Indian Defence Budget 2013-14

While presenting the Annual Budget to the Parliament on February 28th, India’s Finance Minister hiked the defence allocation by 5.3% to $37.4 billion to be spent during the financial year 2013-14 starting from April 1st.

6th May 2013


Indian Defence Budget 2013-14

Dr Laxman Kumar Behera / New Delhi

While presenting the Annual Budget to the Parliament on February 28th, India’s Finance Minister hiked the defence allocation by 5.3% to $37.4 billion to be spent during the financial year 2013-14 starting from April 1st. The modest increase in the latest defence budget comes after a massive cut of $2.7 billion in the previous year’s allocation and in the wake of a faltering economy and an imminent general election, scheduled to be held next year. However, the defence forces - which are in the midst of a massive modernisation process - may find the new budget inadequate to sustain the momentum and may be forced to slow down their acquisitions.

Economics and Politics of Defence Budget 2013-14
The main reason for only a modest increase in the defence budget is the economic slowdown and the government determination to contain the fiscal deficit. Just a few weeks before the defence budget was announced, the Central Statistical Organisation (CSO), the government’s official record keeper, pegged the growth of gross domestic product (GDP) for 2012-13 at 5% - which is far below the government’s initial projection of 9% (+/- 0.25%). Although the government has now put on a brave face, saying that the economy is expected to grow by 6.1-6.7% in 2013-14, the growth rate, if achieved, would still be lower than the peak of 9.3% reached a few years before.

With the economy performing below the expectation, the government’s revenue has come under sharp pressure, forcing the Finance Minister to tighten the purse. The austerity drive has further been necessitated by a widening fiscal deficit and current account deficit (CAD), fuelling concerns among the investors. International rating agencies (such as Fitch) have threatened to reduce India to junk status - which would make it quite difficult for the government and corporate sector to raise foreign capital. The fear of the downgrade has been so great that the Finance Minister has not only revised budgeted expenditure for 2012-13 to contain the fiscal deficit at 5.2% but has gone a step further to reduce the deficit level to 4.8% in 2013-14. Moreover, he has also laid down a fiscal consolidation path whereby the fiscal deficit is to be reduced by 0.6% every year till it becomes 3.0% of GDP in 2016-17.

While the austerity measures have slowed down the overall level of government expenditure, its impact on defence has however been more than one would assume. As the budget documents show, defence expenditure has taken a larger share to accommodate the fiscal pain. This is evident from the growth rate of both the annual budget and the defence budget. While the former has increased by 12%, the increase in 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 relatively larger share for other government expenditure heads. This is not surprising given that the latest annual budget is the last full-fledged budget before the country goes for a general election in 2014 to elect the next government. A degree of ‘populism’ within the limited fiscal space was expected and the finance minister has not lost sight of that. However he has tried to take the Defence Minister, a key member of the Cabinet, into full confidence - which is evident from his showering of praise on him for being ‘most understanding’. The Defence Minister on his part has also shown a degree of flexibility by complementing the Finance Minister for a ‘fair’ job, given the ‘difficult economic situation both at home and abroad.’ It is worth noting that the same defence minister had voiced a degree of concern last year even after getting a 12% hike in his ministry’s budget.

Downward Revision of Budget 2012-13
Although the defence budget 2013-14 has been increased by a modest 5.3%, the growth rate is a hefty 14.1% over the revised allocation for 2012-13. The difference in these growth rates is due to cut of $2.7 billion (or 7.7%) from the original allocation for 2012-13. Of the total reduction, 67% is accounted for by capital expenditure (most of which is spent on modernisation) which has been cut by $1.8 billion (12.6%). Of the total reduction in capital expenditure, 65% is accounted for by the Navy whose modernization budget has been reduced by $1.2 billion (26.9%), partly due to slippage of delivery of aircraft carrier INS Vikramaditya by almost one year to late 2013. The revenue expenditure (or the running or operating expenditure) on the other hand is revised downward by $0.9 billion (4.3%).

Share of Army, Navy, Air Force, DRDO and OFs
India’s official defence budget is meant for five main organisations that include the three armed forces (Army, Navy and Air Force), the state controlled Defence Research and Development Organisation (DRDO) and the 40-odd Ordnance Factories (OF). Among the organisations, the Army with a budget of $18.3 billion accounts for 49% of total 2013-14 defence budget. The Air Force follows the next with a budget of $10.6 billion (28.2 per cent). The Navy, the smallest service among the armed forces, has a budget of $6.7 billion (17.8%). The allocation for DRDO’s 50-odd laboratories is pegged at $1.9 billion (5.5%); the Ordnance Factories have a reduction of $0.1billion. Among the armed forces, the Air force has received a lift of 19.3% over the previous year’s allocation, whereas the Army has only a 2.5% hike. On the other hand, the Navy’s budget has been cut by 2.6%.

Impact on Modernisation
The Indian armed forces are on a massive modernisation process. Besides the existing ones, contracts worth several billion dollars are expected to be signed in the current financial year. Among the services the Air Force - the most capital intensive service - is expected to sign the much awaited $15-20 billion contract for 126 French Rafale fighters. The first 18 will come in fly-away condition from France and the remaining 108 will be license manufactured by India’s state monopoly Hindustan Aeronautics Ltd (HAL). Besides Rafael jets, the air force has already selected the prospective supplies 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 the $1.0 billion contract for 16 multi role helicopters which is at advance stage of vendor selection. The Army is hoping that its much delayed artillery modernisation programme finally gets going in 2013, with the contract in place for 145 units of BAE Systems’ M777 155 mm/39 calibre light weight howitzers ($647 million). Besides, the army is also expected to choose between the Kamov Ka-226T and Eurocopter AS 550 C3 Fennec for its 197 helicopter tender - valued $550 million (the helicopter programme has however run into controversy with MoD reportedly deferring the decision pending an investigation into kickback allegations).

Given the long-list of new acquisitions, the question is how much the new defence budget caters to it. It is noteworthy that most of India’s defence modernisation budget is spent on ‘committed liabilities’ (contracts already signed) with little money available for the ‘new schemes’ (or new contracts). For instance for the years from 2011-12 to 2012-13, the overall ratio between the committed liabilities and new schemes stands at roughly 85:15. Assuming the same ratio for the new allocation, total available funds for the new schemes would be little over $2.0 billion, which is probably enough for the first stage payment towards the Rafale deal.

This means there is a very little money available for new schemes including of the Air Force, which despite having a 30% hike in its modernisation budget would still need more money to sustain its modernisation drive. The attack and heavy lift helicopter programmes and the tanker deal may be postponed, if additional money does not come forth. For the Army and Navy, the resource constraint is more severe, with the negative growth in their respective modernisation budgets. Between the latter two, the Navy is likely to face the resource crunch more. A part of its last year’s modernisation budget, which remained unutilised due to the postponement of delivery of Admiral Gorshkov, would be paid this year. Considering that Navy has already placed orders for construction of over 40 ships (for which substantial part of its modernisation budget will be used), this leaves little money for signing new contract.

Service Modernisation Budget (US$ Billion) % Growth
Army 2.45 -3.46
Navy 4.31 -2.79
Air Force 6.80 29.98
Total 13.56 11.13

No Headway in ‘Make’ Projects
In one of the major policy measures taken in recent time, the ministry of defence incorporated a ‘make’ provision in its defence procurement procedure (DPP) of 2006. The provision is intended to stimulate domestic defence industry, by way of placing contracts on local enterprises and funding the developmental cost up to 80%. Over six years down the line the ‘make’ provision is still in the policy domain with no major contract in place to make it effective. This is evident from the utilisation and allocation of resources for the ‘make’ projects. Of the total allocation of $16.4 million made in 2012-13, not a single pie has been utilised so far. Moreover, the allocation has been further reduced to a mere $0.2 million 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 indentified for development by the domestic players.

Widening Gap with China
Just days after India announced its $37.4 billion defence budget, China announced an 11% hike in its 2013 defence budget which now stands a staggering total of $115.7 billion - which is second largest military budget after the US’s (to many outside observers, China’s actual defence spending is much more than the official estimate. The US Department of Defence in its annual review of China’s military capability estimated Beijing’s 2011 defence spending at $120-180 billion which is almost twice bigger than Beijing’s official figure of $91.5 billion for that year). From the Indian perspective what is worrisome is not only the magnitude of difference between two countries’ defence budget but also the pace at which China has sustained its military budget in the past two decades or so. According to the Stockholm International Peace Research Institute (SIPRI), Beijing’s military expenditure in real terms has grown by 620% between 1990 and 2011. In comparison, India’s military spending has grown by 152%. Consequently, the gap between the two countries’ military spending which was almost negligible in 1990 has been widened by a factor of over three in favour of Beijing. Consequently while China has a military capability which is increasingly becoming state of the art, India is still struggling to replace a vast majority of weapon systems procured in the seventies and eighties.

Future Outlook
This is not the first time that the defence budget has been subject to a modest growth. In 2010-11 the budget was hiked by a mere 4%. However in that year, the actual expenditure surpassed the budgetary allocation by 5%, and the next year saw a hefty 12% 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 the 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% in 2010-11, the growth in the coming years is not that encouraging although some better results are 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%.

GDP growth of less than seven per cent combined with fiscal consolidation path that the Finance Minister has articulated in his budget speech means a lot of pressure for the defence ministry - whose plan of expenditure for the 12th five year plan (2012-2017) is based on past GDP growth of 8-9%. Given this, a mismatch of huge proportion is expected in the coming years between the allocation to and expectation by the defence ministry. One of the paths that the defence ministry is now expected to do is to rework its future expenditure based on the current reality. This would mean a bit of reprioritisation of its main items of expenditure, which is easier said than done given the absence of an institutional mechanism to do the exercise in a holistic manner. The Chief of Defence Staff (CDS) which was supposed to undertake this vital task is yet to be set up, although more than a decade has been passed since it was recommended by the high-profile Group of Ministers in 2001.
 

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