by Prakhar Gupta

As pensions continue to weigh heavily on budget allocation, the quantum jump in defence budget needed for rapid modernisation may not come anytime soon. However, the right mix of efficient spending and smart choices might just do the trick for India

Attempting to strike a balance between available resources, which cannot be stretched beyond a point, and the necessities of the armed forces, the government has allocated Rs 404,277 crore (including pensions) or Rs 294,427 crore (excluding pensions) in the Union budget towards defence for the next fiscal.

The Rs 294,427 crore figure includes a capital outlay (for purchase of new equipment) of nearly Rs 99,000 crore and a revenue component (for salaries, allowances, etc) of around Rs 195,000 crore.

Let’s take a closer look at these numbers.

Compared to 2017-18, the overall budget allocation has increased approximately 8.5 per cent (including pensions) and approximately 6 per cent (excluding pensions). The budget allocation for pensions has increased 14.6 per cent over the last year, and for revenue, it has risen by approximately 5 per cent.

The most important component of the budget, capital outlay, which is meant to be used for the modernisation of the armed forces, has risen by 8.6 per cent.

As a percentage of gross domestic product (GDP), India’s defence expenditure has come down to 2.16 per cent in this budget from 2.23 per cent in the previous year. This, however, shouldn’t come as a surprise because India’s defence spending has been decreasing as a percentage of GDP for the last six years.

Moreover, the Defence Ministry excludes defence pensions from the budget figures. Doing this brings the spending as a percentage of GDP down to 1.56. This gives the impression that the government has moved further away from meeting the 2.5 per cent (of GDP) spending target even as the actual spending remains relatively close to the desired figure.

What Do These Numbers Tell Us?

One, new major acquisitions are unlikely to be made this year. With capital expenditure increasing only marginally, it will be just about enough to meet the committed liabilities for earlier contracts. New acquisition deals, like the one for the S-400 air defence systems from Russia, could be delayed further, affecting modernisation plans.

Two, unlike in the previous years, the Defence Ministry has managed to spend all funds allocated to it for modernisation in 2017-18. Large defence purchases often take years to complete, but the budget allocation lapses at the end of the financial year. As a result, the ministry is forced to return the money meant for capital acquisition. With the allocated fund spent in time, the ministry seems to have made the most of it.

Three, in 2018-19, India would spend significantly more on pensions than on acquiring new weapons platforms. The allocation for personnel expenses and pensions has ballooned drastically with the implementation of the Seventh Central Pay Commission and the ‘One Rank, One Pension’ formula. Of the 8.5 per cent increase in allocation, nearly 2.5 per cent is due to the rise in pensions. This has reduced the government’s ability to allocate more funds for modernisation of the armed forces.

What is the Way Out?

As pensions continue to weigh heavily on budget allocations, the quantum jump in the defence budget needed for rapid modernisation may not come anytime soon.

To address budgetary challenges, the government can try to reduce manpower cost. Faced with similar budgetary constraints in the past, China has cut the strength of its army in several phases over the years. It reduced troop numbers by one million in 1985, 500,000 in 1997, around 200,000 in 2003 and another 300,000 in 2015. India could initiate similar restructuring and reform, although ours need not be as drastic as China’s. The numerous security threats India faces make this a sensitive issue, but the fact that a streamlined and well-equipped military is better than a manpower-intensive one equipped with mostly obsolete equipment, remains.

Another piece of the solution could be a more efficient utilisation of the limited capital allocation. Despite its best efforts, including the introduction of a revised Defence Procurement Procedure, the government seems to have failed to significantly re-engineer the equipment acquisition system. The process is still marred with confusion, long gestation periods and lengthy discussions on pricing and delivery, the latest case in point being the acquisition of minesweeper vessels for the Navy. A long gestation period not only affects the preparedness of the armed forces, it also results in a significant increase in the cost of equipment being procured. By making the process of acquisition shorter and smoother, and by making smarter choices, India can acquire more for its forces with lesser expenditure.

To deal with the issue of unused funds, capital allocations in the defence budget should be made non-lapsable. In 2017, a proposal for the same was sent to the Finance Ministry, which is reportedly not interested in the creation of a new fund. There has been no movement on the issue ever since.

The idea of creating non-lapsable funds is not a new one. In 1998-99, the National Democratic Alliance government of Atal Behari Vajpayee created the Non-Lapsable Central Pool of Resources for the North Eastern states to ensure effective utilisation of funds allocated for the region.

With the Defence Ministry managing to spend all of the allocated funds this year, many have argued against the need for such a fund, but we don’t know if the trend would continue. The fact that the percentage of underspent funds has gone up over the years is indicative of the inefficient use of available funding. In the four years preceding 2016, the ministry surrendered as much as Rs 35,000 crore of its capital allocations.

Indigenous manufacturing is another piece of the puzzle. Although a costly affair in the near term, as it involves the development of technology and an industrial base, indigenous manufacturing can help cut costs in the long term and be a source of employment for skilled labour in the country. Two announcements made in the budget can have an impact on this – one, the government’s decision to set up two defence industrial corridors, and two, its plan to introduce an industry-friendly Defence Production Policy “to promote domestic production by public sector, private sector and Ministry of Micro, Small and Medium Enterprises”.

While both of these initiatives are welcome for the industry, one hopes they do not meet the same fate as other policy initiatives such as Make in India and the Strategic Partnership Model. Bureaucratic bottlenecks, long-winded negotiations and lack of requisite political push in some cases have stalled these schemes. For all the rhetoric surrounding these initiatives, not one of the 105 proposals (worth Rs 233,000 crore) that have been granted Acceptance of Necessity (first step in the defence procurement process) by the government in the last three financial years and categorised as Make in India, has actually taken off by some accounts.

At the level of the three forces – army, navy and the air force, integrated planning of procurement and modernisation can help prioritise. Capital allocation is divided among the three services, but rarely in equal proportions. Increase in one’s share comes at the expense of another’s. Through joint planning, the forces can coordinate in a better manner and pursue the most important acquisitions.

The Long-Term Integrated Perspective Plan does not seem to have had sufficient impact on improving coordination between the three services. Political push and follow-through would be required for better results on this front.

While none of these approaches by itself is likely to help, a combination of them might just do the trick for India. Will the government move beyond periodically intoning its commitment and bite the bullet?