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Business News/ Opinion / Rescuing India’s defence spending from oblivion

Rescuing India’s defence spending from oblivion

With a squeezed defence budget, it's essential to kick-start a broad swathe of defence reforms in the country

When you exclude defence pensions, the defence budget drops to a meagre 1.6% of GDP, a drop from last year’s low of 1.74%. Photo: Abhijit Bhatlekar/MintPremium
When you exclude defence pensions, the defence budget drops to a meagre 1.6% of GDP, a drop from last year’s low of 1.74%. Photo: Abhijit Bhatlekar/Mint

Last year, finance minister Arun Jaitley did something different in his budget speech. For the first time in decades, he entirely skipped mentioning defence spending in his speech.

This year, he did a slightly better job of discussing defence. Apart from mentioning a few minor things about a defence travel system and an online pension disbursement system, he had this one sentence to say: “For defence expenditure excluding pensions, I have provided a sum of Rs2,74,114 crore including Rs86,488 crore for defence capital."

Between what was said and unsaid, there are many implications for defence expenditure in the country.

The first thing left unsaid was that the budget estimate of defence pensions this year is a whopping Rs86,000 crore. When you include defence pensions, the overall defence budget amounts to Rs3.59 trillion, or 2.1% of gross domestic product (GDP). When you exclude defence pensions, it drops to a meagre 1.6% of GDP— a drop from last year’s low of 1.74% of GDP.

ALSO READ: Union Budget 2017: Defence budget up over 6.2% at Rs2.74 trillion

Falling expenditure on defence is of concern in the world seen in 2017. This year has an increasingly belligerent China, a new president in the US who wishes to be more insular about American interests and a Russia that is playing footsie with Pakistan. The deterrent effect of defence spending is needed more now than in the last few years.

The song remains the same on the capital acquisitions budget. As the government has done repeatedly, there was a 9% slash in last year’s revised estimate, compared to the budget estimate. This year, there is a nominal increase of 10% in the capital acquisitions budget over last year —but this is a net reduction in capital spending once you account for inflation and slashed expenditures in the revised estimate.

While Rs86,000 crore on capital acquisitions might sound like a large number, close to 90% of it is allocated to paying off instalments of money for past purchases of Sukhoi fighter craft, aircraft carrier Vikramaditya, transport planes like the C130J Super Hercules and more. The available budget for future acquisitions will be about Rs10,000 crore and no more.

Outside of the budget, the Modi government has done a fine job in liberalizing foreign direct investment (FDI) in defence, increasing it all the way up to 100% foreign ownership, with any FDI up to 49% foreign ownership under the automatic route.

This move was long overdue and a necessary step in providing competition to a moribund public defence production sector— and avoiding an excessively high defence import bill.

However, with barely Rs10,000 crore allocated towards new capital acquisitions, Make-in-India-Defence might remain a slogan and nothing more.

ALSO READ: Highlights of Union Budget 2017

With a squeezed defence budget, it’s essential to kick-start a broad swathe of defence reforms in the country. The Indian Armed Forces (especially the Indian Army) is too person-heavy and needs some force rationalization. Even China decided to reduce its troop size by 300,000 people in 2015. India seems stuck with an old mindset of raising new troops like an 80,000 strong Mountain Strike Corps directed against China.

Apart from this, the defence ministry needs to urgently follow the railway ministry in adopting accrual accounting. It is evident that the true pension liabilities of the Indian Armed Forces are unknown—and the Armed Forces need a good reckoning of their assets and liabilities to be prepared for future conflict. Successive standing committees on defence have cried themselves hoarse on accrual accounting and zero-budgeting, to little avail so far.

Defence sector reforms and reorganization need not happen with the budget. But with the second budget in a row that faces deeper fiscal constraints than ever before, one can hope that defence minister Manohar Parrikar introduces new policies over the coming year.

Pavan Srinath is a fellow and faculty member at the Takshashila Institution, an independent think tank and school of public policy. He tweets at @zeusisdead

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Published: 03 Feb 2017, 01:30 AM IST
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