Defence spending cut in real terms; it is down to 1.65 per cent of GDP, lowest since 1962

By Ajai Shukla

Business Standard, 1st March 2016

Defence allocations: 2016-17

(In rupees crore; one crore = ten million)

	2014-15 (Actual)	2015-16 (BE)	2015-16 (RE)	2016-17 (BE)
Revenue budget
Salaries
(a)  Army *	67576	73068	71683	82174
(b)  Navy	5788	6288	6287	7688
(c)  Air Force	10533	11360	11359	13437
(d)  DRDO	2306	2500	2444	2873
TOTAL SALARY	86203	93216	91773	106172
Other revenue expenditure	50604	58923	51463	56578
Total Revenue allocation	136807	152139	143236	162759
Capital budget
Army	13890	22406	18486	22110
Navy	21249	23911	18678	20715
IAF	30809	31481	28644	27555
Defence R&D Org	7483	7788	6480	6866
Land & works	7075	7087	8368	8207
Other heads	1381	1915	744	888
Total Capital allocation	81887	94588	81400	86340
Total budget allocation	218694	246727	224636	249099
Total government spending	1663673	1777477	1785391	1978060
Gross domestic production	12653762	14108945	13567192	15065010
Defence budget as % of total spending	13.15%	13.85%	12.50 %	12.6%
As % of GDP	1.73%	1.75%	1.66%	1.65%

*    Including Rashtriya Rifles and J&K Light Infantry

Every finance minister, while presenting the annual budget, pays tribute to the military. He announces the defence allocation for the coming year --- normally 15-20 per cent higher than the previous year’s allocation --- and then promises that the government will make available whatever more is needed for defending the country.

This year, Finance Minister Arun Jaitley’s speech did not make even a token mention of the government’s highest chunk of expenditure. The defence allocation, at Rs 2,49,099 crore, was barely held at the same level as last year’s budget allocation of Rs 2,46,727 crore.

From this year’s revised allocation of Rs 2,24,636 crore, it was a raise of a little more than 10 per cent, well below defence inflation, which normally runs at 15 per cent annually.

The all-important capital head, under which new equipment is bought for modernising the military, spending has been flat for three years. In 2014-15, the capital spend was Rs 81,887 crore; in the revised estimates for 2015-16, it has dropped to Rs 81,400 crore; and will be only marginally higher this year at Rs 86,340 crore.

That assumes the defence ministry manages to spend its entire capital allocation. In the current year, it will surrender Rs 13,188 crore, about 14 per cent of its allocation.

Meanwhile, revenue expenditure continues to rise. From Rs 1,43,236 crore in the current year’s revised estimates, the allocation for the coming year has been raised to Rs 1,62,759 crore, a rise of Rs 19,523 crore, or about 14 per cent.

There is apprehension that even this might not be enough, with the military facing a two-pronged pressure of growing manpower numbers; and higher salaries when the 7^th Central Pay Commission is implemented.

In addition, the government will face financial pressure from implementing the One Rank One Pension (OROP) award, although pensions are not included in the defence budget. From Rs 60,238 crore allocated for pensions in the revised estimates for the current year, the coming year has an allocation of Rs 82,333 crore --- a rise of over 35 per cent.

The capital expenditure allocations for the three services provide some indication of what contracts might be signed. The army is the big gainer, with its capital allocation up from Rs 18,486 crore in the current year, to Rs 22,110 crore next year. This jump suggests the likelihood of artillery gun contracts being concluded, including the purchase of M777 ultralight howitzers from BAE Systems.

The navy has been given a marginal raise in capital expenditure, which suggests that its flow of new warships is likely to continue smoothly.

Significantly, the Indian Air Force (IAF) allocations have been marginally reduced. This suggests the defence ministry is not expecting to sign a contract next year for the Rafale fighter --- for which it would have to budget about Rs 9,000-10,000 crore as the signing amount.

In terms of overall government spending, defence will consume about 12.6 per cent of the government’s overall spending next year, approximately the same as the current year’s revised estimates.

As a percentage of Gross Domestic Product (GDP), defence is now down to about 1.65 per cent of GDP, the lowest level since the 1962 war with China. This continued downward trend indicates that the government does not perceive any pressing national security threats, and has chosen to direct spending to the social sectors instead.