The Union Budget 2012-13, presented to the Parliament on March 16, 2012 hiked the defence outlays to Rs. 1,93,407.29 crore (US$ 40.44 billion). This represents a growth of 17.63 per cent over the previous year’s outlays – one of the highest increases in recent years excluding that for 2009-10 when the budget was increased by over 34 per cent, mostly to accommodate the pay hikes caused by the implementation of the recommendations of the Sixth Central Pay Commission.
The increase in the latest defence budget was made possible by the expansionary fiscal policy adopted by the government in general. Further, although the increase looks impressive at first glance, it is not however driven by the modernization needs as much as by manpower needs.
Defence Budget Escapes Economic Slowdown
The new defence budget comes at a time when the performance of the Indian economy is under stress and the prospect of recovery is tenuous. As the Economic Survey 2011-12, presented to the Parliament a day before the Union Budget, puts it, GDP growth is projected at 6.9 per cent in the present fiscal year and at 7.6 per cent in 2012-13. These growth rates, which are significantly lower especially in comparison to the nearly 10 per cent growth registered in 2006-07, has however not forced the government to tighten its purse. Instead, it has resorted to what can be termed as fiscal profligacy, by increasing the overall central government expenditure by a hefty 18.54 per cent, with little regard for the fiscal situation. Consequently, the fiscal deficit, which the Finance Minister had promised in his previous budget speech to reduce to 4.1 per cent of GDP in 2012-13, is now projected to increase to 5.1 per cent. This expansionary fiscal policy has been the prime mover for the large increase in the budget of the defence ministry, which would otherwise have come under severe budgetary pressure if the Finance Minister had chosen a tight budget.
Key Aspects of the Defence Budget 2012-13
Although the latest defence budget has witnessed an increase of 18 per cent, the growth rate is only 13.15 per cent over the revised estimate of the now concluding fiscal year. In other words, the defence budget for 2011-12 has been revised upward by Rs 6,521.32 crore to Rs. 1,70,936.81 crore. However, unlike the revised estimate for 2010-11, in which both the Revenue Expenditure and Capital Expenditure were higher than their respective budget estimates, the revised estimate for 2011-12 shows an increase in Revenue Expenditure (by Rs. 9,576.32 or 10.06 per cent) and decline in Capital Expenditure by Rs. 3,055 (or 4.41 per cent).
The large increase in the defence budget notwithstanding, its impact on various components has been different. From the perspective of resource allocation, while the share of the defence budget in the GDP has marginally increased, its share in central government expenditure has fallen. One noticeable aspect of the new budget is that in comparison to Capital Expenditure, the Revenue Expenditure has increased faster. This growth has however been driven primarily because of the increase in pay and allowance of the armed forces, which has increased by 27 per cent to Rs. 63,182.46 crore, accounting for around 46 per cent growth of the total defence budget.
Shares in Defence Budget
The Army with an approximate budget of Rs. 97,302.54 accounts for 50 per cent of the latest defence budget, followed by the Air Force (Rs. 48,191.16; 25 per cent), Navy (Rs. 37,314.44; 19 per cent), Defence Research and Development Organization (Rs. 10,635.56 crore; six per cent) and Ordnance Factories (Rs. 135.13 crore).
It is noteworthy that compared to the previous year’s budget, Navy is the only service which has increased its share in total defence allocation (from 15 to 19 per cent). The Air Force’s share has decreased the most (by four percentage points), whereas the Army’s share has declined by one percentage point.
Impact on Modernization of Armed Forces: The Devil Lies in the Details
The 15 per cent increase in the Capital Expenditure has resulted in an additional amount of Rs. 10,379.82 crore. Given that most of the Capital Expenditure is incurred on modernization of the armed forces, it is vital to see how the increase would affect each of the services.
It is however to be noted that the three services (Army, Navy and Air Force) account for 94 per cent (Rs. 74,439.95 crore) of total Capital Expenditure in 2012-13, with the Air Force at the top with a share of 38 per cent (Rs. 30,485.35 crore), followed by the Navy (31 per cent or Rs. 24,766.42 crore) and the Army (24 per cent or Rs. 19,188.18 crore).
Of the total Capital Expenditure of the three services, around 89 per cent (Rs 66,459.43 crore) is earmarked for capital acquisition or modernization. These impressive figures do not however reveal the complete story. A closer look at the growth of the modernization budget of 2012-13 would reveal that the focus is entirely driven by the Navy, which has got a 72 per cent hike (to Rs. 24,151.51 crore) in its modernization budget.
The Air Force’s modernization budget has increased marginally (by 0.5 per cent) to Rs. 28,503.9 crore, while the Army’s has declined by three per cent to Rs. 13,804.02 crore.
The marginal increase in the Air Force’s modernization budget and the decrease in the Army’s do not seem to be in sync with their modernization requirements.
This is more so given the pending signing of some of the big-ticket contracts (including the multi-billion dollar Rafael Rafale), and the sharp devaluation of the Indian rupee against the US dollar. As regards the latter, although the rupee has appreciated from its lowest point in mid-December 2011, the present exchange rate, which is around fifty rupees to a dollar, is still high and, if it remains at the same level could further erode the import capacity of the acquisition budget.
Return to Under-spending
When the defence budget 2011-12 was presented in February 2011, it gave an impression that the years of effort put in by the defence ministry to fine-tune its procurement process has finally yielded dividend.
This impression now seems to be premature, as the defence ministry has once again come back to under-spending its capital budget. As the new budget reveals, of the total Capital Expenditure earmarked for 2011-12, Rs. 3,055 crore (4.41 per cent) has been surrendered at the time of revised estimate. The unspent amount could have been much higher if the Navy had not been allowed to overspend its allotted capital budget by Rs. 2801.25 crore (the Air Force and the Army together have surrendered Rs. 5,727.15 crore).
While the surrender in the Air Force’s modernization budget is mostly from the head of ‘aircraft and aero-engine’, in the case of the Army the surrender is from a number of heads, including ‘aircraft & aero-engine’, and ‘other equipments’.
The surrender of funds under such critical heads and of such magnitude not only reflects poorly upon budgetary management and the procurement system, but is also a cause of concern given the huge gap in national military capability and the rapid modernization in neighboring countries, particularly China which is pursuing an unprecedented level of military modernization with a double-digit annual increase in defence expenditure for two decades.
Given this scenario, the least that needs to be avoided by the services is the surrender of allotted funds. The defence establishment including the service headquarters therefore need to introspect and arrive at solutions that expedite procurement in a time-bound manner.
Source: Institute for Defence Studies and Analysis
