Defence budget rises 8%, insufficient to cover inflation

By Ajai Shukla

Business Standard, 2nd Feb 18

The 2018-19 Budget has raised defence allocations from the current year’s revised estimate of Rs 374,003 crore (Rs 3.74 trillion, or US $58.45 billion) to Rs 404,364 crore (Rs 4.04 trillion, or $63.2 billion) an increase of Rs 30,361 crore (Rs 303.61 bn, or $475 million). That constitutes a rise of 8.1 per cent, which is insufficient to even cover year-on-year inflation in manpower and equipment costs.

Defence allocations from 2016-17 to the present

(In Rupees crore: $ value in brackets alongside)

	2016-17 (Actual)	2017-18 (BE)	2017-18 (RE)	2018-19 (BE)
Revenue	172241 cr ($26.92 bn)	182534 cr ($28.53 bn)	187542 cr ($29.31 bn)	195948 cr ($30.63 bn)
Capital	91483 cr ($14.30 bn)	91580 cr ($14.31 bn)	91461 cr ($14.30 bn)	99564 cr ($15.56 bn)
Pensions	87826 cr ($13.73 bn)	85740 cr ($13.40 bn)	95000 cr ($14.85 bn)	108853 cr ($17.01 bn)
TOTAL budget	351550 cr ($54.95 bn)	359854 cr ($56.25 bn)	374003 cr ($58.46 bn)	404364 cr ($63.20 bn)
Total govt spending	1975194 cr ($308.72 bn)	2146735 cr ($335.53 bn)	2217750 cr ($346.63 bn)	2442213 cr ($381.72 bn)
Share of total govt spending	17.8%	16.8%	16.8%	16.5%
Gross Domestic Product (GDP)	15075429 cr ($2.36 tn)	16847455 cr ($2.63 tn)	16784679 cr ($2.62 tn)	18722302 cr ($2.93 tn)
Share of GDP	2.33%	2.14%	2.23%	2.16%

(Source: budget documents) 

These figures include all government expenditure on defence, including allocations to the ministry, defence pensions, revenue and capital expenditure, and defence R&D and production.

The defence ministry, for reasons unclear, excludes defence pensions from the budget figures. However, worldwide, pensions are included as an important aspect of military manpower costs.

While military planners would be dissatisfied with the small overall increase, the silver lining in the budget is the expenditure of the entire capital budget this year, without surrendering thousands of crores as the military did the previous two years.

However, the increase in capital allocations, which have risen from Rs 91,461 crore (Rs 0.91 tn, or $14.3 bn) in the current year to Rs 99,564 crore (Rs 0.99 tn, or $15.56 bn) in 2018-19, constitutes a rise of just 8.9 per cent, which defence analysts and industry regard as inadequate, given the large number of defence procurements in the pipeline.

Jayant Patil, who is whole time director at Larsen & Toubro and heads the defence business, notes that the capital budget has been raised by Rs 8,000 crore (80 bn, or $1.25 bn) after being largely flat for two years.

“While this is inadequate for India’s defence modernisation needs, the additional capital allocation can leverage new contracts up to Rs 50,000 to 60,000 crore (Rs 500-600 bn, or $7.8 to $9.4 bn) over and above the contracts concluded this year, assuming that committed liabilities for earlier contracts remains approximately unchanged year”, noted Patil.

Overall the increase seems too small to be able to conclude any large Make in India contracts under the “strategic partner” route in the current year”, he said.

Once again, manpower costs – especially defence pension – will account for the bulk of the budget. The allocation for pensions rose from Rs 87,826 crore (Rs 878 bn, or $13.73 bn) in 2016-17 to Rs 95,000 crore (Rs 950 bn, or $14.85 bn) in this year’s revised estimates – a rise of 8.1 per cent. For 2018-19, the allocation has risen to Rs 108,853 crore (Rs 1088 bn, or $17 bn) a worrying rise of almost 15 per cent.

Calculating defence spending (including defence pensions) as a proportion of government expenditure, it has fallen steadily from 17.8 per cent in 2016-17; to 16.8 per cent in the current year, and is pegged at 16.5 per cent in 2018-19.

As a percentage of Gross Domestic Product, defence expenditure has fallen steadily from 2.33 per cent of GDP in 2016-17, to 2.23 per cent in the current year; and is pegged at 2.16 per cent in this Budget.

Several defence analysts, including some closely linked with the ruling Bharatiya Janata Party, have publicly argued for pegging defence expenditure at 3 per cent of GDP, which they consider the minimum for countering a two-front threat from China and Pakistan, combating two-three internal insurgencies and dominating a 7,500 coastline and the Indian Ocean beyond.

In his budget speech, Finance Minister Arun Jaitley, who has been stopgap defence minister twice in the National Democratic Alliance (NDA) government, talked up defence reforms.

“We will take measures to develop two defence industrial production corridors in the country. The Government will also bring out an industry friendly Defence Production Policy 2018 to promote domestic production by public sector, private sector and MSMEs”, he said in parliament.

Jaitley did not mention there is already a Defence Production Policy of 2011, which was promulgated with fanfare by the United Progressive Alliance (UPA) government, and then ignored by both governments since.