2.5 per cent of GDP ideal

Issue No. 14 | July 16-31, 2014By Air Marshal (Retd) B.K. PandeyPhoto(s): By Dassault Aviation

Given the huge backlog of acquisitions of military hardware, it appears that the 12.7 per cent enhancement in the budgetary allocation for defence may not be adequate.

The newly elected Government of Prime Minister Narendra Modi presented its first budget on July 10, just 45 days after taking over the reins of power. On account of the promises of “good times ahead” made by the National Democratic Alliance (NDA) during the election campaign, expectations of the nation from the Minister of Finance Arun Jaitley had justifiably risen sky high. Unfortunately, the NDA Government had inherited an economy that was not in a very healthy state with the fiscal deficit at nearly twice the acceptable level. The problem has been compounded further by the escalating crisis in the Middle East that may impact oil prices as well as predictions of a failed monsoon that would have a devastating effect on agricultural production. These factors made it all the more difficult for the government to muster resources seriously limiting the options before the Finance Minister in the formulation of the budget.

The presentation of the budget was followed by a stormy debate in the public domain and was unfortunately reduced to a BJP vs Congress slanging match. However, what was conspicuous by its absence was serious debate on the defence budget except for the sharp increase in foreign direct investment (FDI) in the defence sector from 26 to 49 per cent with approval by the Foreign Investment Promotion Board (FIPB). Incidentally, this is not entirely a new proposition as it was mooted by the UPA II Government too as the inflow of FDI was pitifully low. This proposal was stoutly resisted by the then Minister of Defence A.K. Antony on account of some vague and unwarranted apprehensions. The UPA Government had finally settled for FDI in the defence industry at 49 per cent only if it involved transfer of high-end technology and that too on case-by-case basis and required to be approved by the Cabinet Committee on Security (CCS) and not just the FIPB.

In the budget of 2013-14 the sum allotted for defence was Rs. 2,03,162 crore representing a hike of a measly 5.3 per cent over the previous year, not enough even to compensate for inflation. Besides, a sum of Rs. 7,869 crore was taken back from the defence budget before the end of the financial year 2013-14 and credited to the consolidated fund of India to meet with pressing commitments in other sectors, further eroding the percentage hike.

As against the allocation in 2013-14, despite the prevailing fiscal stress, the allocation for defence in 2014-15 is to the tune of Rs. 2,29,000 crore, up by Rs. 25,838 crore representing a hike by 12.7 per cent.

Allocation under capital expenditure, as compared to last year, has gone up from Rs. 78,872 crore to Rs. 94,588 crore, an increase by Rs. 15,716 crore which represents a hike by nearly 20 per cent. This was badly needed in view of the several proposals for acquisition of urgently required military hardware that have been languishing on account of lack of resources. On the other hand, the revenue expenditure has gone up by Rs. 9,612 crore i.e. from Rs. 1,24,800 crore to Rs. 1,34,412 crore, a hike by 7.7 per cent only. Also, the ratio between allocations under capital expenditure and revenue expenditure in the financial year 2013-14 was 0.63 whereas in the budget for 2014-15 this ratio has gone up to 0.70 reflecting the distinct shift in focus towards capital expenditure. This should be good news for the armed forces who are eagerly looking forward to the induction of modern military hardware.

In the circumstances in which this budget has been formulated, the defence sector may have reasons to be happy with the allocations. However, the ground realities are not very comforting and do not bode well. Given the huge backlog of acquisitions of military hardware including combat aircraft, attack and heavy-lift helicopters, heavy transport planes, aerial tankers and basic trainer aircraft, all for the Indian Air Force, helicopters, artillery guns and air defence missile systems for the Indian Army as well as submarines and maritime helicopters for the Indian Navy, it appears that the 12.7 per cent enhancement in the budgetary allocation for defence may not be adequate. One cannot ignore the disturbing fact that outlay for defence still constitutes only 1.78 per cent of the GDP. Unless this figure is enhanced substantially or at least to 2.5 per cent, there is a strong possibility that the quest for rapid modernisation of the armed forces may continue to remain a distant dream, at least during the current financial year.