Defence Budget-Dwindling Share of Pie

Defence Budget 2020-21 with a 9.4% growth, translates into an increase of Rs. 40,367 crores. How would this affect India’s defence preparedness?

Background

Just after Independence, India inherited a defence force of around 5,00,000 which after the ceasefire in J&K in 1949, was proposed to be reduced by 200,000. This was a logical decision as at that juncture; the economy could barely sustain the country’s basic needs for survival.

Through the 1950s, the defence budget remained much less than what it was even under the British rule and below that of Pakistan.  It was only after the shock and humiliation of the 1962 border war with China that the attention once again swung back to the military renaissance. Over the next two decades, India was to double its military manpower and see a sharp increase in the defence budget.

Before 1962, India spent about 1.5% of its GDP annually on defence. This percentage grew over the years as the threat perceptions changed and peaked at over 4% in the mid-1980s. Subject to the fluctuating economy and shifting priorities, the defence spending has since been on a clearly declining trajectory, coming down to 2.18% in the last two decades.  

In the budget for 2020-21, the defence budget (less the pension bill) is just about 1.5% of the GDP, which is one of the lowest since the 1962 India-China border war. In contrast, Pakistan spends nearly 3.5% of its GDP on defence.  Our principal competitor, China, has the second-largest defence budget in the world, after the US. In 2018, it spent about $ 250 billion, which is approximately 1.9% of its GDP, a rate which China has maintained since 2013.

In the Indian budget for 2020-21, the Ministry of Defence has been allocated Rs 4,71,378 crore (US$ 66.9 billion).  Out of this, for Defences Services Estimates (DSE)- expenditure on the three-armed forces and the Defence Research and Development Organisation (DRDO)- has been earmarked as Rs 3,23,053 crore ($45.8 billion). The balance portion is distributed between defence pensions (Rs 1,33,825 crore or $19 billion) and civil pension (Rs 14,500 crore or $2.1 billion).  This year’s budget is an increase of 9.4% from the previous year’s budget.  

Analysis

Indian armed forces are in the midst of major modernisation drive with over Rs 40,000 crore worth of committed liabilities in the form of new orders.  The budget does not cater to the outflow for these committed liabilities, and in fact, in 2019-20, the deficit was almost 29% of the allotted funds for modernisation. Army’s ambitious multibillion artillery modernisation plan which is being rolled out will be slowed down.  IAF has to pay for its Rafales and S-400 system, leaving little for any other procurement.  The Navy can only dream of a 200 ship and three aircraft carrier blue water fleet by 2027.

India’s defence spending has been rising over the years, making India a preeminent regional power along with China and Japan. Between 1995 and 2015, it grew on an average of over 5.5% annually.  In 2015, India crossed a milestone, and with a defence budget of over $51 billion, it had the sixth-largest defence outlay in the world.  However, the catch lies in what it actually spends on defence modernisation (capital) in comparison to its administrative (revenue) costs.  

Since the mid-2000s, the pension and personnel cost has dramatically increased vis a vis the investment in new weapons systems.  For 2020-21, the revenue portion of the allocated budget is Rs 2,18,998 crore (64%) and the Capital expenditure is a mere Rs 1,18,555 crore (34%).  The trend for the last decade has seen the capital outlay progressively decreasing from a healthy 45% to the present 34%. The Capital outlay further comes down to nearly 25%, if the miscellaneous acquisitions of the MoD are deducted.

One reason for the erratic capital expenditure trend is the lack of focus on the long-term defence modernisation plans. The Long-Term Perspective Plans (LTPP) are devised in silos by the three services based on the narrow vision of self-aggrandization of own turf rather than taking a holistic view. This is amply illustrated by the conflicting demands- the Navy for its third aircraft carrier (about Rs 96,000 crores), the IAF which needs at least 110 additional fighter jets (over Rs 1 lakh crore) in quick order.  The Army has an equally long list- from attack helicopters to modernisation of the Artillery Arm. It is, therefore, not surprising, the MoD pays just lip service to the actual implementation of these plans and takes the cue from the higher echelons of the political leadership as advised by the fiscal managers. Defence budgets are not carried forward and lapse at the end of the year. The creation of the Chief of Defence Staff (CDS), will hopefully synergise the requirements of the armed forces and ensure the right mix in the best interest of national security.

For a developing nation with competing demands on its fiscal pie, it is not surprising that defence procurements are crisis managed rather than a result of a well thought out strategy.  The US, for example, initiates the process for selection of the next generation of big-ticket weapon systems at least a couple of decades before the current inventory becomes obsolescent.  India, on the other hand, delays or postpones its procurement, till a crisis situation looms overhead.  The state of the IAF fighting platforms is testimony to this fact. The delayed decision is costly as prices are high for off the shelf buying besides the gaps in an operational capacity to which the country's national security is exposed.

There is a crying need for a balance between Capital and Revenue expenditure. Only if the Capital expenditure gets 50% of the defence budget can it address modernisation, and more importantly, put the indigenous defence industry on solid ground. If the modernisation is import driven, as it is now, it drives the cost so high and the procurement cycle so long that in real terms, there is hardly any movement.

A study by International Peace Research Institute Stockholm had India topping the list of arms exporters accounting for over 15% of global arms imports between 2001-14.  Despite a large and lumbering defence public sector organisation, India has barely created any worthwhile high-tech weapons systems beyond the licensed production model.  With the Rupee seeing a devaluation from Rs 40 to a US$ in 2005 to the present Rs72 today, this depreciation has further brought down the real value of the capital outlay in the international arms bazaar.  

Experts advocate a strategy which is based on two pillars- minimum 3% of GDP matched with a focussed strategy of indigenisation over the next two decades.

The primary reason for the increase in revenue cost is due to the increasing cost of salary, pension and other benefits. The defence budget pays nearly 5.1 million people- 1.4 million uniformed personnel, 3.2 million pensioners and 3.98 lakh defence civilians.  Defence pension has grown exponentially- from 10% of DSE in the late 1980s to over 40% in 2020-21. 

While military leaders and defence analysts may raise strident cries for at least 3% of the GDP year on year, it is ultimately the national objectives which will drive the government to take a call.  A clearly defined long-term national strategy will lay down the milestones for national military capability. Only then, allocation of funds to achieve this capability can be done in a more precise manner, rather than doing knee jerk allocations.  For example, while India may declare a capability to fight a two-front war simultaneously, the question is whether the defence budget is commensurate with the creation of this capacity.

Counter View

A contrary view is that should India spend so much of its money on the military?  While every year, the defence budget sees an increase, health and education get less. Should India not increase its allocation on public health care, education, affordable housing and infra projects? The ‘gun versus butter’ debate goes on.

At the present rate of allocation, 27% of the tax revenue is consumed by the defence budget. In case the budget is increased to 3% of the GDP, this will go up to 38% of the tax earnings.  This can be met only by increasing tax rates or widening of the tax base, both of which come with a high social cost. 

Assessment

  • Manpower rationalisation, especially of the Army is imperative.  In a recent exercise, the Army is looking at a reduction of 100,000 soldiers by the creation of Integrated Battle Groups and other reforms. In comparison, PLA has downsized over 300,000 soldiers in the recent past.
  • Every year over 60, 000 soldier retires. This number can be reduced if the retirement ages are increased (for the support elements). For combat elements who will perforce have to retire at an early age, and assured second career in PSU or CAPF will help.
  • Hike in the defence budget is contingent on economic growth. With the growth, this year at 5%, the lowest in eight years, and equally discouraging predictions for next year, the outlook for the defence growth remain grim for the foreseeable future.
  • The import component has to come down through a pragmatic approach by facilitating greater private participation and earning through exports.
  • CDS has recently recommended other measures to finance military projects like monetisation of defence land (approximately 17.3 lakh acres held all over India). However, such proposals have their flip side and should not end up in land mafias with political patronage usurping defence land preserved for so long due to a conservative approach till now.

 

Comments