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Positive Indigenisation Lists

Fifth Positive Indigenisation List (PIL) of Department of Military Affairs (DMA) comprising 98 items was released by Raksha Mantri Shri Rajnath Singh during the plenary session of ‘Swavlamban 2.0’. The list includes Highly complex systems, sensors, weapons and ammunition have been included in the list. All these items will be procured from indigenous sources as per provisions given in Atmanirbharta in Defence Acquisition Procedure 2020 in staggered timeline. The DMA had earlier promulgated four PILs comprising 411 military items. Separately, the Department of Defence Production (DDP) has notified four PILs consisting of a total of 4,666 items, including Line Replacement Units/Sub-systems/Spares & Components for DPSUs. The fourth PIL of 928 items was released by DDP in 2023.

Record Defence Production

The value of defence production in Financial Year (FY) 2022-23 crossed the figure of Rs one lakh crore for the first time ever. It was Rs 95,000 crore in FY 2021-22. The Government is continuously working with defence industries and their associations to remove the challenges faced by them and promote defence production in the country. A number of policy reforms have been taken to achieve the objective of ease of doing business, including the integration of MSMEs and start-ups into the supply chain. Due to these policies, the industries, including MSMEs and start-ups, are forthcoming in defence design, development & manufacturing and there is almost a 200% increase in the number of defence licenses issued to the industries in the last 7-8 years by the Government.

Record Defence Exports

Through consistent policy initiatives of the Government and tremendous contribution of the defence industry, defence exports reached an all-time high of approx. Rs 16,000 crore in FY 2022-23, almost Rs 3,000 crore more than the previous financial year. It a rise of over 10 times since 2016-17. India is now exporting to over 85 countries. Indian industry has shown its capability of design and development to the world, with 100 firms exporting defence products at present. Major platforms being exported include Dornier-228, 155 mm Advanced Towed Artillery Guns, Brahmos Missiles, Akash Missile System, Radars, Simulators, Mine Protected Vehicles, Armoured Vehicles, PINAKA Rockets & Launchers, Ammunitions, Thermal Imagers, Body Armours, besides Systems, Line Replaceable Units and Parts & components of Avionics and Small Arms. There is growing global demand of LCA-Tejas, Light Combat Helicopters, Aircraft Carrier, MRO activities etc.

Separate Budget for Domestic Industry

Record 75 per cent (approx. Rs one lakh crore) of the defence capital procurement budget was earmarked for domestic industry in FY 2023-24, up from 68 per cent in 2022-23. This was announced by the Raksha Mantri during 14th Aero India in Bengaluru. In FY 2023-24, Ministry of Defence was allocated a total Budget of Rs 5.94 lakh crore, which is 13.18 per cent of the total budget (Rs 45.03 lakh crore). Capital outlay pertaining to modernisation and infrastructure development was increased to Rs 1.63 lakh crore.

HAL Helicopter Factory

Hindustan Aeronautics Limited (HAL) Helicopter Factory was dedicated to the nation by Prime Minister Shri Narendra Modi at Tumakuru in Karnataka. The factory is India’s largest helicopter manufacturing facility and will initially produce Light Utility Helicopters (LUHs). The LUH is an indigenously designed and developed three-ton class, single engine multipurpose utility helicopter with unique features of high manoeuvrability. Initially, the factory will produce around 30 helicopters per year and can be enhanced to 60 and then 90 per year in a phased manner.

ALSO READ:Safran and HAL to form joint venture company for helicopter engines

LCA Tejas

HAL handed over the first twin-seater Light Combat Aircraft ‘Tejas’ to the IAF in the presence of Rakha Rajya Mantri Shri Ajay Bhatt in Bengaluru. It is a light weight, all weather multi-role 4.5 generation aircraft, designed to support the training requirements of the IAF and augment itself to the role of a fighter in case of necessity. It is an amalgamation of contemporary concepts and technologies such as relaxed static-stability, quadraplex fly-by-wire flight control, carefree manoeuvring, advanced glass cockpit, integrated digital avionics systems and advanced composite materials for the airframe. The IAF placed an order for 83 LCAs with HAL.

C-295 Transport Aircraft

First C-295 MW transport aircraft was formally inducted into the Indian Air Force in the presence of Raksha Mantri Shri Rajnath Singh. The aircraft are being inducted through a collaboration between Tata Advanced Systems Limited and Airbus Defence and Space S.A., Spain. Fifteen more aircraft will be delivered in flyaway condition and they are scheduled to be received till August 2025. Remaining forty will be manufactured at the C-295 transport aircraft manufacturing facility, the foundation stone of which was laid by the Prime Minister in Vadodara, Gujarat in October 2022. The first Made in India aircraft is expected from September 2026. This medium lift tactical aircraft, which is capable of taking off and landing from unprepared landing grounds, will replace the HS-748 Avro aircraft.

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India’s arms imports fell 11% between 2013-17 and 2018-22, but the country is still the world’s top importer of military hardware, a report by the Stockholm International Peace Research Institute (Sipri) said on Monday. The report comes at a time when India has sharpened its focus on achieving self-reliance in defence manufacturing.

India’s share of the global arms imports was the highest in the past five years at 11%, followed by Saudi Arabia (9.6%), Qatar (6.4%), Australia (4.7%) and China (4.7%), according to data published by the think tank that measures weapons imports over five-year periods.

The latest report is in line with what last year’s Sipri report said. In 2022, it said India’s imports fell 21% between 2012-16 and 2017-21, but that the country was still the world’s biggest arms importer. The new report said the reasons for the decline in India’s imports included attempts to replace imports with local makes and a complex procurement process.

India has taken a raft of measures over the past four to five years to boost self-reliance in defence. These include creating a separate budget for buying locally made military hardware, increasing foreign direct investment from 49% to 74%, and notifying hundreds of weapons and systems that cannot be imported and are planned to be indigenised over the next five to six years.

Around ₹1 lakh crore was set aside for domestic procurement in this year’s defence budget, compared to ₹84,598 crore, ₹70,221 crore and ₹51,000 crore in the three previous years.

“The Indian military is large and will continue to import weapons and systems for some more years. The decline in India’s arms imports is a significant achievement. Imports will drop further as indigenisation efforts succeed,” said Air Marshal Anil Chopra (retd), director general, Centre for Air Power Studies.

The ranking system is dynamic as it depends on how orders are placed in a particular year. For instance, the 2019 Sipri report said India was no longer the world’s largest importer of weapons, a position it held for decades, with Saudi Arabia topping the global share of arms imports between 2014 and 2018. Saudi Arabia accounted for 12% of the global share of arms imports in that period, followed by India in second place with a 9.5% share.

According to new Sipri data, the US was the world’s topmost military exporter in the past five years, accounting for 40% of global exports, followed by Russia (16%), France (11%), China (5.2%) and Germany (4.2%). US arms exports jumped 14% between 2013-17 and 2018-22, while Russia’s fell 31% during the same period. Russia’s imports to India fell 37%.

“It is likely that the invasion of Ukraine will further limit Russia’s arms exports. This is because Russia will prioritise supplying its armed forces and demand from other states will remain low due to trade sanctions on Russia and increasing pressure from the USA and its allies not to buy Russian arms,” said Siemon T Wezeman, senior researcher with the SIPRI Arms Transfers Programme.

On March 3, chief of defence staff General Anil Chauhan said self-reliance in defence manufacturing was one of the biggest lessons for India from the ongoing Russia-Ukraine conflict, and the three services will have to be the driving force for the campaign to succeed.

“We can’t be dependent on military supplies from outside. We have taken some baby steps towards self-reliance in the last two to three years. The government has taken a large number of initiatives to boost it. I think for this campaign to succeed, the three services will have to be the driving force,” Chauhan said at the Raisina Dialogue.

Ukraine was the third biggest importer of major arms in 2022, and the 14th biggest during 2018-22, Sipri said.

France’s arms exports jumped 44% between 2013-17 and 2018-22, with India receiving 30% of its exports during the past five years, the report said, adding that France had displaced the US as the second largest supplier of arms to India after Russia.

“France is gaining a bigger share of the global arms market as Russian arms exports decline, as seen in India,” said Wezeman.

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Non-Salary revenue outlay has been enhanced significantly from Rs 62,431 crore in Budget Estimates (BE) 2022-23 to Rs 90,000 crore in BE 2023-24, representing a 44% jump. This expenditure is expected to close critical gaps in the combat capabilities and equip the Forces in terms of ammunition, sustenance of weapons & assets, military reserves etc. This Budget has also sustained the thrust on Modernisation and Infrastructure Development of the Defence Services, by continuing an upward trend in Capital Outlay.

Highlights:

* As a precursor to this increase in the Non-Salary Revenue segment, the government during the Mid-term review had also enhanced the operational allotments of the current financial year by Rs 26,000 crore, which works out as 42% of the present allocation. This unprecedented increase in the Revised Estimates 2022-23 has ensured liquidation of the entire carry over liabilities during the current year thereby ensuring that there is no dent in the next year’s operational outlay of the Services. 

* The enhanced allocations in the Budget will also cater to Training Aids & Simulators for Agniveers and ensure that they achieve the set standards of training for induction in the Defence Forces. EEE status provided to Agniveer Fund

* Thrust on Modernisation & Infrastructure Development Sustained in Union Budget 2023:

Operational allocation of the Armed Forces gets unprecedented jump
* Rs 1.38 lakh crore allocated for Defence Pensions
* Capital outlay pertaining to modernisation & infrastructure development increased to Rs 1.62 lakh crore; 57% rise since 2019-20
* Capital Budget of BRO enhanced by 43% to Rs 5,000 crore; At Rs 23,264 crore, allocation to DRDO increased by 9%
* iDEX gets Rs 116 crore, an enhancement of 93% over 2022-23, to further foster innovation

Capital Expenditure

In the Union Budget 2023-24, the Capital Investment Outlay has been increased steeply for the third year in a row by 33 per cent to Rs 10 lakh crore, which would be 3.3 per cent of GDP. This will be almost three times the outlay in 2019-20.

Accordingly, the Capital Allocations pertaining to modernisation and infrastructure development of the Defence Services has been increased to Rs 1,62,600 crore representing a rise of Rs 10,230 crore (6.7%) over FY 2022-23. Also, the increase in the Capital Budget since 2019-20 has been Rs 59,200 crore (57%). This increase is a reflection of the Government’s commitment towards sustainable augmentation in the area of modernisation & infrastructure development of the Defence Services.

Border Infrastructure

MoD is committed towards infrastructure strengthening in the Border Areas, particularly the Northern Borders. Accordingly, the Capital Budget of Border Roads Organisation (BRO) has been increased by 43% to Rs 5,000 crore in FY 2023-24 as against Rs 3,500 crore in FY 2022-23. Also, the allocation under this segment has doubled in two years since FY 2021-22. This will boost the Border infrastructure thereby creating strategically important assets like Sela Tunnel, Nechipu Tunnel & Sela-Chhabrela Tunnel and will also enhance border connectivity.

Research & Development

Recognising the crucial role of Research, Innovation and Technological development towards capacity building of the Armed Forces as well as fueling India’s Mission of Aatmanirbharta

Towards strengthening Research and Development in Defence, the allocation to DRDO has been enhanced by 9%, with a total allocation of Rs 23,264 crore in BE 2023-24.

Innovation

To further foster innovation, encourage technology development and strengthen the Defence Industrial ecosystem in the country, iDEX and DTIS have been allocated Rs 116 crore and Rs 45 crore respectively representing an enhancement of 93% for iDEX and 95% for DTIS over 2022-23. This will fulfill the Ministry of Defence’s vision to leverage ideas from bright young minds across the country.

The Union Budget 2023-24 has announced a National Data Governance Policy to unleash innovation and research by start-ups and academia. This will enable access to anonymized data which will further boost the Defence Start-ups and iDEX scheme.

MSMEs

The Union Budget 2023-24 has also announced that the revamped Credit Guarantee scheme for MSMEs which will take effect from 1st April 2023 through infusion of Rs. 9,000 Crore in the corpus. This will enable additional collateral-free guaranteed credit of Rs 2 lakh crore. Further, the cost of the credit has also been reduced by about 1 per cent. This scheme will give a further fillip the MSMEs associated with the Defence Sector.

Pensions & Welfare

The Defence Pension Budget registers a notable jump of 15.5 % in FY 2023-24. In absolute terms, this amount is Rs 1,38, 205 Crore in BE 2023-24 against Rs 1,19,696 crore in BE 2022-23. Further, RE 2022-23 allocations at Rs 1,53,415 crore records a significant jump of 28%, amounting to Rs 33, 718 crores. This includes an amount of Rs 28,138 Crore to meet the requirement on account of revision of Armed Forces Pensioners/ Family Pensioners under One Rank One Pension (OROP).

Towards the Government’s commitment in transforming Healthcare outreach to our veterans, Defence Budget 2023-24 registers a notable increase of 52% in the allotment for Ex-Servicemen Contributory Health Scheme (ECHS) with BE allocation of Rs. 5431.56 Crore in FY 2023-24 against Rs. 3582.51 Crore in FY 2022-23. This enhancement will ensure ‘Cashless Health Services’ and improved ‘Service Delivery’ to our veterans and their dependents across India.

Welfare of Agniveers

The Union Budget 2023-24 has provided Exempt-Exempt-Exempt (EEE) status to the Agniveer Fund.  

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Citing the report of the Stockholm International Peace Research Institute (SIPRI), Minister of State for Defence Ajay Bhatt said India’s spending between 2011 and 2020 rose 76 per cent as against the global average of 9 per cent.

In reply to questions about low defence spending as a percentage of GDP, posed by DMK’s TR Baalu, Bhatt said, “The overall trend in defence spending is based on defence capability development requirements and the expenditure on defence services, including modernisation, and has been increasing year after year. Defence budget which was Rs 2,53,346 crore in 2013-14 has more than doubled to Rs 5,25,166 crore in 2022-23. More importantly, spending under capital outlay which includes modernisation and infrastructure development of the defence services, has grown by 76 per cent to Rs 1,52,370 crore in 2022-23 from Rs 86,741 crore in 2013-14. The defence budget is the highest among all ministries.”

Bhatt said it is not correct to say defence spending trends are not encouraging. He assured the House that there is no shortage in the defence budget. He quoted SIPRI to say India is the third highest spender on defence after the US and China.

“There is no shortage of budget. Also in 2020, India for the first time reached the 25th spot among defence export nations for the first time,” Bhatt added.

Intervening in the reply, Defence Minister Rajnath Singh said the Kargil Review Committee which studied the defence expenditure issue in detail had not recommended fixing of the defence budget as a percentage of the GDP.

“The committee had illustrious members who were not in favour of fixing the defence budget as a percentage of the GDP and had recommended targeting of maximum value against every rupee spent. The committee said there was no need for a fixed GDP to budget allocation ratio and advised prioritisation of defence spending, restructuring of restructure forces efficiency in defence production. We are doing all that the panel said,” Singh said after Baalu argued that defence spending was only 2.33 per cent of the GDP, lower than in the US and Russia.

Bhatt said the Indian borders are secure and the PM had authorised the forces “to address any security concerns there and then”.

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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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Major incentives for the Indian defence manufacturing industry in the Budget includes reserving 68% capex acquisition budget for weapons purchases from the domestic market and increased allocation for border roads development.

The industry has welcomed the plan to earmark a significant part of the Rs 19,000 crore plus research and development budget of the defence ministry for the private sector that is gearing to develop major platforms for sale to the armed forces as well as exports.

“Our government is committed to reducing imports in equipment for the armed forces…defence R&D will be opened up for the industry, startups and academic with 25% of the defence R&D budget earmarked,” finance minister Nirmala Sitharaman said.

Though contours of the allocation have not been disclosed, the Defence Research and Development Organisation is expected to play a major role in handholding the private sector with joint development projects. Promoting a collaborative model for research, the minister said that a special purpose vehicle model could be adopted for joint development of systems.

“Private industry will be encouraged to take up design and development of military equipment in collaboration with DRDO through an SPV model,” she said. Defence minister Rajnath Singh welcomed the move to promote R&D by the private sector.

“Substantial amounts have been allocated towards research and development in several sectors including defence. The proposal to reserve 25% of R&D budget for startups and private entities is an excellent move,” the minister said.

Announcing several measures aimed at boosting the Indian defence manufacturing sector and reducing imports, Sitharaman said that this year 68% of capital expenditure budget will be reserved for domestic procurement. This is a step up from last year, when 63% of capital budget was earmarked for domestic purchases.

The minister took up another longstanding demand of the industry for a robust testing and certification body, announcing that an umbrella organisation will be set up for the same in the coming financial year.

“Creation of a nodal body for setting up testing and certification requirements of defence systems and platforms will help domestic industry through faster processes and cost-efficiency,” Society of Indian Defence Manufacturers president SP Shukla said. The government has allocated Rs 5.25 lakh crore (including pensions) for the defence forces this year, which includes capital expenditure of Rs 1.52 lakh crore, a 12.8% increase in the capital budget for forces.

The defence ministry also spent an additional Rs 21,000 crore in the 2021-22 financial year above the budgetary allocation following the LAC standoff with China that necessitated emergency procurements of arms and equipment and creation of border infrastructure for troops.

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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.

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? 

* 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.

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

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.

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

The post Highlights of the Defence Budget 2022-23 appeared first on IMR.

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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The defence budget, for Financial Year 2021-22, including outlay for payment of pensions, was increased to Rs 4.78 lakh crore for 2021-22 as against last year’s Rs 4.71 lakh crore – a marginal hike of 1.48%. Excluding the pension outgo, the allocation in the Union Budget for the armed forces stood at Rs 3.62 lakh crore. Excluding defence pensions, the hike was about 7.34%.

Capital Outlay

The allocation under Capital of Rs 1,35,060.72 crore for FY 2021-22 is the highest ever increase in capital outlay of Defence in the last 15 years. Last year, the capital outlay was Rs 1.13 lakh crore. The allocation under capital expenditure which relates to modernisation and infrastructure development of Armed Forces has been significantly increased.  represents an increase of 18.75 per cent over Budget Estimates (BE) FY 2020-21 and 30.62 per cent over FY 2019-20.

Army. In the budget, the Army has been granted a capital outlay of `36,481 crore as against `33,213 crore in 2020-21, as per the revised estimates.

Navy. The allocation made to the Navy for capital expenditure is `33,253 crore which was `37,542 crore in the previous budget.

Indian Air Force. Similarly, the IAF has been given Rs 53,214 crore to buy new platforms and weapons which is a drop of Rs 1,840 crore compared to the money it spent under capital expenditure in the current fiscal. The budgetary capital outlay for the IAF for 2020-21 was Rs 43,281.91 crore but the revised estimate put the figure at Rs 55,055 crore.

DRDO. The capital allocation for the Defence Research and Development Organisation (DRDO) has been pegged at ?11,375 crore which is an increase of 8% over the amount earmarked in 2020-21.

Revenue Expenditure

The total revenue expenditure, which includes expenses on payment of salaries and maintenance of establishments, has been pegged at Rs 3.37 lakh crore. The total revenue expenditure included Rs 1.15 lakh crore for payment of pensions.

Allocation under Non-Salary Revenue to meet operational requirement has been increased to Rs 54,624.67 crore.  This is 6 per cent growth over FY 2020-21.

Pensions

The defence pensions saw a significant dip from Rs 1.34 lakh crore in Budget Estimate last year to Rs 1.25 lakh crore in Revised Estimates and further to Rs 1.15 lakh crore allocated this year. From BE 2020-21 to BE 2021-22 this represents a decrease of Rs 17,775 crore or about 13.4%.

Last year it was more because approximately Rs 18,000 crore was to be paid on account of pension arrears. Also salary and pension are based on actuals.

Emergency Allocations

Budget data also shows that the armed forces got an additional allocation of `20,776 crore under capital expenditure last year for emergency procurements in the face of massive mobilisation along the Line of Actual Control (LAC).

In January 2021, Army Chief Gen. Manoj Naravane had said that, in 2020, 38 deals were made through ’emergency and fast track’ route worth about `5,000 crore and in addition capital procurements worth `13,000 crore were also concluded. The procurements included light machine guns, light special vehicles and protective gear for infantry, infantry combat vehicles for mechanised infantry and long range vectors for artillery and also equipment for Engineers and Signals regiments.

DRDO

The capital allocation for DRDO has been increased to Rs 11,375.50 crore, an increase of 8% over 2020-21, the Ministry said.

Despite the increase, indigenization efforts for large projects (like Tejas, Rustom UAVs, Arjun Tanks) through DRDO Labs have often been adversely impacted by various Transfer-of-Technology (ToT) shortcomings. Lack of acknowledgement of limited indigenization capabilities (be it private agencies, DRDO or OFBs) for defence has impacted the Armed Forces’ preparedness. Dovetailing defencemodernisation with these organisations may only leave the defence forces wanting.

Percentage of GDP

Despite a nominal year-on-year growth rate, the defence budget appears to be somewhat underwhelming when viewed as a proportion of India’s Gross Domestic Product (GDP), but over the last few years, India’s defence budget as a proportion of its GDP has been on a decline. The Defence budget comes to around 1.63% of the GDP.

The 15th Finance Commission observed it its report that the expenditure on defence services as a proportion of GDP declined from 2% in 2011-12 to 1.5% in 2018-19 and to 1.4% in BE 2020-21.

According to last year’s figures, the overall defence budget was just 2.1% of the then estimated GDP. This was the lowest figure since the early 1960s.

Military experts believe that India should allocate at least 2.5% of its GDP to defence expenditure for building requisite deterrence against China and Pakistan.

Border Roads Organisation

The allocation for Border Roads Organisation (BRO) has been increased to `6,004 crore which is 7.48% more than the amount given in 2021-22.

Indigenization in Defence

The indigenization in defence even with buzzwords like Atmanirbhar Bharat or Self-reliant India in Defence has not shown the leap forward required to support the defence forces. The Negative List for imports published by the defence ministry in August 2020, was in any case simply the list which was on the anvil for indigenization by defence forces for the last decade or so. Overall, this highlights the lack of vibrant defence equipment manufacturing within India. Surely, the Defence Procurement Procedures encourages induction of well proven and mature equipment for purchase after their due tests and trials.

NDA vs UPA Governments

As a proportion of the total budget expenditure, India’s defence spending was the highest in 2000-01 under the then Atal Bihari Vajpayee government at 16.73%.

The Manmohan Singh-led UPA government began its term by setting aside a handsome chunk for the armed forces in its first couple of years. But the proportionate spending fell to an average of 13% in its later years.

Similarly, the Narendra Modi government set aside an average of 12% of the total budget for defence in its initial years. However, the proportion fell to 11.62% in 2018 and then further to 10.96% in 2019, the lowest in the last two decades.

In 2020, the spending picked up again when the defence ministry was allocated the highest sum among all the other sectors at 15.5% of the total budget expenditure.

India vs The World

With a steady increase in its defence allocation, India became the third-largest military spender in the world for the very first time in 2019.

According to data released by global think-tank Stockholm International Peace Research Institute (SIPRI), India surpassed Russia with a military expenditure of $91.1 billion in 2019.

However, it still lagged way behind US and China – the top two military spenders. The US spends more than 10 times and China almost four times India’s defence budget.

SIPRI had said that China’s military expenditure reached $261 billion in 2019, a 5.1% increase compared with 2018, while India’s grew by 6.8% to $71.1 billion.

“India’s tensions and rivalry with both Pakistan and China are among the major drivers for its increased military spending,” the report had said.

Measures to Reduce Revenue Expenditure

There is an urgent need to increase the capital outlay and somehow reduce the revenue expenditure. Some of the measures which are being contemplated are:

•             A proposal to increase of retirement age in selected categories is under consideration. This will, in time, effect reduction in the revenue budget.

•             A long standing demand of the armed forces has been that since a soldier retires early, there is merit in lateral absorption of a soldier in other departments or forces. This will ameliorate the burden of pension bill, besides providing disciplined and trained manpower.

•             Right sizing of the armed forces is a bold exercise that has been undertaken by the defence forces themselves. Owing to ongoing integration of Army, Navy and Air Force, and raising other structures, this may take some time but will eventually scale down the revenue expenditure.

•             Leasing, rather than outright purchase which has recently been permitted for defence platforms is a step in the right direction.

•             A new entry scheme for officers called tour of duty is under consideration. This will not only reduce the revenue expenditure in salaries as well as pensions but also attract better talent for shorter duration.

•             There is merit in examining smart financial engagement models other than outright purchase of everything. For instance, the transportation requirements in other than operational areas can be out sourced, as can several other logistic services.

Monetisation of some selected parcels of land (not A1 land under the Army in which cantonments and military stations are housed) should be considered. There is land under the Defence Estates which is outside the cantonments and away, including grazing grounds etc. Some of these are being encroached. Judiciously selected, some of them can form part of this drive to modernise the armed forces.

Defence PSUs and ordnance factory have huge potential to generate revenue as well as enhance their outputs by opting for joint ventures with private sector.

Comments

Overall, the Budget did not bring in the focus towards bringing new technologies to replace the manpower for defensive and other ISR activities. The lack of netcentric warfare technology as required to be implemented for the Theatre Level Commands may leave the modernization of the Armed Forces at a snails’ pace. Defence cannot be tied down by progress of the local industry to produce the military equipment and such an option can be detrimental on the Armed Forces’ edge to effectively handle rapidly modernizing adversaries like China.

In the backdrop of China’s adventurism in Ladakh, it was widely expected that the defence budget would be enhanced this year. In absolute terms, the increase has not been significant, barely enough to cover inflation.

This year, however, the defence sector is eyeing a generous capital infusion amid a heightened need to strengthen the military infrastructure in view of the ongoing border conflict with China. Under the Covid-19 overhang there are competing demands, with a huge focus on healthcare as a prime and universal concern, and it should be easy to understand why the government would not be able allocate more for defence needs.

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