Defence budget analysis: High costs, running expenses, leave little for defence equipment

By Ajai Shukla

Business Standard, 24th July 14

The Rs 2,29,000 crore that Finance Minister Arun Jaitley allocated for defence in the Bharatiya Janata Party (BJP)-led government’s first budget on July 10, a mere 2 per cent rise over the last government’s interim allocation in February, would have disappointed those who were reading too literally the BJP’s manifesto and nationalist rhetoric in the run up to the general election in May.

This would also have disappointed the military, which was allocated just 80 per cent of its projected requirement of Rs 2,85,202 crore.

The modest allocation would suggest that the government anticipates a benign security environment in the region, notwithstanding the United States and North Atlantic Treaty Organisation troop drawdown in Afghanistan by end-2014.

Instead of placing defence allocations on a trajectory towards 2.5-3 per cent of Gross Domestic Product (GDP), which national security hard liners have argued for, Mr Jaitley allocated just 1.78 per cent of GDP, only marginally higher than the interim budget’s 52-year low of 1.74 per cent. This will amount to 12.75 per cent of the central government spending this year.

In fact, the defence spending actually amounts to 2.55 per cent of GDP if one takes into account several expenditures that are not included in the defence budget, but which most countries count as defence spending.

These hidden expenditures includes (see Chart 1) Rs 3,639 crore allocated to the defence ministry itself (Demand No 20); and Rs 51,000 crore earmarked for defence pensions (Demand No 21). It includes Rs 8,737 allocated to the department of atomic energy (Demand No 4), which develops, builds and stores India’s nuclear weapons. It includes Rs 37,322 crore spent on border forces and counter-insurgency forces like the Border Security Force, Indo-Tibet Border Police, Assam Rifles and the Assam Rifles (Demand No 55). Finally, it includes Rs 6,673 crore allocated to the Border Defence Management Board that builds strategic roads for the military (Demand No 83).

Counting these allocations, defence expenditure is actually Rs 3,36,371 crore, a full Rs 1,07,371 crore higher than the stated allocation. This amounts to 2.55 per cent of GDP.

Of the stated budget (see Chart 2), the army gets roughly half (49.5 per cent); the air force almost a quarter (23 per cent); while the remaining quarter is shared between the navy (16 per cent), the Defence R&D Organisation (DRDO), the Ordnance Factory Board (OFB) and others.

The big gainer this year is DRDO, which has seen funding rise from about 5 per cent to 6.5 per cent of the defence budget. Its capital budget has been raised by almost 60 per cent, to Rs 9,298 crore. This signals strong ministry support to indigenisation projects under way, such as the Tejas Mark II fighter; the Arjun Mark II tank; the Sagarika submarine launched ballistic missile (SLBM) and a major new project to develop a 155 millimetre/52 calibre towed howitzer.

Worryingly the modernisation budget (Rs 94,588 crore) remains significantly lower than the revenue budget (Rs 1,34,412 crore), with a capital-to-revenue ratio of just 41:59. The army spends just 18 per cent of its budget on equipment. In contrast, the navy and air force spend a healthy 61-62 per cent of their budget on capital expenditure, i.e. new warships, aircraft, weapons and ammunition.

The army’s massive manpower accounts for its high revenue spend, and this is set to grow. Defying the global trend of army downsizing, two recently raised mountain divisions and a planned mountain strike corps will raise the army’s numbers from 12 lakhs to almost 13 lakhs.

The Parliamentary Standing Committee on Defence figures reveal that the army’s equipment modernization is steadily falling. In 2008-09, the army spent 27 paisa of each rupee on capital expenditure. This fell to 24 paisa in 2009-10; 23 paisa in 2010-11; 20 paisa in 2012-13 and just 18 paisa in the last two years.

This army’s payroll of Rs 65,808 crore this year (see Chart 3) will consume almost 60 per cent of its entire budget, leaving just one-third that amount for new equipment. This is so even after doubling the army’s capital allocation from Rs 10,749 crore last year to Rs 20,665 crore this year (see Chart 4). As the cost-of-living index rises, so too will military salaries; the seventh pay commission will raise them even higher.

Aircraft acquisitions are also lagging, due to the air force’s dependence on expensive foreign purchases. Its capital budget is down from Rs 36,017 crore in 2013-14 to Rs 31,818 crore this year. With most of this pre-allocated for equipment bought in preceding years, little is left for buying the Rafale fighter, which the defence ministry is negotiating with French vendor, Dassault. With the Rafale’s contract value estimated at Rs 80-1,00,000 crore, the signing advance would be Rs 10-15,000 crore. Additional allocations would be needed for the contract to be signed this year.

The navy’s capital allocation has been raised from Rs 19,600 crore in 2013-14 to Rs 22,312 crore this year. A major capital procurement this year will be the Rs 45,000 crore contract for seven Project 17A stealth frigates that two public sector shipyards will build --- Mazagon Dock Ltd, Mumbai; and Garden Reach Shipbuilders and Engineers, Kolkata.

In his budget speech, Mr Jaitley also announced that the FDI cap in defence would be raised from 26 per cent to 49 per cent. While adding a reformist patina to an otherwise unremarkable defence budget, this was really a policy announcement, unconnected with defence allocations.

================================

Chart 1: Defence spending outside the budget

Ministry/Head	2012-13 (Actual)	2013-14 (RE)	2014-15 (BE)
Ministry of Defence (Demand No 20)	3383	3742	3639
Defence pensions (Demand No 21)	43368	44500	51000
Dept of Atomic Energy (Demand No 4)	6317	6969	8737
Border security and counter insurgency (Demand No 55)	28513	33446	37322
Border roads agencies (Demand No 83)	3291	6572	6673
Spend outside defence budget	84872	95229	107371
Spend within defence budget	181776	203672	229000
Actual defence spend	266648	298901	336371
Gross Domestic Product	10113281	11320463	12876653*
Def budget percentage of GDP	1.79%	1.79%	1.78%
Def spending percentage of GDP	2.60%	2.60%	2.55%

Chart 2: Budget share breakdown

	Revenue	Capital	Total	Share of the budget	Revenue to Capital ratio
Army	92669	20665	113334	49.5%	82:18
Navy	13976	22312	36288	16 %	38:62
Air force	20507	31818	52325	23 %	39:61
Ordnance factories	1275	1207	2482	1 %	51:49
Defence R&D Org	5985	9298	15283	6.5%	39:61
Others	0	9288	9288	4 %	---
Total	134412	94583	229000	100%	59:41

Chart 3: Revenue budget breakdown

Sub-head	Allocation
	2012-13	2013-14 (RE)	2014-15 (BE)
Salaries (Army)	53984	59551	65808
Salaries (Navy)	4696	5056	5506
Salaries (IAF)	8378	9155	9972
Total salaries	67058	73762	81286
Transportation	3233	3401	3544
Stores	23777	27081	28026
Works	8256	9235	9635
Tri-service bodies	1295	1481	1589
DRDO	5150	5673	5985
Ordnance Factories	(-)617	397	1275
Miscellaneous	3125	3770	3072
Total revenue allocation	111277	124800	134412

Chart 4: Capital budget breakdown

	2012-13	2013-14 (RE)	2014-15 (Final)
Land & works, Married Accommodation	5755	6054	6952
R&D (DRDO)	4644	5258	9298
Ordnance factories	349	466	1207
Army	10872	10749	20665
Navy	16889	19600	22312
IAF	31053	36017	31818
Joint Staff	924	619	1029
Defence Rail Network	-	-	1000
Miscellaneous	13	109	307
Total capital allocation	70499	78872	94588