To take your ideas to Policymakers, Join the Campaign of #PolicyPulse Write to feedback@policypulse.com

Shrinking Capital for Upgrading Capability

This year’s budgetary provisions vis-a-vis defence provide little room to hope for desired level of adding new equipment and weaponry, writes C Uday Bhaskar

Policy Pulse
Publish Date: Mar 22 2016 2:41PM | Updated Date: Mar 22 2016 2:52PM

Shrinking Capital for Upgrading CapabilityFile/ photo

This year’s budgetary provisions vis-a-vis defence provide little room to hope for desired level of adding new equipment and weaponry, or updating technology for over a million personnel of the armed forces, writes C Uday Bhaskar 

 
India announced its annual defence outlay for the financial year 2016-17 on February 29 and this was followed a few days later by a similar announcement from Beijing (March 5) and the contrast is instructive. The   estimate of India’s total defence spending for all sectors – including pensions – for this year (2016 -17) is pegged at Rs 342, 921 crore – which is US $ 50.3 billion. The Chinese defence budget was increased by 7.6 percent from the previous year to US $ 146 billion – or almost three times that of India.
 
However to get a more holistic context of  Beijing’s military allocation, it may be useful to note that for financial year 2016, the USA has pegged its defence outlay at US $ 534 billion – or about three and a half  times that of China. Hence contextualising the Indian defence outlay in the larger global backdrop is a relatively more meaningful approach to get a sense about the efficacy of the effort being made by Delhi.
 
India maintains a manpower intensive military and the total personnel strength is about 1.3 million of which the Army alone is in excess of one million. The Air Force is the second largest service with about 170,000 personnel and the Indian Navy is the smallest service with a personnel strength of about 60,000.  Consequently, the revenue expenditure of the Indian military (pay and allowances, pensions and annual training and establishment costs) is relatively higher than it is for the capital component – the latter being the allocation for modernisation and new inductions.
 
With pay, allowances and pensions steadily increasing, as also the general inflation index that adds to standing costs – for instance food and fuel – the gap between revenue and capital allocation is increasing with the latter shrinking. Currently the OROP (one rank one pension) issue is likely to be implemented soon – and this will also add to the total defence outlay. Here it must be noted that apart from the uniformed personnel – the large number of civilians who are part of the Defence Ministry – including the DRDO, defence PSUs and other allied cadres are also part of the pension bill.
 
So if on one hand the gap between capital and revenue is growing – as a percentage of the total defence budget in favour of the latter – there is another fiscal context that throws more light on the co-relation between India’s defence allocation and the actual accretion of tangible military capacity.
 
Some statistics are revealing. The numerical summary is as follows against the new budgetary format of classifying fiscal allocations for the Defence Ministry. The total budget estimate (BE) for the Ministry of  Defence (that  caters to the  civilian bureaucracy, armed forces, the DRDO, ordnance factories and pensions) for FY 2015-16 allocated by the FM in end February 2015 was Rs 3,10,079 crore. This was the expected expenditure for the financial year that will end on March 31, 2016.
 
It is instructive to note that the revised expenditure (RE) that is the amount actually spent in FY 2015-16 is Rs 2,93,579 crore. In other words, a sum of Rs 16,500 crore was unutilised from the overall BE allocation. Was this necessitated to balance the fiscal deficit? One can only speculate at this stage.
 
The disaggregation is revealing.  The BE for the capital head in FY 2015-16 was Rs 98,175 crore and in the documents tabled on February 29 – it was indicated that the RE for capital expenditure was Rs 85,112 crores. In essence – about Rs 13,000 crores (almost US $ 2 billion) was unspent and this at a time when the Indian military is in dire need of inventory modernisation and major platform induction.
 
The capital component is the critical fiscal allocation for capacity building of the military and the trend lines again are instructive – albeit in a negative manner. If one were to review just the last three years – the following figures are relevant. The budget presented on Monday (Feb 29) provided the details of the actuals for FY 2014 – 15.  The actual defence expenditure was Rs 2,01,929 crore – against a BE of Rs 2,29,000 crore. (This classification does not include pensions – which the latest budget does in the new format.)
 
In that FY – namely 2014-15, the actual capital expenditure was Rs 83,074 crore. In the following fiscal year – ie 2015-16, the capital component at the BE stage was Rs. 98,175 crore – and this was revised – hence the RE was revealed (on Feb 29) to be Rs 85,112 crore. And for this year – i.e 2016-17, the capital component of the defence allocation is budgeted – hence BE – is Rs. 89,208 crores.
 
What does this mean in reality? India has the dubious distinction (as per 2015 data) of being the world’s largest importer of arms – so the capital component of the defence budget is being used to pay for arms that are being imported. This has to be paid in foreign exchange at the prevailing rate and hence indexing the capital component of the Indian defence budget to the US dollar is again revealing.
 
The total capital component in FY 2014-15 works out to US $ 13. 9 billion; the RE of 2015-16 is US $ 13. 6 billion; and if the Indian rupee does not slide further against the US dollar – then the amount allocated as BE in the current fiscal year will be US $ 13.03 billion.
 
In other words, the fiscal ability of the Indian Defence Ministry to redress military inventory gaps (artillery guns, fighter aircraft and submarines for example) is shrinking in terms of forex value.   
 
So at a time when the Indian Air Force for example is clamouring for new fighter aircraft to deal with the challenges it has to face – or the Navy is looking for new submarines to replace old platforms – or the Army is still waiting for a replacement to the Bofors gun – the value of the capital component of the Indian defence budget is shrinking and this poses a very complex challenge for Defence Minister Manohar Parrikar and for realisation of the 'Make in India' vision. – The writer a retired Commodore is a foremost commentator on strategic and security matters. He is also Director, Society for Policy Studies.