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Rahul Bhonsle

Oct 26, 2012

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India Defence Budget: Challenged by Fiscal Deficit


       Modernisation constraints for the armed forces are likely to increase with a possible cut back in defence budget for fiscal 2012-13 apart from inflation, exchange rate variation, procurement inefficiencies and integrity. With a no-nonsense finance minister in Mr P Chidambaram, it is time that the military look for fiscal and procedural efficiency to ensure that modernization remains on track.
India’s defence expenditure for the 2012 -13 may be challenged by attempts by the government to rein in the fiscal deficit. From the point of view of economic prudence a fiscal deficit that is around 5 percent of the GDP is recommended by most analysts for the current financial year. India is likely to touch 6 percent which has led the Finance Minister Mr P Chidambaram to undertake a major exercise targeted at restricting the fiscal deficit to 5.3 percent of GDP.

This will be just about a notch above the planned 5.1 percent. The target if achieved will ensure that the country’s fiscal credibility is restored and prevent downgrading by ratings agencies whose Damocles sword is looming large on the horizon. The route to achieve this is a mix of reduction in expenditure, divestment, sale of spectrum and other natural assets and dividend from the Public Sector Enterprises.

The real gains are expected to be from a cut back in non plan expenditure.  A report in the Economic Times of 25 October indicated that the finance ministry has called for a reduction of non plan expenditure by 10 percent. This is expected to provide an inflow of Rs 75,000 Crore (Approx US D 15 Billion). While defence spending has not been included in this figure there is likely to be a crunch on the Ministry of Defence as well, particularly knowing that it has been a laggard in expenditure on the capital account year on year. In the last two years many believe that it is only by balancing the books that Ministry of Defence could succeed in marking up expenditure.

So the scenario may well be that the defence budget for the fiscal 2012-13 (April to March) which is Rs 193407.29 Crore/Rs 1.93 trillion or  US $ 38.7 Billion may see a shortfall of US $ 1 to 2 billion. The revenue and capital component of the budget are Rs 1, 13,829 Crore and Rs 79,578 Crore respectively. There is limited scope for cutback in revenue expenditure given the need to make up for hollowness after revelations of letter by former army chief General V K Singh to the Prime Minister in the middle of the year. Ministry of Defence has recently approved a number of orders for missiles for tanks and infantry combat vehicles (Invar [25000 at Rs 2000 Crore], Konkurs M [10000 at Rs 1200 Crore] ). The Indian Air Force order for  200 BrahMos for Rs 6000 Crore has also been cleared. These will have to be partly fulfilled through revenue account.

The slash may therefore come in the capital expenditure earmarked for modernization. The major head under which capital expenditure for 2012-13 is envisaged is on aircraft and aero engines where the IAF will be spending the maximum almost three times the sum by the Navy and the Army combined. The Army is spending maximum on Heavy and medium vehicles as well as on other equipment which would include artillery guns, air defence systems, communications and so on. The army budget in this is almost 50 percent of the overall budget of the three services. The Navy has exclusive allotment for the naval fleet and also sizeable sums for aircraft and aero engines. Given a cut back there could be a delay in procurements in these areas.

Meanwhile the forebodings of cut back in non plan allotment for the 12th Five-Year Plan for the Ministry of Defence and Home is on the cards. Economic Times reported on 26 October that against a demand of Rs 114000 Crore by the Ministry of Home Affairs for the 12th Plan the allotments by the Planning Commission are only 46% that is Rs 52,000 Crore. The Army alone is expected to place a demand for Rs 100,000 Crore for the 12th Plan the other two services capital requirements are also likely to be in proportion, so how much will come their way remains to be seen?

While the economic difficulties of India are increasing security challenges also seem to be expanding particularly of modernization of the armed forces which have to face with a resurgent China spending two and half to four times of India on its military. At an 8 percent growth in GDP India could well afford to provide adequate resources for defence balancing the requirements of development. With estimates of GDP growth between 5 to 6 percent or a drop of 2 to 3 percent and the elections in 2014 looming large, there is likely to be further pressures for funds for the development sector.

Under the circumstances, defence will remain the milching cow with the existing inefficiencies in expenditure in the sector and reports of profligacy coming under the audit scanner including that by commanders in the theatre, the military will have to fight for more resources and also tighten the efficiency belt. With a no-nonsense finance minister in Mr P Chidambaram, it is time that the military look for fiscal and procedural efficiency to ensure that modernization remains on track. The Army’s tagline to attract youth to the officer corps, Do You Have it in you could well also include budget and procurement management for the future?

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