From the IDSA website
India’s
Defence Budget 2013-14: A Bumpy Road Ahead
March 4, 2013
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.
Table I: Comparative
Statistics of Defence Budgets, 2011-12 & 2012-13
|
|
2012-13
|
2013-14
|
|
Defence Budget (Rs. in Crore)
|
1,93,407.29
|
2,03,672.12
|
|
Growth of Defence Budget (%)
|
17.63
|
5.31
|
|
Revenue Expenditure (Rs. in Crore)
|
1,13,828.66
|
1,16,931.41
|
|
Growth of Revenue Expenditure (%)
|
19.55
|
2.73
|
|
Share of Revenue Expenditure in Defence Budget (%)
|
58.85
|
57.41
|
|
Capital Expenditure (Rs. in Crore)
|
79,578.63
|
86,740.71
|
|
Growth of Capital Expenditure (%)
|
15.00
|
9.00
|
|
Share of Capital Expenditure in Defence Budget (%)
|
41.15
|
42.59
|
|
Share of Defence Budget in GDP (%)
|
1.90
|
1.79
|
|
Share of Defence Budget in Central Government
Expenditure (%)
|
12.97
|
12.23
|
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.
Figure I: %Share of Services
in Defence Budget 2013-14
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).
Table II: Allocation for
Modernisation of Armed Forces
|
|
BE 2012-13 (Rs in Cr)
|
RE 2012-13 (Rs in Cr)
|
Under/over Spending (Rs in Cr)
|
Under/over Spending (%)
|
BE 2013-14 (Rs in Cr)
|
% Growth of BE 2013-14 over BE 2012-13
|
|
Army
|
13804.02
|
11568.76
|
2235.26
|
16.19
|
13327.04
|
-3.46
|
|
Navy
|
24151.51
|
17651.51
|
6500
|
26.91
|
23478.78
|
-2.79
|
|
Air Force
|
28503.9
|
28575.99
|
-72.09
|
-0.25
|
37048.06
|
29.98
|
|
Total
|
66459.43
|
57796.26
|
8663.17
|
13.04
|
73853.88
|
11.13
|
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
IDSA COMMENT
India’s
Interim Defence Budget 2014-15: An Appraisal
February 23, 2014
On February 17, 2014, the Finance Minister while
presenting the Interim Union Budget 2014-15 to the Parliament, allocated Rs
2,24,000 crore (US$ 37.15 billion as per the prevailing average exchange rate)
for the national defence. The interim defence allocation, which represents a
9.98 per cent increase over the 2013-14 defence budget is exclusive of Rs
53,582.15 crore for defence pension that includes Rs 500 crore on account of
the government’s acceptance of the armed forces’ long-standing demand for One
Rank One Pension (OROP) principle. Although the interim budget is relevant till
the new government presents a regular budget after the 2014 general elections,
it nonetheless sets a broad roadmap for various ministries and departments.
Defence being a major charge on the central government budget, it is worthwhile
to look at the interim allocation that impinges on the modernization and other
needs of the Indian armed forces.
Interim Budget: Growth Factors and Key Elements
It is noteworthy that the 10 per cent hike in the interim
defence budget is with respect to both budget estimate and revised estimate of
2013-14 allocation. In other words, there has been no upward or downward
revision of the defence allocations provided in the previous budget. With the
overall 2013-14 allocation remaining same, the capital expenditure has,
however, been revised downward by 9.07 per cent or Rs. 7868.48 crore, which has
been added to the revenue expenditure. Around 46 per cent of upward revision of
the revenue expenditure has been necessitated due to the increase in pay and
allowances of the three armed forces.
The
increase in the pay and allowances is also the main reason for bulk of the hike
in the interim defence allocations. Suffice to mention that in the new budget,
48 per cent of the total increase is accounted for by the hike in armed forces
salary component. Compared to this, the capital expenditure, which mainly
caters to the modernisation requirement of the armed forces, has contributed to
only 14 per cent of the total hike.
Table-1 below provides a comparative overview of the key
elements of the interim defence budget 2014-15 and the defence budget of
2013-14. Among others, it brings out clearly that although the growth of the
interim budget is higher than that of the previous year’s budget, the growth,
as mentioned earlier, is consumed by swelling revenue expenditure.
Consequently, the capital expenditure, its growth and its share in total
defence budget cut an unimpressive outlook. An interesting aspect of the table
is that the share of defence in GDP and total Central Government Expenditure
(CGE) has moved on opposite direction. It is largely due to the difference in
the growth projection of these two parameters. While the nominal GDP is assumed
to grow by 13.4 per cent in 2014-15, the CGE is estimated to grow by 5.9 per
cent.
Table 1: Comparative Statistics
of Defence Budget: 2013-14 & 2014-15 (Interim)
|
|
2013-14
|
2014-15 (I)
|
|
Defence Budget (Rs in Crore)
|
203672.12
|
224000.00
|
|
Growth of Defence Budget (%)
|
5.31
|
9.98
|
|
Revenue Expenditure (Rs in Crore)
|
116931.41
|
134412.05
|
|
Growth of Revenue Expenditure (%)
|
2.73
|
14.95
|
|
Share of Revenue Expenditure in Defence Budget (%)
|
57.41
|
60.01
|
|
Capital Expenditure (Rs in Crore)
|
86740.71
|
89587.95
|
|
Growth of Capital Expenditure (%)
|
9.00
|
3.28
|
|
Share of Capital Expenditure in Defence Budget (%)
|
42.59
|
39.99
|
|
Capital Acquisition (Rs in Crore)
|
73444.59
|
75779.66*
|
|
Growth of Capital Acquisition (%)
|
11.23
|
3.18*
|
|
Share of Defence Budget in GDP (%)
|
1.80
|
1.74
|
|
Share of Defence Budget in Central Government
Expenditure (%)
|
12.23
|
12.70
|
Note: *: approximate figure.
Rs 1.0 crore = Rs 10 million = US$ 165,852 (as per the average exchange rate
for the first 10 months of 2013-14)
Interim Defence Budget: Share of Defence Services
Among the defence services, the Army with an approximate
budget of Rs. 1,18,231 crore accounts for 53 per cent of the total interim
defence budget, followed by the Air Force (Rs 54,262 crore; 24 per cent), Navy
(Rs 37,627 crore; 17 per cent), the Defence Research and Development
Organisation (DRDO) (Rs 11,960 crore, five per cent) and the Ordnance Factories
(Rs 1,873 crore; one per cent) Among the three armed forces, Army has the
highest (19 per cent) increase in the budget. While the Navy’s budget has been
increase by a modest 3.5 per cent, the Air Force’s budget has been contracted
by a 5.6 per cent. The DRDO on the other hand has got a 13 per cent hike in its
budget.
Impact on Modernisation
The 10 per cent hike in the overall defence allocation
notwithstanding, there has only been a marginal increase in the capital
acquisition budget of the armed forces (Table II-V). Of the three armed forces,
the Army is only service which has got an impressive hike in its modernisation
budget. Much of its growth is however concentrated on ‘Other Equipment’ which
caters to missiles and artillery guns among other. This may provide a cushion
to the Army to finally sign to pursue its long-delayed procurement deals of
ultra-light howitzer, Javelin anti-tank guided missile and night vision
equipment.
Compared to the Army, both the Navy and the Air Force have
witnessed a decline in the capital acquisition budget, with the latter bearing
a heavy brunt. The sharp decline of the air forces modernisation budget,
especially from the ‘Aircraft and Aero Engines’ head is surprising, given that
it is on the verge of signing several multi-billion dollar deals including for
medium multi-role combat aircraft (MMRCA) programme for which French Rafale has
been declared winner way back in January 2012. Given that its budget has been
reduced sharply, it is very unlikely that the Air Force could sign this much
talked about fighter deal in 2014-15. Some of Air Force’s other programmes
which are likely to be affected include the multi-role tanker aircraft and
heavy and attack helicopters.
Table 2: Capital Acquisition
|
Armed Force
|
BE 2013-14 (Rs in Cr)
|
RE 2013-14 (Rs in Cr)
|
Under/over Spending (Rs in Cr)
|
Under/over Spending (%)
|
Interim 2014-15 (Rs in Cr)
|
% Growth of Interim 2014-15 over BE 2013-14
|
|
Army
|
13327.04
|
10801.22
|
2525.82
|
18.95
|
20900.20
|
56.83
|
|
Navy
|
23478.78
|
19864.31
|
3614.47
|
15.39
|
23020.86
|
-1.95
|
|
Air Force
|
37048.06
|
36016.54
|
1031.52
|
2.78
|
31817.89
|
-14.12
|
|
Total
|
73853.88
|
66682.07
|
7171.81
|
9.71
|
75738.95
|
2.55
|
Notes: The Capital acquisition
figure is approximate and exclusive of funds for ‘Make’ projects in columns 4 and
5, plus figures denote under-utilization and minus figures over-utilization
Table 3: Army Capital
Acquisition
|
|
2013-14 (BE) (Rs in Cr)
|
2013-14 (RE) (Rs in Cr)
|
2014-15 (I) (Rs in Cr)
|
% Growth of 2014-15 (I) over 2013-14 (BE)
|
|
Aircraft & Aero-Engine
|
1527.79
|
1182.32
|
2127.99
|
39.29
|
|
H&MV
|
2024.37
|
1480.94
|
2128.16
|
5.13
|
|
Other Equipment
|
9758.86
|
7889.47
|
16155.93
|
65.55
|
|
Rolling Stock
|
0
|
81.5
|
275.07
|
|
|
Rashtriya Rifles
|
16.02
|
166.99
|
213.05
|
1229.90
|
|
Total Acquisition Expenditure Acq Exp
|
13327.04
|
10801.22
|
20900.2
|
56.83
|
Table 4: Navy Capital
Acquisition
|
|
2013-14 (BE) (Rs in Cr)
|
2013-14 (RE) (Rs in Cr)
|
2014-15 (I) (Rs in Cr)
|
% Growth of 2014-15 (I) over 2013-14 (BE)
|
|
Aircraft & Aero-Engine
|
6708.71
|
7418.40
|
3330.69
|
-50.35
|
|
H&MV
|
53.74
|
3.90
|
34.27
|
-36.23
|
|
Other Equipment
|
2192.82
|
2514.87
|
4358.10
|
98.74
|
|
Joint Staff
|
740.08
|
619.27
|
828.87
|
12.00
|
|
Naval Fleet
|
11772.26
|
8757.87
|
12856.06
|
9.21
|
|
Naval Dockyard
|
2011.17
|
550.00
|
1612.87
|
-19.80
|
|
Total Acquisition Expenditure
|
23478.78
|
19864.31
|
23020.86
|
-1.95
|
Table 5: Air Force Acquisition
|
|
2013-14 (BE) (Rs in Cr)
|
2013-14 (RE) (Rs in Cr)
|
2014-15 (I) (Rs in Cr)
|
% Growth of 2014-15 (I) over 2013-14 (BE)
|
|
Aircraft & Aero-Engine
|
25539.59
|
28588.85
|
16271.43
|
-36.29
|
|
H&MV
|
2.82
|
36.14
|
194.29
|
6789.72
|
|
Other Equipment
|
11505.65
|
7391.55
|
15352.17
|
33.43
|
|
Total Acquisition Expenditure
|
37048.06
|
36016.54
|
31817.89
|
-14.12
|
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 higher allocation for Make projects
notwithstanding, it is not clear as to what projects the funds are allocated
for. 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 indecisive 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.
Conclusion
The 10 per cent growth in the interim defence budget
although looks impressive from outside, it has a poor outlook on the
modernisation front. Much of the hike in the interim budget is consumed by the
increase in salary, leaving very little to meet the modernisation requirements,
particularly of the Indian Air Force which has lined up several deals for
contract signing. From a long term perspective what is of more relevance is
that given the continuous steep rise in the pay and allowances of the 1.4
million strong Indian armed forces, the pressure on modernisation would be felt
more acutely in the coming years. This is more so, given the given the
prevailing poor economic outlook, increasing subsidy bill, growing demand from
social sector on union budget, and limited fiscal space available with the
government.
India’s Defence Budget 2014-15: - Just the Outline
To allocate Rs 2, 29, 000 crore for defence
One Man, One Pension for soldiers- Rs 1000 crore allocated
for this
To up capital outlay of defence by Rs 5,000 over and above
sum provided in interim budget
To create war memorial and war museum - allocating Rs 100
crore for this
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