defence expenditure | IMR

Defence spending rose 76 per cent between 2011 and 2020

IMR Reporter — Fri, 25 Mar 2022 05:11:00 +0000

The government on 25 March said in Lok Sabha that India is the third largest spender in the defence sector after the US and China and there is no shortage in the defence budget which has increased year on year.

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.

Defence Exp Trends

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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China raises defence budget by 7.1% to $230 bn; Three times India’s

IMR Reporter — Sat, 19 Mar 2022 05:17:00 +0000

The Chinese government has proposed the defence budget for the fiscal year 2022 at 1.45 trillion yuan ($230 billion), a 7.1 per cent year on year increase, state-run China Daily reported quoting the draft budget proposals presented by Premier Li Keqiang to the National People’s Congress (NPC), the country’s parliament on 5 March.

The hike is over three times that of India’s defence budget of 5.25 lakh crore (about $70 billion) for 2022.

Last year, China’s defence spending for the first time crossed $200 billion. In 2021, the defence budget grew by 6.8 per cent to $209 billion.

In his work report presented to China’s Parliament, Chinese Premier Li called for deepening comprehensive combat readiness from the People’s Liberation Army (PLA). He said the PLA needs to carry out military struggles in a resolute and flexible manner to defend the country’s sovereignty, security and development interests.

China’s increase in this year’s defence budget came amid the standoff at eastern Ladakh and its increasing political and military tensions with the US.

How to read China’s defence expenditure?

China’s 2019 defence whitepaper outlines three major categories of China’s defence spending: personnel expenses, capital expenses and training and sustainment expenses. The white paper highlights that since 2010, China’s capital expenditure has increased every year. In 2010, China’s capital expenditure was 33.2 per cent of the total budget, and it grew to 41.1 per cent of the total expenditure in 2017. Earlier, in the last two decades, China’s defence spending was roughly equal in all three categories. However, the rising trend, especially in this decade, aligns with Xi Jinping’s rise as the Chinese Communist Party (CCP) general secretary.

Interestingly, China’s 2015 defence white paper emphasised that the PLA should focus more on far seas operations to protect it overseas interests along with near sea defence. This would require a major investment in the Navy and Air Force, which are more capital intensive forces than the ground force. Furthermore, Xi’s armed forces reforms have also emphasised on newer weaponry to achieve ‘multi-domain integrated joint operations’. Thus, in this decade, the PLA’s defence expenditure is majorly utilised on commissioning more advanced and high-tech weapons to achieve regional supremacy and extra-regional operational capabilities.

What the defence expenditure hides?

But these are just conservative estimates that are published by China’s State Council and Ministry of Finance. Military observers across the world have questioned these numbers and claim that China hides more than it reveals. For instance, scholars from the Stockholm International Peace Research Institute (SIPRI), International Institute of Strategic Studies (IISS) and RAND Cooperation have all claimed that China’s defence expenditure is much higher than it showcases. Similarly, the US Department of Defense’s (DOD) annual China military power report doesn’t provide a specific assessment but has repeatedly claimed that China’s military spending could be much higher than projected.

This is because China’s military expenditure hides major categories of defence spending. For instance, China’s published numbers don’t account for People’s Armed Police and Coast Guard expenses (paramilitary forces), which could be significantly high in all probability. Similarly, it doesn’t account for newer but capital-intensive areas like China’s space and cyber programmes, nuclear programmes and defence mobilisation funds. It also doesn’t reveal the provincial military bases’ operating costs. Furthermore, China’s defence expenditure also excludes expenditure on disaster relief operations — which is later to be reimbursed through non-defence related agencies. Finally, China also doesn’t reveal the accurate cost of all its military goods and services, thus, increasing the inconsistencies and ambiguities about its defence spending.

However, China is not the only country to hide its defence expenditure, as India too doesn’t reveal several components like its defence spending on space, cyber and nuclear programmes.

Comparing China’s defence expenditure

The US DOD report projects a slowdown in China’s economic growth in the next 10 years, thus reducing its capabilities to spend on defence and national security needs. However, on comparing defence expenditures, it is clear that China is many folds ahead of its regional competitors, and it would take a significant jump for the regional actors, including India, to catch up with China.

For instance, China’s total defence expenditure for 2022 is more than the combined defence expenditures of India, Japan, Australia, South Korea, and Taiwan for 2021. However, China’s defence expenditure is around 3.5 times less than the US annual military budget, thus making the US an important extra-regional actor in the Indo-Pacific region for balancing China’s rise.

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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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Marginal Increase in Defence Budget 2021-22

Gen Ravi Arora — Mon, 15 Feb 2021 12:33:00 +0000

Chinese Adventurism Demands Speedy Modernisation

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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Pakistan’s Bulging Defence Expenditure is 2.82% of GDP

IMR Reporter — Sun, 02 Aug 2020 14:10:06 +0000

The government of Pakistan announced its annual budget 2020-21, on 12 June. A sum of Rs.1, 289 billion was allotted to the defence sector. The defence budget has increased by 11.9% in the fiscal year 2020-21. When compared with 2019-20 revised spending, which was Rs.1, 227 billion, the growth would be 5%.

The amount earmarked for defence sector makes 17.68 per cent of the total expenditure planned for the 2020-21, which is estimated to be Rs 7,294.9 billion. Last year this share was 14 per cent.

When measured against the GDP, its share is 2.82 per cent. The size of the GDP is estimated to be about Rs 45,643 billion. The original allocation for the outgoing year was 2.62 per cent of the GDP.

The increasing tensions between India and Pakistan post-Pulwama and the Kashmir issue were one of the main reasons behind the increase in defence spending. The defence policy of Pakistan and military spending have always been India-centric. Pakistan attributes its large defence budget to its smaller size and the need to maintain conventional balance with India.

In the defence budget of 2020-21, the Pakistan Navy’s share increased and reached 10.85 %. Similarly, Pakistan Air Force (PAF) budget increased to 21.25%, and the army budget increased up to 47.55%. There was an increase of 20.33% in the for inter-services establishment.

In 2019-20, the navy’s share was 11.3%, while for PAF it was 22%, for army 45.4% and 21% was for the inter-services establishment. This year Pakistan navy got Rs.140 billion, PAF Rs.274 billion, army Rs.613 billion and Rs.262 billion was given to inter-services establishment.

This year the lowest increment is given to the employee related (revenue) expenses which are 5.6%. Rs.475 billion were allocated – Rs.301 billion for operating expenses which include ration, transport, POL, training and medical treatment (a 13.77% increase as compared to the previous year).

For the import of arms and ammunitions and local purchases, Rs.357 billion have been allotted, which is a 13.3% increase as compared to the previous year.

The civil works section grew by 26.14% as the amount allotted to it was Rs.155 billion. The growth in the civil work component was attributed to two major projects that were being commenced by the military i.e. the construction of border posts and fencing of Afghanistan and Iran borders.

The military had last year forgone a major hike because of the economic challenges then facing the country and settled for a raise of 4.74 per cent, but by the end of the year it had overshot the allocation by 6.33 per cent. Hence, it increased its defence budget by 11.9% in 2019-20. In comparison India had enhanced its defence spending by 6% for 2020-21.

According to the budget, Pakistan’s emphasis would be on procurement of the equipment to enhance air defence capabilities, improve operational capabilities of the naval fleet and to advance surveillance and communication systems.

Comments

Pakistan’s defence spending as a percentage of the GDP (2.82 per cent) is the highest in the region with Chinese budget as share of GDP being 1.9 per cent, India 2.4 per cent, and Iran 2.3 per cent.

Comparison of the proposed defence expenditure with the overall expenditure and as share of the GDP to a great extent resemble that of the 2018-19 budget presented by the previous PML-N government, when it was 18.5 per cent of the total pie and 2.87 per cent of the GDP.

The figures given for defence spending do not give a full picture of the amount actually being spent on defence. One major exclusion is the apportionment of pensions for the retired troops. The government would be paying Rs369 billion under this head next year – a 12.8 per cent increase over the previous year. The increase in Pakistan’s defence budget is deceptive because invariably there is an increase midway and a lot of military expenditure is hidden under different heads. These include pensions, major acquisitions and the nuclear programme.

A closer analysis of the proposed figures reveals that the biggest hike in expenses is coming under the head of civil works, which accounts for the funds marked for maintenance of existing infrastructure and construction of new buildings. The civil works component is set to grow by 26.14 per cent to reach Rs155.5 billion.

A leaked joint services headquarters memo had shown that armed forces were seeking a 20 per cent increase in salary. However, that has not happened. The employees’ related expenses would get the lowest increment of 5.6 per cent.

As compared with the budgeted Rs 1.29 trillion defence expenditure, the size of the federal developmental budget is only Rs 650 billion. This shows the priorities of the government and the dominance of the military. Pakistan’s own latest Economic Survey has revealed that the country is bracing towards a massive and widespread joblessness due to the lockdowns and restrictions, required to curb the spread of the deadly coronavirus.

Pakistan Economic Survey 2019-20 has estimated a staggering number of 1.4 million to 18.53 million people going jobless in the country. The survey maintains that the ongoing restrictions and lockdowns due to coronavirus may see at least 2.2 per cent of the country”s employed workforce going jobless, while in case of a lockdown under limited restrictions, the numbers of joblessness in the country would hover around 1.4 million.

In monetary terms, the overall job loss would interpret into at least Rs 23.6 billion. A complete lockdown would interpret to push at least 18.53 million people, which is about 30 per cent of the labour force to unemployment, which job losses worth at least Rs 315 billion.

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