July 24, 2014

High costs leave little for defence equipment

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 two 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 elections 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 US and the North Atlantic Treaty Organization 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 hardliners have argued for, 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. (MILITARY ALLOCATION AND SPENDING)

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 include (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 crore 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-Tibetan Border Police 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 Research &D evelopment Organisation (DRDO), the Ordnance Factory Board (OFB) and others.

The big gainer this year is DRDO, which has seen funding rise from about five 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 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 1.2 million to almost 1.3 million.

The Parliamentary Standing Committee on Defence figures' reveal that the army's equipment modernisation is steadily falling. In 2008-09, the army spent 27 paisa of each rupee on capital expenditure. This fell to 24p in 2009-10; 23p in 2010-11; 20p in 2012-13 and just 18p 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, Jaitley also announced that the foreign direct investment 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.

Business standard

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