Defence allocation: A battle for funds

The defence budget for FY18 has come down to 1.56% of gross domestic product at `2,74,114.12 crore, compared with 1.65% in the current FY17, perhaps the lowest since India lost the border war to China in 1962

Written by Sushant Singh | New Delhi | Updated: March 21, 2017 9:24 am
budget, budget 2018, financial year 2017 2018, defence budget, defence funds, defence india, india military, india news The defence budget for FY18 shows a nominal increase of 5.8 per cent over the last year’s allocation. Illustration: C R Sasikumar

Is there a shortage of funds for the defence ministry? The answer would be yes, if we go by the deposition of defence secretary before the Parliamentary Standing Committee on Defence: “Despite making concerted efforts, MoD (Ministry of Defence) is still short of funds to honour all the commitments of the current year”. It was mentioned in the committee’s report, presented to the Lok Sabha earlier this month.

At Rs 2,74,114.12 crore, the defence budget (excluding pensions of Rs 85,740 crore) for the coming year 2017-18 has come down to 1.56 per cent of the gross domestic product (GDP), perhaps the lowest since India lost the border war to China in 1962. Defence spending had averaged 1.59 per cent of the GDP between 1947 and 1962. At 1.65 per cent of the GDP in the current FY17, it was not expected to go any lower. The standing committee, headed by BJP MP, Major General BC Khanduri (retd) bluntly noted that “in this regard that the defence spending of 1.56 per cent of GDP is way below the 3 per cent mark, which is considered to be optimal and necessary for ensuring the operational preparedness of the Forces. The Committee, therefore, desire that higher allocation, which is in tune with the global trend, should be provided to the Ministry of Defence”.

The defence budget for FY18 shows a nominal increase of 5.8 per cent over the last year’s allocation. If an annual inflation rate of four per cent is assumed, the real increase is only of 1.8 per cent. As noted by the defence secretary, “for 2017-18, the allocation is much less than the projection both for Defence Services as well as the MoD Civil and Miscellaneous Estimates”. Commenting upon the discussions between the defence and finance ministries for additional allocation of funds, the Standing Committee said that it was “distressed to note that no positive response has been received from the Ministry of Finance regarding augmentation of budgetary allocation to the Ministry of Defence”.

The budget is divided into two segments: revenue and capital. Under revenue, provision is first made for salary and other obligatory expenses. At Rs 1,01,460.21 crore for pay and allowances, it is 68.07 per cent of total revenue expenditure and 45.96 per cent of the total defence budget. In the coming FY18, the share of pay and allowances has arisen to 48.72 per cent of the total defence budget. The balance allocation available is distributed to meet the requirement of stores (including ordnance), transportation (of personnel and stores), revenue works and maintenance etc. Allocations are reviewed at Revised Estimates stage to cater for requirements which cannot be met by the budgetary allocations, and invariably always needs more allocation. This allocation is usually made from the capital head of the budget.

Under capital expenditure, also known as modernisation budget, funds are first set aside to meet the projected Committed Liabilities likely to materialise during the year. The remaining allocation is distributed to meet the projected requirement for other items. The procurement plan for capital modernisation schemes may have to be reviewed and re-prioritised, based on available funds. An amount of Rs 86,488.01 crore has been allocated for Capital Expenditure in FY18. However, the Army had projected an amount of Rs 42,485.93 crore for Capital Budget but only Rs 25,246.35 crore has been allocated. The same is the case with the Navy and Air Force which projected a requirement of Rs 27,546.49 crore and Rs 62,048.85 crore but have been allocated Rs 18,603.71 crore and Rs 33,570.17 crore, respectively. As stated by the defence secretary, the defence minister “had also written to the finance minister highlighting the requirement of the funds for capital acquisition” in FY17 but to little avail.

Besides lesser allocations, the finance ministry also imposes cuts on the defence modernisation budget during the revised estimates stage. The finance ministry says that a ceiling on expenditure is imposed as the defence ministry is unable to spend its full allocation of modernisation budget. To overcome this problem, the defence ministry has now mooted a case for a ‘Non-Lapsable Defence Capital Modernization Fund’. The ministry feels that such a fund would help in eliminating the prevailing uncertainty in providing adequate funds for various defence capability development and infrastructure projects. The case was approved by Manohar Parrikar when he was the defence minister and submitted to the finance ministry last month. The finance ministry has been against the institution of such a fund and is likely to reject the defence ministry’s proposal.

It means that a slow pace of expenditure and budget cuts will slow the pace of defence modernisation. A slowing of modernisation means that the defence services cannot achieve the ideal mix of State of Art, current and vintage weapons/equipment, i.e. in the ratio of 30:40:30. The Army is particularly badly affected. For example, the defence ministry told the committee that “the reduced allocation will impact cash outgo in committed payments. Deferment of these payments will impinge on budgetary allocations in next financial year. No funds are available for initial advance payment of medium-range surface-to-air missile (MRSAM) (Rs 1,579 crore) which has been forwarded to Cabinet Committee on Security (CCS) for approval”.

The army also told the standing committee that “for the capability development along the Northern borders, there was a requirement of around Rs 64,000 crore over the next eight years. We have been allotted so far just around Rs 4,000 crore. If the balance money has to come from the Budget allotted to the Army, it would be at the expense of the existing capabilities. The impact of this has been that the reduced budget has not catered for the inflation, let alone the modernisation requirements. Therefore, we have had to spend from the budget allotted for the normal functioning of the Army. I would not be wrong entirely to state that this would affect the defence preparedness in the days ahead”.

The situation in the navy is no better. In FY18, the allocation is Rs 18,000 crore in the capital budget whereas the committed liabilities itself is to the extent of Rs 22,000 crore. This means that it has money for any fresh procurement this year. The air force has been allocated only Rs 4,000 crore for new schemes, which is unlikely to be of great help as aircraft and other equipment cost a lot.

The situation looks grim but it is not hopeless. After all, the finance minister Arun Jaitley, who also holds the additional charge of the defence ministry, told the Lok Sabha last week that “Any critical requirement of the forces will not be compromised with, even if we have to cut expenditure somewhere else.”

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  1. I
    Ivan
    Mar 21, 2017 at 5:02 am
    Maybe this is why Mr Parrikar was happy to leave Defence Ministry. The service chiefs would be hounding him all the time for money.
    Reply