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Policy Initiatives for Self Reliance in Defence

IMR Reporter — Sun, 15 Jan 2023 11:16:00 +0000

Rapid progress has been made towards achieving complete Aatmanirbharta (Self-reliance) in the manufacturing of defence equipment required by the Indian Armed Forces within the country.

India’s defence industry is now capable of manufacturing wide variety of high-end requirements e.g. tanks, armoured vehicles, fighter aircrafts, helicopters, warships, submarines, missiles, electronic equipment, special alloys, special purpose steels, and variety of ammunition.

The value of indigenous defence production for Financial Years 2020-2021 and 2021-2022 was Rs 84,643 crore and Rs 94,846 crore respectively.

Domestic Procurements

The Government, in the last three years, ie, from 2019-20 to 2021‑22 and current year (2022-23 up to September, 2022), had accorded Acceptance of Necessity (AoN) to 163 proposals worth Rs 2,46,989.38 crores approximately, under various categories of capital procurement which promote domestic manufacturing as per DAP-2020.

The share of domestic procurement in the total procurement has seen an upward trend. In 2018-19, the domestic procurement stood at 54% of the total procurement; this figure jumped to 59% in 2019-20 and to 64% in 2020-21. In 2022-23, it has been increased to 68% for domestic procurement, of this 25% budget has been earmarked for procurement from private industry.

With focus of Government on indigenisation and procurement of defence products from the domestic resources, the expenditure on defence procurement from foreign sources has reduced from 46% to 36% in the last four years i.e. from 2018-19 to 2021-22.

Domestic Projects Realised

With focus on indigenisation and procurement from domestic industries, all the major areas of domestic defence production ecosystem such as weapons, ammunition, fighter aircrafts, helicopters, missile systems, warships, submarines, armoured vehicles, radars, communication systems, surveillance systems, etc. have benefited from the initiatives and also given boost to the growth of domestic industries including MSMEs and start-ups.

Many significant projects that have been produced in the country during the last few years include (alphabetically listed):

155 mm Artillery Gun system ‘Dhanush’
25 ton Tugs
Advanced Light Helicopter
Anti-Submarine Warfare Corvette (ASWC)
Arjun Armoured Repair and Recovery Vehicle
Armoured Personnel Carrier ‘BMP-II/IIK’
Bi-Modular Charge System (BMCS) for 155mm Ammunition
Bridge Laying Tank,
Cheetah Helicopter
Dornier Do-228
Fast Interceptor Boat
High Mobility Trucks
INS Chennai
INS Kalvari
INS Khanderi
Inshore Patrol Vessel
Integrated Air Command and Control System (IACCS)
Lakshya Parachute for Pilotless Target Aircraft
Landing Craft Utility
Light Combat Aircraft ‘Tejas’
Main Battle Tank ‘Arjun’
Medium Bullet Proof Vehicle (MBPV)
Offshore Patrol Vessel
Opto Electronic Sights for Battle Tanks
Software Defined Radios (SDR)
Su-30 Mk1
Surface to Air Missile system ‘Akash’
T-72 Tank
T-90 Tan
Unmanned aerial vehicles
Water Jet Fast Attack Craft
Weapon Locating Radar (WLR)

Further, for the first time, a Made-in-India Advanced Towed Artillery Gun (ATAG) howitzer gun developed by our industry was part of the 21-gun salute during the Independence Day celebration at Red Fort in Delhi.

Policy Initiatives to Encourage Self-Reliance

These projects are the result of several policy initiatives and reforms taken by Government in the past few years to encourage indigenous design, development and manufacture of defence equipment, there by promoting self-reliance in defence manufacturing in the country.

These initiatives include:

According priority to procurement of capital items of Buy Indian (IDDM) category from domestic sources under Defence Acquisition Procedure (DAP)-2020.
Earmarking of 25% of R&D Budget for Industry led R&D.
Establishment of two Defence Industrial Corridors, one each in Uttar Pradesh and Tamil Nadu.
Implementation of Public Procurement (Preference to Make in India) Order 2017.
Launch of an indigenization portal namely SRIJAN to facilitate indigenisation by Indian Industry including MSMEs.
Launch of Innovations for Defence Excellence (iDEX) scheme by involving Start-ups & Micro, Small and Medium Enterprises (MSMEs).
Launch of Mission DefSpace.
Liberalisation of Foreign Direct Investment(FDI) policy allowing 74% FDI under automatic route.
Notification of four ‘Positive Indigenisation Lists’ of total 411 items of Services and three ‘Positive Indigenisation Lists’ of total 3738 items of Defence Public Sector Undertakings (DPSUs), for which there would be an embargo on the import beyond the timelines indicated against them.
Opening up of Defence Research & Development (R&D) for industry, start-ups and academia with 25 percent of defence R&D budget.
Progressive increase in allocation of Defence Budget of military modernisation for procurement from domestic sources, etc.
Reforms in Offset policy with thrust on attracting investment and Transfer of Technology for Defence manufacturing by assigning higher multipliers.
Simplification of Industrial licensing process with longer validity period.
Simplification of Make Procedure.

Specific provisions have been introduced in DAP-2020 under ‘Buy and Make (Indian)’ and ‘Buy (Global – Manufacture in India)’ category, wherein indigenous production is carried out with Transfer of Technology (ToT) from foreign OEM.

To enable adoption of Artificial Intelligence in defence, Defence AI Council (DAIC) and Defence AI Project Agency (DAIPA) has been created. Further, an AI roadmap has also been finalised for each Defence Public Sector Undertaking (DPSU) under which 70 defence specific AI projects have been identified for development.

Government has notified the ‘Strategic Partnership (SP)’ Model which envisages establishment of long-term strategic partnerships with Indian entities through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.

The expenditure on defence procurement from foreign sources has reduced from 46% of overall expenditure in 2018-19 to 36.7% as per data till December 2022.

Research & Development

Defence Research & Development (R&D) has been opened up for industry, start-ups and academia with 25 percent of defence R&D budget earmarked, to promote development of defence technology in the country.

Defence Research and Development Organisation (DRDO) identified nine thrust areas for focused research, namely Platforms, Weapon System, Strategic Systems, Sensors & Communication Systems, Space, Cyber Security, Artificial Intelligence & Robotics, Material & Devices and Soldier Support.

Technology Development Fund (TDF) Scheme also funds industries, especially – Start-ups and MSMEs upto an amount of Rs. 10 Crore, for innovation, research and development of defence Technologies in the field of defence and Aerospace.

Defence Industrial Corridors

To achieve ‘Aatmanirbharta’ and realise the goal of ‘Make in India’, Government of India has established two Defence Industrial Corridors (DICs) in the country, one in Uttar Pradesh and other in Tamil Nadu. These are expected to attract investments in Aerospace & Defence sector and established a comprehensive defence manufacturing ecosystem in the country. Moreover, the respective State Governments have also published their Aerospace & Defence Policies to attract private players as well as foreign companies including Original Equipment Manufacturers (OEMs) in these two corridors. The two State Governments have already signed MoUs/Agreements with various industries for investment worth total value of about Rs 24,000 crore. Investments worth Rs 2,242 crore and Rs 3,847 crore have been made in Uttar Pradesh Defence Industrial Corridor (UPDIC) and Tamil Nadu Defence Industrial Corridor (TNDIC) respectively.

DPSUs carved out of OFB

The seven new DPSUs carved out of erstwhile Ordnance Factory Board have been incorporated as wholly owned Government companies under the Companies Act 2013 in October 2021. Government has taken steps to initially handhold and support these new defence companies in starting their business as corporate entities. In this regard, outstanding indents with erstwhile OFB were grandfathered and converted into deemed contracts valuing about Rs 70,776 crore for the next five years. These deemed contracts provide annual targets for delivery of products. Every year, 60% of amount pertaining to that year’s target would be paid by the Services to the new DPSUs as advance as per the terms and conditions stipulated in the deemed contract. The advances provide the working capital to the newly constituted DPSUs. With more functional and financial autonomy, these new DPSUs are focusing on widening their customer base, including exports to augment the volume of defence production.

Defence Innovations

An innovation ecosystem for Defence titled Innovations for Defence Excellence (iDEX) was launched in April 2018 to foster innovation and technology development in Defence and Aerospace by engaging Industries including MSMEs, Start-ups, Individual Innovators, R&D institutes and Academia. iDEX provides them grants/funding and other support to carry out innovations/R&D which has potential for future adoption for Indian defence and aerospace needs. Under iDEX, 233 problems have been opened, 310 Start-ups have been engaged, 140 contracts have been signed. ‘iDEX Prime’ framework under iDEX has been launched in 2022 to support Start-ups with Grant-in-Aid up to Rs 10 crore to enable the development of high-end solutions.

Till October 2022, a total of 595 Industrial Licences have been issued to 366 companies operating in Defence Sector.

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Highlights of the Defence Budget 2022-23

Gen Ravi Arora — Tue, 15 Feb 2022 05:13:00 +0000

The Union Budget was presented by the Finance Minister on 1 February 2022. With ~12.82% increase in capital outlay for defence expenditure, the government has continued its effort towards defence modernization.

Reiterating its commitment to promote indigenization, 68% of the capital procurement has been proposed to be earmarked for domestic industry in 2022-23, up from 58% in 2021-22.

Further, 25% of the R&D budget has been earmarked for industry, start-ups, and academia. Private industry will be encouraged to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through SPV model. This step should incentivize industry led research towards development of military platforms and encourage collaborative efforts in a PPP mode with DRDO and other research institutions in the country.

Prescribing sunset date of 31 March 2023 for existing exemption available on specific imports in relation to defence and internal security forces is a measure to promote the domestic industry and reduce reliance on imports.

Table 1: Budgetary allocation for the Ministry of Defence

2019-20 2020-21 2021-22 2022-23

(Budgetary Estimate)

Defence services (Revenue) 2,23,240.83 2,24,351.76 2,38,717.09 2,39,743.71

Capital outlay 1,11,092 1,34,304.92 1,38,850.90 1,52,369.61

Defence pensions 1,17,810 1,28,065.88 1,16,878 1,19,696

How does the budget impact defence sector?

* Defence allocation for FY 2022-23 is accounted under four demands for grants:
* Demand No 19 – Ministry of Defence (Civil)
* Demand No 20 – Defence Services (Revenue)
* Demand No 21 – Capital outlay on defence services
* Demand No 22 – Defence Pensions

The total defence budget (excluding defence pensions) for FY 2022-23 amounts to USD54.20 billion (INR4,05,470.15 crores). Budgetary allocation towards capital and revenue expenditure stands at USD20.36 billion (INR1,52,369.61 crores) and USD31.14 billion (INR2,33,000.54 crores), respectively.

Unspent Funds

The Army and IAF have been lagging behind in spending allocations under the ‘capital head’ of the Budget meant for new weapons, equipment and systems.

The Army spent only 40-45 per cent of its share of capital budget of Rs 36,481 crore for FY 2021-22. The IAF was a shade better and had spent some 70 per cent of its allocation of Rs 53,214 crore. The Navy was best among the service and had spent close to 90 per cent of its allocated Rs 33,253 crore budget.

Capital Expenditure

Modernization of military forces is primarily driven by the capital outlay within each year’s budget. Budgetary allocation towards capital expenditure for this year is $20.36 billion (INR 1,52,369.61 crores). Current capital budget in INR terms is 12.82 % higher than that of 2021-22 (BE).

Indian Navy and Indian Air Force have witnessed an increase of ~43% and ~4% of their capital budget respectively over 2021-22 (BE), whereas Indian Army’s allocation has reduced by ~12%.

Closer examination of capital expenditure budget in INR terms for Aircraft and Aeroengines shows almost ~50% reduction in case of Army, whereas there is an increase of ~21% and ~7% for Indian Air Force and Indian Navy respectively under this head.

At the RE (2021-22) stage, both Indian Navy and Indian Air Force utilized more than what was allocated at the BE (2021-22) stage. Indian Army had spent ~69% of its allocation at the RE (2021-22) stage.

Revenue Expenditure

Revenue budget estimates for 2022-23 have increased by 10% as compared to 2021-22 (RE). When measured in INR currency terms, Army has witnessed an increase of 10% in budget allocations compared to 2021-22 (RE). Navy has witnessed 8% increase and Air Force has witnessed a 7% increase of allocation during the same period. Overall, the revenue budget has increased by 10% over 2021-22 (RE).

Indian Army

In BE 20-the Army was allocated Rs. 33,392.38 crores, which was nominally revised downwards to Rs. 33,213.28 crores. However, the Army was only able to spend Rs. 26,285.43 crores. Still, BE 21-22 provided them Rs. 36,481.9 crores, which in RE21-22, has to be heavily revised down to only Rs. 25,377.09 crores, which suggests the Army is again failing to utilize its portion of the defense budget. Even for FY 22-23 allocation is merely Rs. 32,015.26 crores, which is even less the FY 20-21 budget allocation.

Most Army’s procurement has been either under emergency authorization from foreign vendors or repeat orders for platforms like T-90, BMP2, Pinaka, Dhruv, Rudra etc. Army in recent years have ordered quite a good number of indigenous products like Akash SAM, Pinaka MBRL, ballistic helmets, Bulltet proof vests, ASLV, Dhanush, Sharang, Dhruv, Rudra, Arjun MK1A, Swati WLR, BSFR etc. The Army still lacks 155mm artillery guns, long-range MBRLs, tank destroyers like NAMICA, attack helicopters, SPAAGs, QRSAM, Wheeled APC/IFV, tracked IFV, and small arms.

Indian Navy

Of the three Services, The Indian Navy received a significant rise in its capital allocation. The navy’s capital budget has been enhanced by about 43 per cent, from an allocation of Rs 33,254 crore in FY 2021-22 to Rs 47,591 crore in FY 2022-23, a rise of Rs 14,337 crore. This increment will be needed to support the acquisition of new platforms, such as six air-independent propulsion (AIP) submarines being acquired under Project 75-I, a second indigenous aircraft carrier (IAC-2), 57 twin-engine deck-based fighters (TEDBFs) and four more P-8I Poseidon long-range maritime patrol aircraft to keep a watch over the Indian Ocean. The navy is also creating operational and strategic infrastructure that will be needed when the tri-service maritime command is operationalised in Karwar, near Goa.

Indian Air Force

Indian Air Force for quite some time has got the biggest chunk out of capital outlay. In BE 20-21, they got Rs. 43,281.91 crores which were revised to Rs. 55,055.41 crores, while they actually spend whooping 58,137.53 crores, however, BE 21-22 allotted them only Rs. 53,214.77 crores which have now been further revised down to Rs. 51,830.93 crores in RE 21-22. BE 22-23 do saw an increase to Rs. 55,586.65 crores, but it still is not near to the actual expenditure of FY 20-21. Still, IAF has been able to keep its ball rolling by signing some big-ticket projects over the years, these include deals like 123 Tejas, 36 Rafale, 18 batteries of MRSAM, 5 regiments of S400,56 C-295, etc. But now most of its major projects are nearing completion with only Tejas MK1A,6 A319 Netra MK-II, C295, etc going into considerable future. This should free up funds for future procurements this year, with MRFA on top of the list. IAF requirements include MRFA, VSHORAD, IJT, BTA, attack helicopters, upgradation of IL76, AN32, MRTT, AWACS(I) etc.

Coastal Security

The capital budget of the Indian Coast Guard has been enhanced by over 60% in FY 2022-23. There is growing recognition of the need to boost coastal security and policing to prevent intrusions into coastal cities and ports that could lead to more terrorist incidents such as the 26/11 Mumbai strikes. Hence, the capital budget of the Indian Coast Guard has been enhanced from Rs 2,650 crore in FY 2021-22 to Rs 4,246 crore in FY 2022-23. This will provide the wherewithal needed for building up assets such as offshore patrol vessels, maritime reconnaissance ships and aircraft, establishment of a coastal security network and building up technical and administrative support structures.

Border Roads Organisation (BRO)

The Border Roads Organisation (BRO) has been augmented by 40% from the current year to FY 2022-23 from Rs 2,500 in the current year to Rs 3,500 crore in FY 2022-23. With an eye on the Chinese, this is intended to expedite the creation of border roads, bridges and important tunnels, such as at Sela and Nechiphu. In 2021, BRO executed a record 102 roads and bridges at extreme altitudes and weather conditions. This includes the world’s highest motorable road at Umling La, at an altitude of 19,024 feet.

Defence Research & Development Organisation (DRDO)

The DRDO’s capital budget allocation is up 5.3 per cent from Rs 11,375 crore in BE 2021-22 to Rs 11,981 crore in the current year, providing only a limited boost to indigenous R&D projects.

25 per cent of the DRDO budget for engagement of industry, startups and academia. The DRDO engages with industry as Development-cum-Production Partner (DcPP), Development Partner (DP) and as Production Agency (PA) during the execution of projects and programmes. Currently, the DRDO engages about 20,000 industries of various sizes in the development of various systems, sub-systems and technologies, directly and indirectly. Through its Technology Development Fund (TDF) scheme, DRDO extends financial support to Indian micro, small and medium enterprises (MSMEs) and startups for indigenous design and development of defence products, components and subsystems.

The DRDO works with more than 250 academic institutes on different defence R&D problems for basic, applied and targeted research. It has established 10 advanced research centres in various academic institutions. The DRDO has also proposed to set up chairs for specific areas in various universities for long term engagement with academic institutions.

New DPSUs

Seven new defence public sector undertakings(DPSUs) were incorporated under the defence ministry after the dissolution of the Ordnance Factory Board (OFB). They require a huge sum for their planned modernisation.

This required earmarking a sum of Rs 1,665 crore in Revised Estimates (RE) of 2021-22 and Rs 1,310 crore in Budget Estimates (BE) 2022-23 for their planned modernisation. Additionally, Rs 2,500 crore were set aside in BE 2022-23 and in RE 2021-22 as Emergency Authorization Fund.

Domestic Defence Industry

The MoD has created the policy conditions needed for the domestic defence industry to flourish.

The total government outlay of Rs 39.45 trillion in the Union Budget of 2022-23, the MoD was allocated Rs 5.25 trillion.

There has been a steady rise in the defence capital outlay from Rs 86,740 crore in 2013-14 to 1.52 lakh crore in 2022-23 – an enhancement of 76 per cent over a period of nine years.

Under the ‘Aatmanirbhar Bharat’ (self-reliant India) scheme, it was announced in the Union Budget that 68 per cent of all capital defence procurement would be earmarked for indigenous manufacturers. In 2021-22, the MoD had reserved 58 per cent of all capital procurement for Indian entities.

Impact Analysis

This financial year builds up very strongly with the beginning of a new decade for an Atmanirbhar Bharat (Self-reliant India). While a 12.82% increase over 2021-22 (BE) in the capital outlay continues to emphasize the importance of modernization of the Indian Armed Forces, there is a significant reduction as compared to a phenomenal 18.75% increase that was seen in the first year of the decade. However, a reservation of 68% of the capital budget for domestic procurement solidifies India’s resolve for an Atmanirbhar Bharat. This is an increase of 10% which was spent for domestic procurement in the current year. As we aim to achieve a US$5 trillion economy with US$25 billion (INR 1,75,000 crore) de-fence production by 2025, this allocation is a giant step towards that goal.

For the first time, a reservation has been made for R&D in defence. The dedicated allocation of 25% in R&D, while encouraging new capabilities in creating and sustaining technologies, shall aid in creating an IP culture. Thus, an increased focus on IP management, output-oriented Industry research in academic institutions and possible collaborations with foreign research labs and centers shall lead to create cutting edge technologies.

With Buy IDDM being the category of highest priority in defence acquisition, this allocation finds synergy with the other stated policies of the GoI, thereby encouraging domestic design to go hand in hand with domestic production.

Domestic demand shall increase with the aforementioned reservations, hence placing an enormous responsibility on domestic suppliers to meet the challenge placed by the Armed Forces. This will indirectly increase capacities, new production facilities, increased collaborative framework with Foreign OEMs, more JVs, and enhanced investments (FDI). FOEMs, of those, who can appreciate the increased focus on domestic spending, shall be lured to find Indian design and production houses for technology transfers, teaming arrangements and a favorable environment to establish production base in India. The spiraling effect shall also be felt in the exports and thus in the economy, with a vibrant industry ready to meet global demands.

Indian Navy’s allocation has witnessed the highest increase (~43%) of allocation of the capital budget amongst the three forces. The allocation under the naval fleet has almost doubled. This is attributed to the major platforms that are likely to be inducted in the near future. These include the Indian Aircraft Carrier, frigates under Project 15B, P 17A, Project 1135.6 and Scorpene Submarine amongst others. Increased 43% allocation suggests a renewed focus in the Indian Ocean Region (IOR). Increase in allocation for Aircraft and Aeroengines for Indian Navy could indicate procurement of fighter aircraft for the Indian Aircraft Carrier (IAC).

Indian Army’s allocation has reduced by 12% in comparison to 2021-22 (BE) with Aircraft and Aeroengines reducing by half. The major committed liabilities include MBT Arjun Mk1A, AK-203 rifles, ATGMs amongst others.

Indian Air Force has witnessed a marginal increase of 4% over 2021-22 (BE) indicating that leasing of BTA and MRTT could be progressed with majority of the budget being utilized for committed liabilities like the Rafales and S-400 Triumf systems.

After the corporatization of the Ordnance Factory Board (OFB) last year, no allocation has been made for the Defence Ordnance Factories (OFs). An allocation of INR13.1 b has been made for the 7 new DPSUs. As against an average of INR6 b each year to the OFs under capital budget, there is more than a 100% increase post corporatization.

The present allocation is the lowest in percentage terms since the 1950s. Also, as a percentage of GDP, the defence allocation amounted to just 2.03%. This is a reason of concern, especially in times when China claims many parts of Indian territory as their own.

India is focusing on military modernisation and border infrastructure development for its national security. There has been a 76% rise in the defence capital outlay from 2013-14 to 2022-23. Although it seems like a healthy growth rate, it actually amounts to less than 5 %, compounded annually.

13.31 per cent of total government spending. but this was the lowest allocation in percentage terms since the 1950s. Furthermore, as a percentage of Gross Domestic Product (GDP), the defence allocation amounted to just 2.03 per cent, threatening to fall below the 2 per cent threshold.

The actual rise in the defence capital outlay amounts to less than 5 per cent, compounded annually – barely enough to cater for inflation and foreign exchange rate variation.

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Highlights of the Defence Budget 2022-23

IMR Reporter — Tue, 01 Feb 2022 10:51:00 +0000

Reiterating its commitment to promote indigenization, 68% of the capital procurement has been proposed to be earmarked for domestic industry in 2022-23, up from 58% in 2021-22.

Highlights

* 12.82% increase in capital outlay allocation.
* Nodal Body – testing and certification
* Continuing the focus on reduction of defence imports and increasing private participation
* Encouraging private sector to collaborate with DRDO.

How does the budget impact defence sector?

Brief on Capital Expenditure

* Modernization of military forces is primarily driven by the capital outlay within each year’s budget. Budgetary allocation towards capital expenditure for this year is US$20.36 billion (INR 1,52,369.61 crores).

* Current capital budget in INR terms is 12.82 % higher than that of 2021-22 (BE).

* Indian Navy and Indian Air Force have witnessed an increase of ~43% and ~4% of their capital budget respectively over 2021-22 (BE), whereas Indian Army’s allocation has reduced by ~12%.

* Closer examination of capital expenditure budget in INR terms for Aircraft and Aeroengines shows almost ~50% reduction in case of Army, whereas there is an increase of ~21% and ~7% for Indian Air Force and Indian Navy respectively under this head.

* At the RE (2021-22) stage, both Indian Navy and Indian Air Force utilized more than what was allocated at the BE (2021-22) stage. Indian Army had spent ~69% of its allocation at the RE (2021-22) stage.

Brief on Revenue Expenditure

* Revenue budget estimates for 2022-23 have increased by 10% as compared to 2021-22 (RE).

* When measured in INR currency terms, Army has witnessed an increase of 10% in budget allocations compared to 2021-22 (RE). Navy has witnessed 8% increase and Air Force has witnessed a 7% increase of allocation during the same period.

* Overall, the revenue budget has increased by 10% over 2021-22 (RE).

Key amendments

Customs

* Several changes to duty rates aligned to ‘Make-in-India’ and ‘Atmanirbhar Bharat’ policy.

* Measures taken for simplification of Customs tariff structure for products including helicopters, parts of manned/ unmanned aircraft etc. The simplified Customs tariff structure to come into effect from 1 May 2022.

* Sunset date of 31 March 2023 specified for existing exemption available on specific imports in relation to Defence and internal security forces.

GST

* Legislative changes proposed to introduce additional restrictions for availing Input Tax Credit (ITC).

* Time limit for availing credit and issuance of credit note extended to 30 November.

Impact Analysis

Glossary

BE- Budgetary Estimate
IDDM- Indigenously designed, developed and manufactured
GoI – Government of India
RE- Revised Estimate
R&D – Research and Development
DRDO – Defence Research and Development Organisation
SPV – Special Purpose Vehicle
OEM – Original Equipment Manufacturer

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Defence Budget – Navy Gets 43pc Capital Outlay Hike, Army Modernisation Funds Dip 12.2pc

IMR Reporter — Tue, 01 Feb 2022 10:42:00 +0000

Defence budget of Rs 5.25 lakh crore a jump of 9.82% over allocations in last fiscal. Significant policy changes announced for promoting self-reliance in defence sector, including 25% earmarking of R&D funds, 68% capital procurement budget for domestic industry and Rs 3,810 crore for 7 new defence PSUs.

Emphasising the central government’s focus on the Indian Ocean Region (IOR) and overall maritime security, union finance minister Nirmala Sitharaman, on 1 February, announced a massive jump of around 43 per cent in the modernisation funds of the Indian Navy in the defence budget for 2022-23 at Rs 47,590.99 crore.

The Indian Air Force retained the biggest share of the forces’ capital budget at Rs 56,851.55 crore–an increase of just about 4.5 per cent from the previous financial year. But the Indian Army’s capital budget went down by 12.2 per cent to Rs 32,102 crore, from Rs 36,481.90 crore in the last fiscal.

The overall defence budget of 2022-23 at Rs 5.25 lakh crore is a jump of Rs 46,970.53 crore and 9.82 per cent over the budgetary estimates of Rs 4.78 lakh crore in the last financial year. This includes Rs 1.19 lakh crore as defence pensions for the Armed Forces, which increased by around three per cent from the previous fiscal.

Of this, the total capital outlay earmarked for the Armed Forces was Rs1.52 lakh crore—a 12.82 per cent increase from the capital budget of Rs 1.35 lakh crore allocated last year. The revenue budget of the Armed Forces stood at Rs 2.33 lakh crore—a hike of 9.89 per cent from the previous financial year. The fourth component of the defence budget, the civil budget for the ministry of defence, stood at Rs 20,100 crore.

In the previous financial year, the Navy’s capital budget was Rs 33,253.55 crore, but its revised estimates last year were hiked to Rs 46,021.54 crore, given its high pace of spending. The Navy also had a high total expenditure of Rs 41,666.76 crore in the financial year 2020-21. Among other things, the Navy is focusing on building its capabilities based on its threat assessments in the IOR.

As per senior government officials, the Army’s capital budget saw a cut due to its low expenditure through the financial year. This is also evident in the budget documents which show the mid-year revised estimates of the Army’s capital budget were cut to Rs 25,377.09 crore from the Rs 36,481 crore it was initially allocated.

The Army had spent just around 40 per cent of its budgetary estimates of the ongoing financial year, while the IAF had used about 70 per cent of its funds. The Navy had, so far, spent the highest of its capital funds at around 90 per cent.

The hike in both the capital and revenue defence budget is significant at a time when India continues to remain locked in a military standoff with China in eastern Ladakh. The capital defence budget is meant for new acquisitions and modernisation of the Armed Forces, while the revenue budget will be utilised for the maintenance and sustenance of the equipment, weapons systems by way of procuring ammunition, spares and will also cater for the salaries of the Armed Forces personnel.

Push Towards Indigenisation, Reducing Imports

The defence budget for the upcoming financial year also announced a 5.3 per cent jump in the DRDO budget, at Rs 11,981.81 crore—up from Rs 11,375 crore.

In her budget speech, Sitharaman said defence research and development will be opened up for the private industry, start-ups and academia. And 25 per cent of the defence R&D budget earmarked for the purpose.

Under this budget, the private industry will be encouraged to take up the design and development of military platforms and equipment in collaboration with the DRDO and other organisations through a special purpose vehicle (SPV) model.

The budget also announced the setting up of an independent nodal umbrella body for meeting wide-ranging testing and certification requirements.

Sitharaman said the government is committed to reducing imports and promoting Atmanirbharta or self-reliance in equipment for the Armed Forces.

The government’s push for indigenisation is also evident in the budget allocated for the newly created seven defence public sector undertakings (PSUs) from the erstwhile Ordnance Factory Board.

The defence budget has set aside a total of Rs 3,810 crore for these seven new DPSUs—of which Rs 2,500 crore is for emergency authorisation and Rs 1,130 crore is to handhold them in the initial years.

In her budget speech, Sitharaman announced earmarking 68 per cent of the capital procurement budget for the domestic defence industry in the defence budget for 2022-23, up from 64 per cent in the previous financial year.

Separate earmarking of 58 per cent capital budget for the private domestic industry was first made in the financial year 2021-22.

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