014-15, the share of capital has increased to 40 percent from the previous year's budget of 39 percent. But the revenue expenditure has fallen from 61 percent in previous year to just 60 percent in the current budget.

Air Force with Rs 33355.39 crores ($6.06 Billion) accounts for the highest share of about 37 percent, followed by Army with a budget of Rs 25116.08 ($4.56 Billion) accounting for 28 percent and then follows Navy with Rs 22821.30 ($4.14 Billion) accounting for 25 percent in the total defence budget pie. Research and Development (R&D) and Ordnance Factories have been allocated Rs 5975.25 crores ($1.08 Billion) and Rs 529.56 crore ($0.096 Billion) respectively in the defence budget accounting for 7 percent in the budget.

Share of  Defence Services in Defence Budget - A Comparison


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Revenue Expenditure

The revenue expenditure, which caters to the 'operating' expenditure of the three services, is pegged at 134412.05 ($24.43 Billion), a Rs 9612.16 crore ($1.74 Billion) rise from previous allocation of Rs 124799.89 ($22.69 Billion). Salary and wages for the defence force personnel accounts for about half of this budget. While the remaining is spent on stores and equipment, revenue works maintenance and transportations among others. In 2014-15, the revenue expenditure has increased by 7.7 percent with its ratio in the total budget having fallen from last 61 percent to 60 percent this year.

revnue exp servise wise

Funds for 'Make' Projects

The interim defence budget has made a provision of Rs 35.7 crore for prototype development under the 'Make' procedure. The interim budget also shows an upward revision of 2013-14 allocation for 'Make' projects from Rs one crore to Rs 29.34 core. The much talked about 'Make' projects - Tactical Communication System (TCS) and Future Infantry Combat System (FICV) - which were under the discussion for long time are now virtually in limbo, due to the indecisiveness on the part of the defence ministry and the complexity of the procedures. More importantly, the MoD is currently engaged in simplifying its 'Make' procedure, the implementation of which is unlikely to happen in 2014-15. Given this, the allocation under the 'Make' head seems to be unrealistic.

Impact Analysis

The defence budget marks the lowest in over three decades in terms of ratio to the GDP but also the lowest in terms of percentage of the total annual government expenditure.
The defence budget of 2014-15 is 12.70 percent of the estimated spending of the government in the upcoming fiscal/financial year, a nominal increase from last year's 12.23 per cent but significantly below from the 15.79 per cent in 1999. As far as the GDP is concerned, the defence budget comes up to barely 1.74 per cent of the GDP this time which is remarkably low for India in at least three decades, with the figure dropping considerably from 3.16 per cent of the GDP in 1987 as well as lower from previous year's 1.79 percent. The Long Term Integrated Perspective Plan (LTIPP) for 2012-27, approved by the Defence Acquisition Council along with the 12th five-year plan, is based on the assumption of allocations to defence at 3 percent of GDP.

impact anaylsis

The real trajedy 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. The low hike in defence spending comes at a time when the Defence Ministry has some big ticket procurements in the pipeline with some already being in their final stages and expected to get materialized in this fiscal.

impact

Even in the current fiscal, Rs 8000 crore ($1.45 Billion) were transferred from the capital expenditure account to the revenue expenditure account in the revised estimates for 2013-14. The fund diversion affected the inking of several defense projects, including the purchase of Boeing AH-64-D Apache helicopters worth US $1.16 billion, Boeing Chinook heavy-lift helicopters worth US $833 million, and the purchase of 145 light howitzers from the US subsidiary of BAE Systems for US $583 million.

Increasing Committed Liabilities

Each year, equipment modernisation is blunted by predictable events; the same patterns dealing double and triple whammies to capital spending. Firstly, contracts concluded during preceding years build up instalments that must be paid, and which are known in advance. This year, the army was to pay more than Rs 64,680 crore about 95 per cent of its capital allocation on pre-committed expenditures, leaving it with just Rs 2,955 crore for new contracts. But capital allocations have ignored this trend, leaving less and less each year for new weaponry.

Increasing Committed Liabilities

YearCapital ExpenditureNew ProcurementCommitted LiabilitiesNew Procurement In %Committed Liabilities in %No of Orders
07-08  27903  10997  16906  39.41  60.59  84 
08-09  30000  9248  20752  30.83  69.17  61 
09-10  38427  11861  26565  30.87  69.13  49 
10-11  45686  17278  28408  37.82  62.18  50 
11-12  42462  9467  32995  22.30  77.70  52
12-13  60359  5520 54839  9.15 90.85  25 
13-14  67635  2955 64680  4.37 95.63  14+ Exact numbers not known 

The above table and the figure depicts the trend.

The Parliamentary Standing Committee on defence in its report presented to Parliament last April stated that there has been a “steady decline” in the number of defence contracts signed during the 11th five-year plan period. The number of contracts signed each year during the period is 84 in 2007-08, 61 in 2008-09, 49 in 2009-10, 50 in 2010-11 and 52 in 2011-12, said the report.

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YearBudget EstimateBudget Estimate Budget Estimate Revised EstimateRevised EstimateRevised EstimateExpenditureUp Spend
Projected  Allocated INR  Allocated % Projected Allocated INRAllocated %
2011-12 88680 64150  72.34 72406 6219985.90 5203810161
2012-13 93828  74518  79.42 80973 6453579.70 592775258
2013-14 123911  81241  65.56   ------ ---Likely 72000.00

The defence budgeting is that the military's long-term equipment planning is based on fundamentally flawed fiscal assumptions. Crucial planning documents, like the Long Term Integrated Perspective Plan (LTIPP) and the Five-Year Procurement Plan, envision the purchase of equipment worth lakhs of crores of rupees, without any sign of the money being available. The LTIPP assumes high GDP growth that has slowed; a stable foreign exchange situation; it barely caters for inflation; and assumes defence allocations of about 3 per cent of GDP, while actual allocations are barely 2 per cent. With the basics so out of sync with reality it is hardly surprising that, year after year, spending is further out of line with planning and that budgeting is merely an activity done in February that is long forgotten by December.

Most of the procurement proposals are languishing through the labyrinthine procurement procedures. The procurement of 126 French Rafale fighter jets, 22 Apache attack choppers and 15 heavy-lift choppers, as well as artillery, UAVs/drones and Electronic Warfare (EW) Systems is outstanding. On top of it austerity measures, depreciation of value of rupee, policy uncertainty and reluctance for foreign investments, mounting 90 to 95 percent committed liabilities, not leaving much for new projects. The capital expenditure is hit by any decline in the rupee. Since capital expenditure, including instalments for equipment bought during previous years, is denominated in foreign currency, any fall in the rupee upends the calculations.
This year about Rs 8000 Crores have been transferred from Capital allocation to Revenue expenditure. Besides to reduce revenue spending, the government has shifted the purchase of several items from the revenue to the capital account. These include new aero engines, spares for in-service aircraft, and several categories of trucks and vehicles. This jugglery does indeed reduce revenue expenditure, but also leaves less in the capital account for the purchase of capital weapons platforms that actually add to combat power.
The final budget for the year to be presented by a new government in July- August 2014 may hike defence budget by 15 to 20 percent which is necessary to meet requirements of the armed forces modernization programme.

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