The outbreak of the Coronavirus presents an alarming human health crisis and has a significant commercial impact, thus, posing challenges necessitating focus on sectors like health and infrastructure and monetary measures to revive economy. As a fallout Defence Sector may get lower priority and may have to take a backseat for the time being.

The outbreak of the Coronavirus (Covid-19) presents an alarming human health crisis which has a significant commercial impact. In a geopolitically volatile and an uncertain complex world with the business environment defined by constant disruptions; the business leaders need to be confident with making strategic choices in the midst of uncertainty. Countries across the world are grappling to mitigate the unprecedented crisis situation continuously compiling immediate business challenges across multiple sectors for minimizing the fallout on the economy. It is time to focus on macroeconomic management, monetary measures, and ease of doing business for Industry in production and service sectors.

Defence Expenditure

As per the report  on ‘Trends in World Military Expenditure, 2019’ by the SIPRI, the global military expenditure rose to $1917 Billion in 2019, almost 2.2% of the global Gross Domestic Product (GDP) representing an increase of 3.6% in annual growth as compared to 2018.

The top five largest spenders — US - $732 Billion, China - $261 Billion, India - $71.10 Billion, Russia -$65.10 Billon and Saudi Arabia - $61.90 Billion, accounting for 62% of the global defence expenditure. Pakistan’s military expenditure was $10.3 Billion about 4% of the GDP in 2019. The Indian budgetary figures of $71.1 Billion include all aspects of defence spending, including salaries and defence pensions, the civilian establishment of the Ministry Of Defence (MoD), the Coast Guard and the Border Roads Organization.  However, the revised estimates put Indian defence spending for 2019-20 at Rs 448,820 Crores or about $59.4 Billion approx. accounts 2.18 percent of the GDP and considering the revised estimate India is placed at 5th position in Military spending.

India is presently world’s third-largest defence spender, although defence budget accounts for 2.4 percent approx. of the GDP indicating that it spends well below the global average. The Indian defence allocation in the budget for 2020-21 was Rs 3.37 lakh Crores, excluding defence pensions, accounting for about 1.5% of the country’s GDP, the lowest in recent times. The expenditure on military preparedness seems to be inadequate considering geopolitical reasons, cross-border infiltration and hostile neighbours who continually resort to economic and verbal aggression. Thus, India cannot afford to lower its defences which is causing burden at a time of economic stress.

Post Covid-19 crisis the Ministry of Finance (MoF) sent a memorandum listing spending and cash flow management of each Ministry, ordering an expenditure ceiling of 20 percent on the military and a spending limit of 15 percent on Civilian Ministries. This means that only 20 percent of the budget can be spent in the first quarter of 2020-2021 (April to June). The spending limits are not applicable on defence pensions and the veterans’ health scheme. With this year’s salary and pension bill of Rs 276,117 Crores exempted from the 20 percent spending limit, the ceiling is applicable only to the rest of the Defence Budget – or Rs 195,261 Crores out of the overall Rs 471,378 Crores. By the end of the fourth quarter, the 20 percent cut would save Rs 39,052 Crores. Thereby, very little money in hand is left after pays and pensions for Capital procurement.

On top of it, the Capital Budget has committed liabilities which as on date is approx Rs 40000 Crores and that have been budgeted for the Armed Forces for programs like the Rafale fighter jet deal and the S-400 air defence systems. India recently finalized defence deals with US worth more than $3 Billion including $2.6 Billion for 24 MH-60 Romeo helicopters and $800 Million for Apache helicopters. Further, India and Russia have signed 14 contracts worth more than $16 Billion, covering everything from Kamov helicopters to Kalashnikovs rifles. The Government has also signed a contract with US arms maker Sig Sauer for $92 Million, and a $117 Million contract with Israel Weapons Industries. Meanwhile, Hindustan Shipyard Limited (HSL) has signed a $2.1 Billion deal with a Turkish shipbuilding company to design and build five 45,000-tonne vessels for the Indian Navy.

There are chances of delay in delivery of orders placed on Foreign OEMs and it would result in deferred payments or committed liability payments, without invoking the penalty clause. The large ongoing foreign procurement consume 90% of the total defence capital budget, and some of them are likely to see delayed deliveries by three to six months. The potential availability of the resources could channel some of our fast-track indigenous programs such as Rs 39,000 Crores order for 83 Light Combat Aircraft (LCA), seven squadrons of Akash air defence missiles worth over Rs 6,000 Crores, six regiments of Pinaka Multi Barrel Rocket Launchers (MBRL) worth Rs 4500 Crores etc. that hold the key to sustaining Indian industry.

The Indian Government has been proactive in the fight; as economy dips, health and infrastructure will get priority over other sectors. The Government has been allocating only 0.3 percent of the GDP for expenditure on health. It may be long haul as the Government’s priority is to focus on health and other sectors to revive economy. If more has to be spent on health, agriculture and on reviving the economy, lower priority sectors like defence will have to take a backseat. Hence, there is significant insecurity in the Industry as budget priority, policies and strategy focus will change for at least next two years and many on-going capital acquisition plans will be deferred indefinitely. 

Way Forward

The Defence Ministry (MoD) has to initiate optimization measures to avoid wastage in view of the economic burden imposed by Covid-19 to limit its first quarter (April-June) spending to 15-20 percent of the entire year’s budget. In view of the above, need to strategize defence expenditure beside re-jig the priorities to optimize the expenditure and advisory issued without undermining the combat  capability due to impairment of the military’s equipment and functioning. Some of the immediate measures which can result in curtailing the procurement expenditures are:-

There is need to initiate expenditure optimization measures to re-jig the priorities without undermining  the combat  capability  due to  impairment of  the military’s equipment and their operational functioning.

To reduce the procurement time and cost, as a long term cost saving measure, the MoD need to adapt some of the measures to improve the procurement process are:-

This Covid-19 crisis also presents an opportunity to give emphasis on domestic procurement and if possible create new capacities to the satisfaction of our Armed Forces. Fortunately, the Industry is fairly well equipped to take up such responsibility. It is important to set the fundamentals for industry selection on strong - technical ability, investments in technology, track record, bandwidth from conceptualization to realization, successes in past programmes, financial strength, indigenous solutions provided in the past. The MoD should have trust in private industries and consider them as equal stakeholders at par with DPSUs and OFB and accountable with adhering to delivery schedule and quality.