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Indian Defence Resource Allocation

The defence budget sends a signal of greater focus on indigenous capabilities with relatively better allocation to DRDO, OFB and creation of a initial corpus for technology development fund to assist SMEs.

In the recently tabled Indian budget for 2014-15, the Indian Government has allocated Rs 2,29,000 crore ($41.66 Billion) for the defence spending, marking an modest increase of 12.44 per cent over the last year's budget of 2013-14, pegged at Rs 2,03,672.12 crore ($37.03 Billion). The hike is just about a marginal 2.2 per cent when compared to the UPA-II government's interim budget in Feb 2014 for 2014-15 when the interne Defence Budget allocation was Rs 2,24,000 crore ($40.72 Billion).
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Comparative Statistics of Defence Budgets 2013-14 & 2014-15 (Amount in INR Crore)

Particulars 2012-132013-142014-15
 Defence Budget (Rs. in Crore)    181775.77  203672.12     229000
 Growth of Defence Budget (%)  6.36  12.05 12.44
 Revenue Expenditure (Rs. in Crore)   111276.65 124799.89  134412.10
 Growth of Revenue Expenditure (%)   6.22   12.15   7.70
 Share of Revenue Expenditure in Defence Budget (%)  61.22    61.27   58.70
 Capital Expenditure (Rs. in Crore) 70499.12 78872.23  94587.95
 Growth of Capital Expenditure (%)   6.58  11.88   19.93
 Share of Capital Expenditure in Defence Budget (%)   38.78  38.73  41.30

 

The Capital and Revenue Outlay
2 In the budget for 2014-15, the capital outlay, largely meant for acquiring new weapon systems and platforms has been scaled up to Rs 94,587.95 crore ($17.19 billion), witnessing a hike of 19.93 percent from last year, which though an healthy increase still does not seem substantial considering the number of billion dollar deals in the pipeline to be signed keeping in sync with their respective modernization plans.

 

 

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On the other hand, the revenue expenditure, which caters to the 'operating' expenditure of the three services, is pegged at Rs 1,344,12.1 crore ($24.43 billion), an Rs 9,612.16 crore ($1.74 Billion) rise from previous allocation of Rs 1,24,799.89 ($22.69 Billion). Salary and wages for the defence force personnel accounts for about half of this budget. While the remaining is spent on stores and equipment, revenue works maintenance and transportations among others. In 2014-15, the revenue expenditure has increased by 7.7 percent with its ratio in the total budget being fallen from last 61 percent to 60 percent this year.

The Defence Ministry has also set aside Rs 1,000 crore ($181.81 million) to build strategic railways for the armed forces near the international borders.

Defence Budget 2014-15: The Sub-Allocation
Out of the Rs 2,29,000 crore ($41.66 billion) earmarked towards defence spending this year, the sub allocations to the different services are as follows:

Services Capital (in INR Crore)Revenue (in INR Crore)% In Total Budget 2014-15
 Indian Army (Rs. in Crore)    24980.39  92669.32     51
 Indian Air Force   33310.18    20506.84  24
 Indian Navy (Naval Fleet & Naval Dockyards) (Rs. in Crore)   22803.80   13975.79 16
 R&D   9298.25   5984.67    7
 Ordnance Factories 1206.56     1275.43    1
Misc   2988.77 --- 1
 Total (%)   94587.95   134412.1    100 %

This year the Army's share of budget at 51 percent remains the highest amongst the three services and a nominal increase from previous year's share of 50 percent. However, the share of Air Force has witnessed a decline by 4 percent while that of Navy remains the same. Also there has been a change in the share of Research & development (R&D) which has witness an increase of 2 percent and as for the Ordnance Factories; it has witnessed a nominal hike of 0.37 percent. The pie diagram depicted below gives us the percentage shared by defence services in Defence Budget 2014-2015:

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Out of the total capital allocation, Air Force with Rs 33,310.18 crores accounts for the highest share of about 35 percent, followed by Army with a budget of Rs 24,980.39 crores, accounting for 27 percent and then follows Navy with Rs 22,803.80 crores accounting for 24 percent in the total defence budget pie.

The DRDO's capital allocation of Rs 5,975 crore, provided in February in the interim budget, has been hiked by almost 60 per cent to Rs 9,298 crore with revenue allocation of Rs 5,985 crore, the R&D budget totals up to Rs 15,283 crore, which is almost 7 per cent of the Rs 2,29,000 crore defence budget. The DRDO, which has been receiving about 5 per cent of the defence budget, has long pleaded for 7-8 per cent. The capital allocation of Rs 530 crore has been raised to Rs 1,207 crore for the Ordnance Factory Board (OFB) to modernize the Ordnance factories.

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Funds for 'Make' Projects
The defence budget has made a provision of Rs 35.7 crore for prototype development under the 'Make' procedure. The interim budget also shows an upward revision of 2013-14 allocation for 'Make' projects from Rs one crore to Rs 29.34 core. The much talked about 'Make' projects - Tactical Communication System (TCS) and Future Infantry Combat System (FICV) - which were under the discussion for long time are now virtually in limbo, may see the light. More importantly, the MoD is currently engaged in simplifying its 'Make' procedure, the implementation of which is unlikely to happen soon. Given this, the allocation under the 'Make' head seems to be unrealistic.

 Policy Analysis
The policy change to increase in Foreign Direct Investment (FDI) in the defence manufacturing from the present cap of 26 per cent to 49 per cent subject to Foreign Investment Promotion Board approval is welcome change. This enhancement will be formally notified once the Department of Industrial Policy and Promotion releases the Press Note. The increases in the FDI limit for defence manufacturing to 49 percent definitely seems to be a step in the right direction as the FDI cap of 26 per cent had hampered the entry of foreign players into the Indian defence manufacturing industry. However, the effect of this enhancement in FDI limit remains to be seen.

Also, to boost indigenous industry and accelerate SME participation, the Defence Ministry has set up a Rs.100 crore initial corpus for a Technology Development Fund to assist Small and Medium Enterprises (SMEs).

Impact Analysis
The defence budget marks the lowest in over three decades in terms of ratio to the GDP as it comes up to barely 1.74 per cent of the GDP this time which is remarkably low for India in at least three decades, with the figure dropping considerably from 3.16 per cent of the GDP in 1987 as well as lower from previous year's 1.79 percent. The Long Term Integrated Perspective Plan (LTIPP) for 2012-27, approved by the Defence Acquisition Council along with the 12th five-year plan, is based on the assumption of allocations to defence at 3 percent of GDP.

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Scope for New Contracts
Each year, equipment modernization is blunted by predictable events; the same patterns dealing double and triple whammies to capital spending. The contracts concluded during preceding years build up installments that must be paid, and which are known in advance. The capital allocations have ignored this trend, leaving less and less each year for new weaponry.

The Parliamentary Standing Committee on defence in its report presented to Parliament in April 2013 stated that there has been a “steady decline” in the number of defence contracts signed during the 11th five-year plan period. The number of contracts signed each year during the period is 84 in 2007-08, 61 in 2008-09, 49 in 2009-10, 50 in 2010-11 and 52 in 2011-12, said the report.

Although the share of capital budget has increased by Rs 5,000 crore in comparison to the Interim Budget allocation; however, a large portion of this increase is accounted by R&D. Thus, the extra allocated amount may not mean more money for weaponry acquisitions and could be a disappointment for the three defence services which has been asking for more allocation keeping in mind the aging and obsolete inventory which needs to be replaced. Over 90 per cent of the capital allocation is pre-committed towards committed liabilities, there is unlikely to be any funding for big-bang purchases. Several crucial procurement proposals are languishing through the labyrinthine procurement procedures and are waiting to be inked in the current financial year 2014-15 including 126 French Rafale fighter jets, 22 Apache attack choppers and 15 heavy-lift choppers, as well as artillery, UAVs/drones, Electronic Warfare (EW) Systems and multi-role helicopters for the Navy. The austerity measures, depreciating value of rupee and mounting 90 to 95 percent committed liabilities, would not leave much for the new projects. For example, the contract for 126 Rafale medium fighter aircraft would require at least Rs 10-15,000 crore as the signing advance.

The military's long-term equipment planning is based on fundamentally flawed fiscal assumptions. Crucial planning documents, like the Long Term Integrated Perspective Plan (LTIPP) and the Five-Year Procurement Plan, envision the purchase of equipment worth lakhs of crores of rupees, without any sign of the money being available. The LTIPP assumes high GDP growth that has slowed; a stable foreign exchange situation; it barely caters for inflation; and assumes defence allocations of about 3 per cent of GDP, while actual allocations are barely 2 per cent. With the basics so out of sync with reality it is hardly surprising that, year after year, spending is further out of line with planning and that budgeting is merely an activity done in February that is long forgotten by December.

Ritika Behal

Ritika Behal

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