Tuesday, December 07, 2021

Why Rs 3.59 lakh crore for defence means only Rs 5,000 crore for modernisation

Till the mid-1980s, defence pensions were counted as part of the defence budget.

Written by Sushant Singh |
February 7, 2017 12:41:19 am
budget, defence budget, arun jaitley, defence ministry, manohar parrikar, defence money, defence budget allocation, indian express explained, explained Committed defence liabilities which have already been signed, such as for the Rafale fighter, would entail an expenditure of around Rs 65,000 crore

Last year’s Budget speech was an anomalous one with Finance Minister Arun Jaitley deviating from usual practice and skipping the allocations for the Defence Ministry and armed forces. Things have returned to usual this year with the minister announcing the allocation of Rs 2,74,114.12 crore for defence, and Rs 85,740 crore for defence pensions.

Till the mid-1980s, defence pensions were counted as part of the defence budget. Then, to avoid adverse international scrutiny of burgeoning defence expenditure, pensions were taken out and only re-included in the budget last year. As stated by the Supreme Court, pensions are deferred wages, and technically this means that these are payments paid for active military service rendered in the past. Since there is no way to estimate the future pension budget of 14.7 lakh armed forces personnel currently in service, including it in the defence budget is a pragmatic way of accounting for the expenditure.

The total defence budget for Financial Year 17-18 is thus Rs 3,59,854 crore.

Pensions apart, the salary bill for the armed forces this year would be around Rs 1,06,922.79 crore, taking up a bulk of the defence budget. This only partially accounts for the Seventh Pay Commission recommendations, as allowances are yet to be fixed as per the new scale. If the five core demands of the military chiefs on the anomalies of the Pay Commission are conceded by the government, the salary bill will shoot up further.

Going by past evidence, the government may not make additional provisions for salaries but only transfer money from the amount for capital acquisitions in the defence budget for this purpose.

In FY17-18, Rs 86,488.01 crore has been earmarked for capital expenditure of the defence services; and Rs 1,82,534.42 crore is for revenue expenditure. Revenue expenditure is for operating expenses of the Defence Ministry while the bulk of the capital expenditure is for procurement of military equipment to modernise the armed forces. As a finance secretary explained to the parliamentary standing committee on defence, the Finance Ministry is not really concerned with this division of expenditure. It only allocates the total money and leaves the revenue and capital allocations to the discretion of the ministry.

Over the years, governments have taken to making budgetary announcements with high allocation for capital acquisition to ward off any criticism about forsaking defence modernisation. By the time revised estimates are prepared, a portion of that allocation is transferred towards revenue expenses or returned to the government. Take the example of the current FY 2016-17. In the 2016 budget, Rs 78,586.68 crore was allocated for capital expenditure at the budgetary stage, which came down to Rs 71,700 crore at the revised estimates stage. This means that the ministry did not use Rs 6,886 crore for defence modernisation, and the amount was transferred to revenue expenditure to meet the increased salary bill. This is not a one-off thing. In the past decade, Rs 51,515 crore has been similarly returned from the budget for capital acquisitions.

Even if the full capital allocation of Rs 86,488.01 crore is somehow kept intact, it doesn’t mean that the whole amount is available for buying new defence equipment. Out of this, Rs 7,552.32 crore goes to DRDO (Defence Research and Development Organisation), Rs 803.68 crore to ordnance factories and Rs 7,868.59 crore to land and construction works, which leaves around Rs 70,000 crore for buying defence equipment.

Committed liabilities for defence deals which have already been signed, such as Rafale fighters or M777 howitzers, would entail an expenditure of around Rs 65,000 crore. This leaves only Rs 5,000 crore for new defence deals; but only if, and it is a big if, no money is returned from capital to revenue expenditure.

In simple terms, a total defence budget of Rs 3.6 lakh crore — which is 2.14 per cent of India’s GDP — leaves the ministry with only Rs 5,000 crore for new defence deals. If these defence deals are assumed to have an upfront payment of 10 per cent, the total cost of equipment that can be bought in the coming financial year is Rs 50,000 crore. To put that into perspective, one single deal for 36 Rafale fighters signed last year was alone worth Rs 59,000 crore. Any expectations of greater defence modernisation in the coming year would thus be futile.

The bureaucracy and the armed forces take a lot of flak for stalled defence procurements, but the real constraint is finding resources. In a slowing economy with multiple competing demands, it is always a challenge for the government to find additional resources for defence. The only other option is to rebalance and restructure the armed forces. Unfortunately, neither looks likely in the near future.

sushant.singh@expressindia.com

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