Funds crunch to impact key defence projects

By Ajai Shukla

Business Standard, 3rd Mar 13

With the defence capital budget raised by just Rs 7,162 crore --- a 9% rise from the 2012-13 budgetary estimate of Rs 79,578 crore to this year’s allocation of Rs 86,740 crore --- the threat of delay hangs over several major arms purchases, including the Multi-Role Tanker Transport (MRTT) for the Indian Air Force (IAF); the army’s mountain strike corps for the Sino-Indian border; and the navy’s keenly-pursued Project 75I to build six conventional submarines.

Senior government officials defend the token 9% rise in the capital procurement budget by calling it a 25% rise over last year’s revised estimates. Senior military officers reject that logic, pointing out that the revised estimates were artificially lowered through an arbitrary cut of Rs 10,000 crore by the finance ministry (MoF) at the end of 2012, to reduce the fiscal deficit.

Top military officers say that annual inflation in the cost of defence equipment is 15%. This year’s capital budget should have been at least 15% higher than last year’s budgetary estimates. Over and above that, the Rs 10,000 crore slashed last year should have been added on to this year’s allocation, they say.

All three services are scrambling to ensure that key programmes are not impacted. IAF boss, Air Chief Marshal NAK Browne, and Defence Minister AK Antony, both stated at the Aero India 2013 show in Bengaluru last month that the contract for 126 Rafale fighters would be inked with French company, Dassault, in 2013. With 15% of that estimated Rs 75,000 crore contract required to be paid at the time of signing, the Rafale contract alone would account for 13% of the total capital budget. That is why the military argues that the Rs 10,000 crore slashed from last year’s budget should be added on to this year’s allocation.

That leaves a question mark over key IAF procurements. The most immediate is the IAF’s proposed acquisition of 37 more Pilatus PC-7 Mark II trainer aircraft for about Rs 1,250 crore. Last year’s contract for 75 Pilatus trainers, the first of which have been delivered already, specifies an option for 37 more trainers at the contracted price. Now the MoD is pushing for an indigenous trainer, the Hindustan Turbo Trainer – 40 (HTT-40), which Hindustan Aeronautics Ltd (HAL) could be asked to develop and build.

Also on the chopping block is the contract for 12 AgustaWestland AW-101 VVIP helicopters, which the MoD proposes to cancel after Italian investigators claimed that parent company, Finmeccanica, bribed Indian officials to secure. Rs 1,800 crore has already been paid to AgustaWestland (i.e. 45% of the total Rs 4,000 crore price), but the MoD has blocked further payments, including Rs 1800 crore that was to be paid in 2013-14.

Likely to be delayed is the IAF’s ongoing Rs 9,000 crore purchase of six Airbus A330 MRTT aircraft, which was chosen earlier this year over the Russian IL-78. The contract has not yet been inked; so far, Airbus has been chosen as the “preferred bidder,” with whom the contract will be negotiated. But with money in tight supply, IAF officials apprehend that “price negotiations” will be dragged on through 2013. Reportedly muddying the waters is a fresh offer from Moscow for providing the IL-78 tanker on lease to the IAF.

The Indian Army will face its share of cuts, with the biggest target being the “mountain strike corps” for the Sino-Indian border that will be raised in the 12^th Defence Plan period (2012-2017) at a reported cost of Rs 80,000 crore. With this money to be paid out over 7-8 years, the current year could see only manpower recruitment and low-cost acquisitions, with the bulk of the expenditure pushed forward into 2014-15 and after.

Also delayed will be the Future Infantry Combat Vehicle (FICV), a massive Rs 50,000 crore initiative for Indian defence manufacturers to design and build 2,600 FICVs to replace the army’s obsolescent BMP-II infantry carriers. With the MoD unable to choose between the four Indian bidders (L&T, Tata Motors, Mahindras and the Ordnance Factories), this year’s money crunch would result in this decision being pushed into the next year.

A question mark also hangs over the procurement of 155 millimetre artillery guns, which has been sputtering along for over a decade. The MoD has asked the Ordnance Factory Board (OFB) and the Defence R&D Organisation (DRDO) to press ahead with indigenous manufacture. Financial outlays are unlikely to be made this year.

The Indian Navy, streets ahead of the army and IAF indigenous production of defence equipment, is unlikely to face delays in the ongoing projects to build warships in Indian defence and private sector shipyards. However, the fund crunch is likely to impact the conventional submarine building programme, particularly Project 75I. This involves building six submarines with “air independent propulsion” for an estimated Rs 35,000 crore. Although the shortage of submarines is now a critical operational weakness for the navy, there is unlikely to be movement in Project 75I.