India’s Defence Budget 2012-13

Byline: Laxman Kumar Behera / New Delhi

The Union Budget 2012-13, presented to the Indian Parliament in March 2012, has allocated US $40.3 billion for the Defence Services that include the three armed forces (Army, Navy and Air Force), the Defence Research and Development Organisation (DRDO) and Ordnance Factories. The allocation – which constitutes India’s official defence budget – is an increase of 17.6 per cent over the previous amount. It is however to be noted that the official budget is apart from $9.3 billion which has been earmarked for Defence (Civil Estimates) to meet the secretariat expenses of Ministry of Defence and the expenses of defence ministry-affiliated organisations, including the Coast Guard. The major portion of the Civil Estimate is however accounted for by defence pensions, which amounts to $8.1 billion in 2012-13. If all these elements are included, the total resource available for the Ministry of Defence and its various establishments totals $49.6 billion.

While announcing the budget for defence, the Finance Minister also mentioned that the “allocation is based on present needs and any further requirement would be met.” The Ministry of Defence, which is in the midst of a major controversy surrounding the gaps in defence preparedness, does not seem to be very happy over the allocation, although growth of new defence budget is one of the highest in recent years. The Union Defence Minister, AK Antony while reacting to the defence allocation said: “I know the limitations of this year’s defence budget… but we will try and get more money in the second half of the year.”

Defence Budget Escapes Economic Slowdown

The new defence budget comes at a time when the performance of the Indian economy is under stress and the prospect of recovery is tenuous. As the Economic Survey 2011-12 – presented to the Parliament a day before the Union Budget was handed down – mentions, the real GDP growth is projected to grow by 6.9 per cent in 2011-12 year and at 7.6 per cent in 2012-13. These growth rates, which are significantly lower especially in comparison to nearly 10 per cent growth registered in 2006-07, have however not forced the government to tighten its purse. Instead, it has resorted to what can be termed as fiscal profligacy. This has been done by increasing the overall central government expenditure by a hefty 18.5 per cent, where as the GDP in nominal terms is projected to grow by 14 per cent. Consequently, the fiscal deficit, which the Finance Minister had promised in his previous budget speech to reduce to 4.1 per cent of GDP in 2012-13, is now projected to increase to 5.1 per cent. This expansionary fiscal policy has been the prime mover for the large increase in the budget of the defence ministry, which would otherwise have come under severe budgetary pressure if the Finance Minister had chosen a tight budget.

Revenue and Capital Expenditure

India’s defence budget is broadly divided into two categories: Revenue Expenditure and Capital Expenditure. The Revenue Expenditure is the ‘running’ or ‘operating’ cost of the defence services. The major items under this head include pay and allowance, transportation, stores (such as ordnance stores, supplies by ordnance factories, rations, patrol, oil and lubricants, spares, etc), and works (which include maintenance of buildings, water, electricity charges, rents and taxes, etc). The Capital Expenditure is incurred mostly on account of procurement of big-ticket items such as tanks, aircraft and aero-engine, ships, submarines etc. In the new budget, the Revenue Expenditure has increased by 19.5 per cent to $23.7 billion, primarily due to increase in the manpower cost of the armed forces. In fact, the pay and allowances of the three services account for 46 per cent of total growth in the defence budget. The Capital Expenditure has increased by 15 per cent to $16.6 billion.

Highlights of India’s Defence Budget 2012-13
• Defence budget: $40.3 billion
• Revenue Expenditure: $23.7 billion (58.9%)
• Capital Expenditure: $16.6 billion (41.1%)
• Capital Procurement Budget: $13.9 billion
• Share of Army: $23.3 billion (50%)
• Share of Navy: $7.8 billion (19%)
• Share of Air Force: $10.1 billion (25%)
• Share of R&D: $2.2 billion (6%)
• Defence Budget as Percentage of GDP: 1.9%
• Defence Budget as Percentage of Central Government Expenditure: 12.9%

Share of Army, Navy and Air Force

The Army with an approximate budget of $20.3 billion accounts for 50 per cent of the latest defence budget, followed by the Air Force ($10.1 billion; 25 per cent), Navy ($7.8 billion; 19 per cent), and Defence Research and Development Organisation ($2.2 billion; six per cent). It is noteworthy that compared to the previous year’s budget, Navy is the only service which has increased its share in the defence allocation (from 15 to 19 per cent). The Air Force’s share has decreased the most (by four percentage points), whereas the Army’s share has declined by one percentage point.

Impact on Modernisation of Armed Forces

The 15 per cent increase in the Capital Expenditure has resulted in an additional amount of $2.2 billion. Given that most of the Capital Expenditure is incurred on equipment acquisition for modernisation of the armed forces, it is pertinent to see how the increase would affect each of the services. It is however to be noted that the three services (Army, Navy and Air Force) account for 94 per cent ($15.5 billion) of total Capital Expenditure in 2012-13, with the Air Force at the top with a share of 38 per cent ($6.4 billion), followed by the Navy (31 per cent or $5.1 billion) and the Army (24 per cent or $4.0 billion). Of the total Capital Expenditure of the three services, around 89 per cent ($13.9 billion) is earmarked for capital acquisition or modernisation. These impressive figures do not however reveal the complete story. Of the total capital acquisition budget, over ninety per cent is accounted for by the ‘committed liabilities’, leaving aside only $1.2 billion for the ‘new schemes’. Moreover, a closer look at the growth of the modernisation budget of 2012-13 would reveal that the focus is entirely driven by the Navy, which has got a 72 per cent hike (to $5.0 billion) in its modernisation budget. The Air Force’s modernisation budget has increased marginally (by 0.5 per cent) to $5.9 billion, while the Army’s has declined by three per cent to $3.0 billion.

The decrease in the Army’s capital acquisition budget and a marginal increase in the Air Force’s budget do not seem to be in sync with their modernisation requirements. This is more so given the Army’s ‘hollowness’ in its preparedness, the falling fighter squadron strength of the Air Force and its big-ticket contracts (including the multi-billion dollar Rafael fighter) that it is expected to sign in the 2012-13, and the sharp devaluation of Indian rupee against US dollar.
The hollowness in Army’s preparedness has evoked a sharp response in recent time, particularly after the Army Chief’s leaked letter to the Prime Minster brought to public notice the deficiencies in its combat power. Among others, the Army Chief has noted that the tanks are “devoid of critical ammunition”, the air defence is “97 per cent obsolete” the special forces are “woefully short of essential weapons” and there is a large scale void in critical surveillance and night-fighting capabilities. Although the defence minister has refuted the claims of the Army Chief, saying “these are all rumors … and India is in much more strong position as compared to the past”, the ground reality is somewhat different. The Parliamentary Standing Committee while examining the 2012-13 budgetary provisions of the defence services has noted key deficiencies in country’s defence preparedness. The report of the Committee presented to the Parliament on 30th April, noted “huge gaps between the sanctioned and the existing machines with Army Aviation”, short supply of tank ammunition, huge delay in induction of artillery guns and shortages of bullet proof jackets. For the Air Force, the Committee has observed that the Air Force is presently operating at 19 per cent less than the government sanctioned strength of 42 squadrons. The Committee has also expressed its concern over the fact that most of the fighter aircraft fleet is more than 30 years old and the number of squadron is likely to reduce further during the 12th Plan (2012-17).

The lack of adequate budgetary support to address the above deficiencies has further been aggravated by the sharp fall of Indian rupee against international currencies, particularly the US dollar. The present exchange rate, which is around fifty-two rupees to a dollar, is around 10 per cent devalued compared to the average exchange rate for 2011-12. If it remains at the same level or falls below it would further erode the import capacity of the acquisition budget.

Return to Under-Utilization

When the defence budget 2011-12 was presented in February 2011, it gave an impression that the years of effort put in by the defence ministry to fine-tune its procurement process has finally yielded dividend. This impression now seems to be premature, as the defence ministry has once again come back to under-utilization of its capital budget. As the new budget reveals, of the total Capital Expenditure earmarked for 2011-12, $0.6 billion (4.41 per cent) has been under-utilized at the time of revised estimate. The unspent amount could have been much higher if the Navy had not been allowed to overspend its allotted capital budget (total under-spending from Air Force and the Army together amounts to $1.2 billion.
While the un-spent amount in the Air Force’s modernisation budget is mostly from the head of ‘aircraft and aero-engine’, in the case of the Army the under-spending is from a number of heads, including ‘aircraft & aero-engine’, and ‘other equipments’. The surrender of funds under such critical heads and of such magnitude not only reflects poorly upon budgetary management and the procurement system, but is also a cause of concern given the huge gap in national military capability.

Widening Gap between India & China

The under-utilization of modernisation budget is also a cause of concern given the rapid military modernisation in neighboring countries, particularly China which is pursuing an unprecedented level of military modernisation with an official defence budget of $106 billion in 2012. From the Indian perspective what is worrisome is the pace at which China has increased its military budget in the past two decades or so. As per the estimates of the Stockholm International Peace Research Institute (SIPRI), Beijing’s military expenditure in real terms has grown by 620 per cent between 1990 and 2011. In comparison, India’s military spending has grown by 152 per cent. Consequently, the gap between the two countries’ military spending which was almost negligible in 1990 has been widened by a factor of three in favour of Beijing. Consequently also, while China is boasting of a military capability which is increasingly becoming state of the art across the spectrum, India is still struggling with basic requirements, as highlighted by the army chief’s leaked letter to the Prime Minister and the report of the recent parliamentary committee.





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