Finance Minister Nirmala Sitharaman, presenting her maiden budget on July 05, 2019, kept unchanged the allocation provided to the Ministry of Defence (MoD) in the interim budget on February 01, at Rs 4,31,011 crore ($ 61.96 billion).1 Nonetheless, she changed the composition of the MoD’s budget by shifting few of the elements from one head of expenditure to another. With the overall budget of the MoD remaining the same, the FM also changed the basic customs duties for certain defence imports, in an attempt to lessen the resource crunch facing modernisation of the armed forces.
State of the Economy
Despite a slight moderation of gross domestic product (GDP) growth from 7.2 per cent in 2017-18 to 6.8 per cent in 2018-19, India remains the fastest growing major economy in the world. The twin effects of greater flow of resources to socio-economic sectors to spur economic activity and further squeezing of the fiscal deficit has constrained the FM from enhancing the overall allocations for the MoD. Though some leeway is provided by way of exempting certain defence imports from customs duty, it may not be enough, given the vast deficiencies existing across the defence services. Suffice to say that in 2018-19, the three armed forces together had projected a shortfall of Rs 1,12,137 crore, or 30 per cent of their total requirement. This is exclusive of the shortfalls projected by the Defence Research and Development Organisation (DRDO) and others.
What is of greater importance for the defence establishment is that it is unlikely to see a major growth in its budget in the near-to medium-term. The Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement, presented along with the Union budget, forecasts the revenue expenditure of the defence services to grow by 10 per cent per year for the next two years. Though there is no specific forecast for the capital expenditure of the defence services, it is unlikely to see a major jump, considering the limited space available in view of the government’s focus on massive spending on infrastructure development. The MoD and the wider defence establishment would have to perforce learn to live with the limited growth in defence spending at least till 2021-22.
MoD’s Total Budget: Civil, Pension and Defence
Table 1 provides the distribution of the MoD’s total spending among three broad heads of expenditure: MoD (Civil), Defence Pensions and Defence Services. It is worth noting that, of the three major constituents of the latest MoD budget, the Defence Services, which conventionally constitute India’s defence budget, amounts to 71 per cent, with Defence Pensions (26 per cent) and MoD (Civil) (three per cent) comprising the rest. What is of greater significance is that out of MoD’s total budget, close to 60 per cent3 is spent on salary and pensions of nearly 4.9 million personnel, of which 3.1 million are defence pensioners, 1.4 million uniformed and 0.4 million defence civilians. Owing to the periodic revision of salary and pension and the implementation of the One Rank One Pension (OROP), this segment has witnessed the highest growth.
Note: Figures in parenthesis represent the percentage share in MoD’s total expenditure. MoD (Civil) includes MoD Secretariat, Border Roads Organisation, Defence Accounts Department, Coast Guard Organisation, Defence Estate Organisation, Jammu and Kashmir Light Infantry, Armed Forces Tribunal, etc. BE and RE represent Budget Estimate and Revised Estimate.
With the return of Military Farms and the ECHS to the fold of the Defence Services, the defence budget has marginally increased over the interim allocation (see Table 2). The increase is, however, largely on the revenue expenditure front, as the new entrants have very little capital expenditure. Of the total increase of Rs 3430 crore in the budget of Defence Services, Rs 3145 crore is on account of the ECHS, whereas the Military Farms have contributed Rs 285 crore.
With respect to the actual expenditure of 2018-19, the latest allocation is a modest increase of six per cent (or Rs 17,896 crore). Of the total increase, the Revenue expenditure contributes Rs 9,440 crore and the Capital expenditure Rs 8,456 crore.
Note: *: Unaudited provisional actual expenditure
Key Defence Parameters
Table 3 provides the key defence parameters for 2018-19 and 2019-20. As can be seen, there has been a further decline in the share of defence expenditure in both the Central Government Expenditure (CGE) and the GDP. It is, however, important to note that even though the MoD’s budget constitutes a little over two per cent of the GDP, it still accounts for 15.5 per cent of the total CGE. The wide disparity in the shares is largely due to the small percentage of the GDP forming part of the government’s revenue,4 as much of the economic activity in the country does not translate into tax collection, the major source of government’s revenue. In fact, India’s tax-GDP ratio is one of the lowest among the comparable countries.5 Unless the tax base of the country increases substantially in the coming years, defence’s share in the CGE will remain high.
Note: *: Based on GDP’s revised estimate for 2018-19 and budget estimate for 2019-20; #: The share is with respect to the capital segment of the defence budget. If the MoD’s total capital expenditure is taken into accounts, the share increases to 33 per cent and 32 per cent in 2018-19 and 2019-20, respectively.
Share of Defence Services
With the inclusion of Military Farms and ECHS in the Army’s budget, the latter’s allocation has increased by Rs 3,430 crore from the interim allocation. As in the past, the Indian Army with a budget of Rs 1,71,023 crore accounts for the biggest share in the defence budget, distantly followed by the other defence services (see Figure 1). However, unlike its sister services, the Army’s budget is largely revenue expenditure-driven (see Table 4).
Note: Army includes Military Firms, Ex-Servicemen Contributory Heath Scheme, Directorate General of Quality Assurance (DGQA) and National Cadet Corps (NCC).
Note: Army includes Military Firms, Ex-Servicemen Contributory Heath Scheme, Directorate General of Quality Assurance (DGQA), National Cadet Corps (NCC).
Impact on Modernisation
The Indian armed forces are currently in the midst of a huge modernisation process. However, owing to the resource crunch, their ability to pay for it has come under a great deal of stress. The resource crunch has been so intense that they are finding it difficult to even pay for the past contracts. In 2018-19, as against a requirement of Rs 1,10,044 crore to meet the Committed Liabilities, the total budget (including for New Schemes) was Rs 74,116 crore. If the requirement of the New Schemes is added, the shortfall on modernisation front was a staggering Rs 67,363 crore or 48 per cent.
As against a huge shortage on modernisation budget in the previous year, the latest budget has allocated an additional amount of Rs 6,893 crore, the same amount provided in the interim allocation (see Table 5 and Annexure). The additional amount is grossly inadequate, to say the least. However, partial relief is provided in the form of exemption of import of defence items not manufactured in India from the basic customs duty (CD). The MoD estimates the CD exemption will lead to a savings of Rs 25000 crore over the next five years.
Note: *: Figures for Army are approximate; #: (I) stands for Interim Budget.
It is significant to note that even though the MoD has a severe resource crunch to fund capital procurement, it has not deterred the Ministry from signing new contracts. Since April 2018, the MoD has signed at least 30 contracts with a cumulative value of nearly Rs 1,17,000 crore. An outgo at the rate of 15 per cent per year would require an additional amount of Rs 17,550 crore to pay for these contracts. It does not look like the additional budget and CD relief would be enough to cater for that.
Make in India in Defence
Some of the Make in India initiatives articulated in the budget to boost indigenous capabilities in defence beside others include:
- Lower corporate tax of 25 per cent for companies with an annual turnover of up to Rs 400 crore (earlier threshold was Rs 250 crore)
- Increase in minimum pubic shareholding in listed companies from 25 per cent to 35 per cent.
- Strategic Disinvestment of Central Public Sector Undertakings (CPSEs).
- Payment platform and ease of access to credit for Micro, Small and Medium Enterprises (MSMEs).
- Abolition of ‘Angel-Tax’ for Start-Ups.
- The Defence Corridor and the scheme for funding defence attaches for export promotion, the budget makes a token provision of Rs 100,000, which is grossly inadequate.
With the latest Union budget keeping the MoD’s interim allocation unchanged, the defence establishment has an uphill task in managing its resources. Though a partial relief is given in the form of customs duty exemptions for certain defence imports, it is unlikely to mitigate the severe resource constraints that the three armed forces have witnessed in recent years for their modernisation requirements. The MoD also needs to rebalance its defence expenditure so as to contain the manpower cost and devote more resources for modernisation.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.
For detailed analysis please see the 0riginal paper published by Institute for Defence Studies and Analyses (www.idsa.in) at https://idsa.in/issuebrief/indias-defence-budget-2019-20-lkbehera-080719