Defence allocation remains a mystery: Govt has not clarified if new accounting base used

By Ajai Shukla

Business Standard, 3rd March 16

It remains unclear how much money the government has allocated for defence in 2016-17. The finance minister, departing from custom, did not announce a figure in his Budget speech. The Indian Express has reported it at Rs 2.58 lakh crore, or 1.74 per cent of Gross Domestic Product (GDP). Later, in the same article, it is stated to be 1.71 per cent of GDP without counting pensions as a part of defence expenditure, and 2.26 per cent if pensions are counted. The Times of India reported it as Rs 2.49 crore. The Economic Times puts defence allocations at Rs 3.4 lakh crore.

The contradictions extend to the budget documents. In the “Expenditure” section of “Budget at a Glance”, the defence allocation adds up to Rs 2,49,099 crore --- adding Rs 1,62,759 crore allocated for defence revenue expenditure; with Rs 86,340 crore rupees allocated for defence capital expenditure.

In another section of the budget documents, viz. “Budget Provision for Ministries”, there are four “Demands for Grants” under the defence ministry heading. These include Rs 36,133 crore for “Ministry of Defence (Miscellaneous)”; Rs 82,333 crore for “Defence Pensions”; Rs 1,43,869 crore for Defence Services (Revenue); and Rs 78,587 crore for “Capital Outlay on Defence Services”. Adding these, the defence allocation amounts to Rs 3,40,922 crore.

The government has not yet clarified whether it is establishing a new datum for calculating defence expenditure.

The difference between these two documented figures is Rs 91,823 crore. Of that, pensions alone account for Rs 82,333 crore. The remaining Rs 9,490 crore consists of various expenditures under the “Ministry of Defence (Miscellaneous)” grant, which were, in previous years, not viewed as a part of the defence budget.

This confusion stems from the finance ministry’s changed format this year for tabulating defence allocations. In previous years, defence allocations were spread across eight separate “Demands for Grants” --- of which seven were for revenue expenditure and one for capital spending. The seven revenue grants were to: the defence ministry; pensions; Ordnance Factory Board (OFB); Defence R&D Organisation (DRDO); and one each to the three services --- army, navy and air force.

Confusingly, parts of these allocations counted as defence expenditure, while others did not. A glaring exclusion was the money granted for the “Ministry of Defence” and for “Defence Pensions”. This was inexplicable since the “Ministry of Defence” grant included some Rs 1,000 crore for the Jammu & Kashmir Light Infantry; Rs 3,000 crore for the Border Roads Organisation (BRO); Rs 2,500 crore for the Coast Guard, and several other allocations that went directly to military personnel.

This also meant that India was the only country in the world that excluded pensions paid to retired soldiers, sailors and airmen from its defence budget. This made defence expenditure seem lower than it really was, which made sense when India depended on international aid, and agencies like the International Monetary Fund demanded lower defence spending. Today, ignoring pensions is one reason for complaints from the strategic community that defence spending is inadequate.

In the accounting method adopted so far, the defence budget was calculated by adding revenue allocations to the military, the OFB and the DRDO; with the capital allocations that were disbursed under a single head. The allocations for “Ministry of Defence” and “Pensions” were simply ignored.

This year’s defence budget has been tabulated in just four “Demands for Grants”, numbered 20 to 23. According to the “Concordance Tables” published with the budget, the OFB and DRDO revenue expenditure has been merged into the “Ministry of Defence” grant, which has been re-categorised as “Ministry of Defence (Miscellaneous)”, and numbered as Demand No. 20.

“Defence budget calculation: then and now”

Grants till FY 2015-16	Grants in FY 2016-17
Army (Revenue expenditure)	Defence Services (Revenue expenditure)
Navy (Revenue expenditure)
Air Force (Revenue expenditure)
Capital outlay (on army, navy, air force, DRDO and OFB)	Capital outlay (on army, navy and air force only)
DRDO (Revenue expenditure)	Ministry of Defence (Miscellaneous), including OFB and DRDO capital and revenue expenditure
OFB (Revenue expenditure)
MoD (Revenue expenditure)
Defence Pensions	Defence Pensions

Similarly, what were previously separate revenue grants for the army, navy and air force, are merged this year into the “Defence Services (Revenue)” grant (Demand No. 22). That means that the previous six revenue grants have been consolidated into just two grants in this budget.

Defence capital expenditure, like in previous years, consolidates all three services’ capital outlay into a single grant, termed “Capital Outlay on Defence Services”. In addition, there is a significant change. The OFB’s and DRDO’s capital allocations, which also formed part of this grant, have been merged in the new budget (along with their revenue allocation) into the “Ministry of Defence (Miscellaneous)” grant.

What neither the budget documents, nor the finance minister’s speech clarifies is whether all this is now part of the defence budget. An expanded interpretation of defence spending would mean the defence budget is not 1.65 per cent of GDP (at the lower figure), but a more acceptable 2.26 per cent.

The larger figure, however, would highlight even more dramatically how little is spend on equipment modernisation --- Rs 86,340 crore rupees, out of a defence allocation of Rs 3,40,922 crore amounts to just 25 per cent.

Adding an annual pension liability of Rs 82,333 crore to next year’s military payroll of Rs 1,06,172 crore would take manpower costs (excluding training) to Rs 1,88,505 crore, which is over 55 per cent of the overall budget.