INDIA’S DEFENCE BUDGET 2011-12

India’s federal budget 2011-12, presented to the Parliament in February, increased the defence allocation to US$ 36.1 billion. The allocation, to be spent in India’s current fiscal year spanning from April 2011 to March 2012, is a 12 per cent increase over the pervious budget. While announcing this spending increase, the Finance Minister also promised that “any further requirement for the country's defence would be met”. The Ministry of Defence A K Antony - whose budget had grown by a mere four per cent in the previous year - has expressed satisfaction over the new allocation, saying: "By and large we are very happy about the Budget because apart from the allocation, the Finance Minister has said that if the defence needs more money, there won’t be any problem. On the whole, we are happy with the assurance that if we want more, we will get more money.”

3rd May 2011


 

 INDIA’S DEFENCE BUDGET 2011-12

India’s federal budget 2011-12, presented to the Parliament in February, increased the defence allocation to US$ 36.1 billion. The allocation, to be spent in India’s current fiscal year spanning from April 2011 to March 2012, is a 12 per cent increase over the pervious budget. While announcing this spending increase, the Finance Minister also promised that “any further requirement for the country's defence would be met”. The Ministry of Defence A K Antony - whose budget had grown by a mere four per cent in the previous year - has expressed satisfaction over the new allocation, saying: "By and large we are very happy about the Budget because apart from the allocation, the Finance Minister has said that if the defence needs more money, there won’t be any problem. On the whole, we are happy with the assurance that if we want more, we will get more money.”

DEFENCE BUDGET ESCAPES AUSTERITY MEASURES


Before the budget was announced, many in India had feared a cut in the defence budget in view of the government’s resolve to put India’s overall fiscal situation on a sounder footing. Analogies were being drawn to the US, UK and some other advanced countries which have taken concrete measures to reign in their defence budgets to overcome the debt burden on their economies. However, contrary to the fears of a cut, the defence allocation proved to be immune. The growth rate is in fact one of the highest in recent years if one excludes the year 2009-10 when the budget was increased by a one-off 34 per cent mainly to accommodate the pay rise of the 1.3 million strong armed forces.The double-digit growth in the defence budget is primarily because of the impressive turnaround of the economy from the effects of the global financial crisis. The improved performance of the economy to the pre-crisis, nine per cent growth path has given the finance ministry extra hope of stepping up its revenue collection, while keeping the fiscal deficit in check. The government’s net revenue is expected to rise by nearly 16 per cent to $173.3 billion in the 2011-12, mainly on account of increase of tax revenue which is projected to grow by 24 per cent to $145.8 billion. The bounce of expected revenue collection has thus made it possible for the Finance Ministry to go simultaneously on the twin path of fiscal consolidation and expanding its total expenditure. The fiscal deficit which was as high as 6.8 per cent in 2008-09 is projected to come down to 4.4 per cent in 2011-12. The progress on both sides – revenue collection and fiscal deficit - has in turn benefited many central ministries and departments including the MoD. Moreover, if the growth momentum of Indian economy is sustained, there is likelihood that the Armed Forces - which are on a mass modernisation drive - will continue to get higher allocation in the coming years.

 

UNDERSTATING INDIA’S DEFENCE BUDGET


India has a unique way of presenting its defence budget. Its budget is the summation of allocations for the defence services, which include three armed forces (Army, Navy and Air Force), Defence Research and Development Organisation (an umbrella organisation consisting of 50-odd laboratories engaged in defence-related research and development) and 40-odd Ordnance Factories. The budget however does not include defence pension (which used to be part of the defence budget till late 1990s) and Civil Estimates of the Ministry of Defence. The later consists of allocations on MoD Secretariat, Defence Estates Organisation, Coast Guard Organisation, Jammu and Kashmir Light Infantry (JAKLI), Armed Forces Tribunal and Canteen Stores Department among others. In the new Budget, defence pension accounts for $7.5 billion and the Civil Estimate $0.9 billion. If these two heads of expenditures are included, then the total budget available for Defence Ministry stands at $44.4 billion.In addition to the above heads of expenditure, there are also some other areas which are related to defence but do not come under the Ministry of Defence’s purview. Rather they are distributed in other central departments/ministries. The bulk of these expenditures come under the Ministry of Home Affairs’ (MHA) Police fund, majority of which is spent on paramilitary forces (such as Central Reserve Police Force, National Security Guard, Border Security Force, Indo-Tibetan Border Police, Assam Rifles and Sashastra Sima Bal), and on boarder management and costal security. In 2011-12, the Police Budget has been increased by 32 per cent to $8.7 billion. The Ministry of Road Transport and Highways (MoRTH), which is responsible for construction of civil road infrastructure also handles some of the defence and strategic infrastructure through its budget for Border Roads Development Board (BRDB). The BDRB although gets budget from the MoRTH, for all practical purpose, it functions under the administrative control of MoD. The Board is responsible for developing strategic roads in the border areas close to Pakistan, China and Bangladesh. In the latest budget, its allocation has been pegged at $0.7 billion.Although the above expenditures are not formally part of India’s defence budget, they are still transparent, easily distinguishable and available in the public domain. However there are two types of expenditures which are completely firewalled from the public. These are related to nuclear weapon and military space programmes. The budget for the nuclear programme is clubbed in the budget of the Department of Atomic Energy (DAE) – similar to the US practice - while the budget for military space programme is included in that of Department of Space (DoS). Given the secrecy, it is virtually impossible to separate the military component from the budgets of these two organisations. Nonetheless, for the new financial year, DAE’s total budget has been increased by 10 per cent to $2.1 billion and that of DoS by 15 per cent to $1.5 billion.

 

REVENUE EXPENDITURE & CAPITAL EXPENDITURE


India’s defence budget is broadly divided into two categories: Revenue Expenditure and Capital Expenditure. The Revenue Expenditure mainly caters to the running or operating expenditure of the defence services. The major items under this head of expenditure includes, Pay and Allowances of the Defence Services, Stores and Equipments, Maintenance of Buildings and Installations, etc. The Capital Expenditure on the other hand, is spent on creating assets of long-term nature. Its most crucial part is the acquisition expenditure which caters to procurement of hardware such as aircrafts, tanks, missiles, radars, naval ships, etc. Historically, the Revenue Expenditure accounts for the bulk of the defence budget, although its share has come down sharply over the years. For instance, in 1990-91 the Revenue-Capital ratio was 70:30. The ratio has vastly improved in favour of Capital which now accounts for 42 per cent of the total defence budget. This reflects New Delhi’s greater focus on modernisation of its armed forces. In the new budget, the Revenue Expenditure totals $20.9 billion and the Capital Expenditure $15.2 billion.

 

SHARE OF SERVICES


In 2011-12, the Army with an approximate budget of $18.3 billion accounts for 51 per cent of total defence budget, distantly followed by Air Force (28 per cent, $10.1 billion), Navy (15 per cent, $5.5 billion), Defence Research and Development Organization (6 per cent, $2.2 billion), and Ordnance Factories ($0.2 billion). The majority share for the Army is because of large scale provision under Revenue Expenditure - which is primarily driven by pay and allowances. In terms of Capital Expenditure, the Air Force with a budget of $6.6 billion is the most capital-intensive. Of it total Capital Expenditure, around 94 per cent (or $6.2 billion) is earmarked for procurement. The Army follows next with a $4.2 billion Capital Expenditure, of which $3.1 billion is earmarked for procurement. The Navy’s Capital Expenditure is pegged at $3.2 billion, of which $2.9 billion would go for acquiring weapons and platforms.

 

FULL UTILISATION OF CAPITAL EXPENDITURE


For a long time the Defence Ministry has been witnessing a great deal of difficulty in spending its full budget, especially the capital portion which is meant for procurement of hardware for the armed forces. As a result, the progress on modernisation has been way behind the desired level and funds amounting to billions of dollars have been surrendered at the end of each fiscal year. For instance between 2000 and 2009, the Defence Ministry gave back a cumulative total of $10 billion to the exchequer. Although the Defence Ministry has taken some key measures, by way of streamlining its procurement procedures, full utilisation of the allocated funds still continues to be a major challenge.The new defence budget however reveals that the MoD has spent $183.6 million more than previous year’s capital allocations. On the face of it, the utilisation of capital fund is credible given Ministry of Defence’s past record of surrendering funds, as explained earlier. However a closer examination of the budget reveals that the spending has not been done as intended in the original budget, leading to underutilisation in some areas and overutilization in others. For instance, 30 per cent of allocation under the head of ‘Other Equipment’ (which caters to procurement of missiles, radars and other electronic items) has remained underutilised, where as the allocations under the heads of ‘Air-craft and Aero-Engine’ and ‘Naval Fleet’ have been over-utilised by 24 per cent and 11 per cent respectively. It is however not clear whether the overspending is necessitated due to change of plan midway, or because of parking of funds with the state-owned enterprises so as not to surrender funds. As regards parking of funds, there have been several occasions in the past, where the MoD deliberately transferred funds in excess of annual budgetary provisions to its production agencies. The Comptroller and Auditor General of India (CAG), the supreme national auditor of government accounts, in a recent report also “noticed instances of parking of funds with Defence Public Sector Undertakings,” which function under the administrative control of the Defence Ministry. In this context, the efficiency of the MoD lies not only in spending the capital head within the stipulated time period but also spending it as per the original plan.

 

IMPACT ON MODERNISATION


India’s armed forces are on a modernisation drive. The shopping list includes virtually all kind of weapons and platforms, including fighter aircrafts, armoured vehicles, radars, missiles and warships. The most pertinent question is whether the latest budget makes the necessary provisions to meet these requirements. The answer to the above question however does not lie in one year’s budget figures, as capability build-up is a long-drawn process requiring a steady and sustained level of funding on a continuous basis. From the perspective of the new defence budget, there has been a modest attempt to step up the modernisation process. This is evident from the size of the capital acquisition budget of the three armed forces, which has been increased by more than 25 per cent to $12.2 billion. Assuming that 60 per cent of the capital acquisition budget goes for committed liabilities (on account of contracts already signed), the MoD would have around $4.9 billion to pay for new acquisitions including the Medium Multi-Role Combat Aircraft (MMRCA) (for Air Force), C-17 Globamaster (Air Force), and advanced helicopter (for Air Force and Army), and patrol vessels (for Navy), which are up for contract signing in the present fiscal year. If these contracts go off well, it will provide a huge boost to the modernisation process.

 

SECURITY THREATS & ADEQUACY OF DEFENCE BUDGET


Although India enjoys a geo-strategic advantage with respect to continental Asia and the vital Indian Ocean, it nonetheless faces a multitude of security threats from both within and outside. The growing menace of the Left-wing extremism has been a major concern in recent years, requiring extra efforts from the armed forces and other security agencies which are already engaged in battling Pakistan-supported proxy-war in Jammu and Kashmir and various militant movements in the north-eastern states. The internal security challenges have further been compounded by the external threats poised by rising military capability of nuclear neighbours, instability in India’s immediate and extended neighbourhood and growing piracy in the Indian Ocean.Among the all the external threats, China and Pakistan pose the most critical challenges from India’s long-term security point of view. India has already fought five wars - four with Pakistan in 1947-48, 1965, 1971, and 1999, and one with China in 1962. Despite several efforts of improving the bilateral ties with Islamabad and Beijing, the relationship with these countries still continues to be strained and volatile. Although India has an overwhelming conventional military superiority over Pakistan, it lacks credible deterrence against China, which has made giant stride in military capability, supported by rapid increase in defence spending. Just days after India declared its $36.1 billion defence budget, China announced its $91.5 billion official budget (China actual defence spending is widely believed to be considerably higher than its official budget). The size and scale of Chinese defence spending and the consequent progress on military modernisation has been a major concern among Indian security establishment. There is growing demand among analysts that India needs to step up its defence allocation to meet wide range of security challenges in general and the Chinese threat in particular.In the above context, the vital question is whether New Delhi’s defence spending is enough to meet the requirements of its armed forces. A close examination of India’s military balance vis-à-vis its stated requirements does not generate much confidence. As pointed out by the Parliamentary Standing Committee on Defence and Comptroller and Auditor General of India, there exists a vast gap in India’s existing military capability. The Indian Air Force, the 4th largest air arm in the world is battling with dwindling combat strength from the authorised level of 39.5 squadrons to less than 30. The Indian Navy, the 5th largest naval force in the world is presently fighting the grim prospect of retaining only 61 per cent, 44 per cent and 20 per cent of the envisaged force levels for frigates, destroyers and corvettes, respectively. Its submarine force level is also depleting at a faster rate and is presently 65 per cent of the force level envisaged in 1985. The Army’s situation is no better. Its artillery force is mostly consists of vintage 130 mm guns procured in 1960s. Successive replacement efforts have been thwarted by some reason or other.The sub-optimal force level is primarily because of the resource constraints, amply evident by the dwindling share of defence in the country’s gross domestic product (GDP). The latest defence budget amounts to just 1.8 per cent of India’s GDP, compared to 3.1 per cent in mid-Eighties and the global average of 2.5 per cent. The declining share of defence in GDP echoes India’s paltry spending on defence till the early 1960s, which was blamed for India’s lack of defence preparedness leading to humiliating defeat in the 1962 war with China. Moreover the present allocation is far below the 3.0 per cent of GDP which the Prime Minister had assured to provide to the defence forces way back in 2005. Given that resources constitute the single most crucial input for augmenting military capability, and present gap in country’s force level, there is a need to augment military spending to higher level – ideally to 3.0 per cent of GDP as promised by the Prime Minister
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FUTURE OUTLOOK


India is on a defence modernization drive, replacing and acquiring weapons/platforms for its armed forces to meet the myriad security challenges facing the country. The government buoyed by an unprecedented economic growth averaging nearly 9.0 per cent per year, is in a more comfortable situation to provide the required resources. If the current momentum of defence budget growth is sustained, New Delhi’s defence spending will reach around $100 billion by the end of the next decade (that is by 2021-22). By then its total cumulative defence acquisition budget will exceed $220 billion, or an average increase of $20 billion per year. This will not only provide the armed forces with the resources for modernization, but will provide significant market opportunities for industry - both within India and from outside.

 

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