What can the Defence Sector expect from 2017-18 Union Budget ?

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The Union Budget 2017–18 that comes in the wake of the demonetisation drive will be keenly watched in the country. Amidst speculations of being a budget with extra sops, defence, a crucial sector that was inconsequential in the previous budget, can do with more priority this time. The year 2016 will be remembered as the year with the longest period of unrest in the Kashmir valley, with 244 militant killings, 116 infiltrations and the highest number of casualties (army death toll alone is 66, which is the highest in the last six years). In this backdrop, the sector will be expecting a better share of budgetary allocations to equip it.

Understanding the Defence Budget

The previous budget witnessed some changes in the long-established format of resource allocation among the three defence forces (army, navy and air force) and other establishments under MoD.

The defence budget is inclusive of the finances for employee salaries, training costs, maintenance of equipment and facilities, support of new or ongoing operations and development and procurement of new weapons, equipment and vehicles.

Currently, over 60 per cent of the requirements are met by imports. This trend puts a heavy toll on the development priorities of the country. Since 2014, there has been a series of efforts aimed at overhauling the sector. This includes the decision to allow 100 per cent Foreign Direct Investment (FDI) and revising the Defence Procurement Policy (DPP) to boost defence manufacturing in tune with the flagship Make in India programme of the Centre. Though the initiatives and policy prescriptions have long-term benefits, the fact that such efforts were undertaken signifies the importance of schemes with long-term benefits.

In 2016–17, the budgeted allocation of defence was Rs 2,49,099 crore, a nominal increase from 2015–16, when the allotted amount was Rs 2,46,727 crore (though the revised estimate figure was Rs 2,24,636 crore). The one per cent increase in the last fiscal year, however, has nothing to do with the overall improvement of the sector. In fact, over the past few years, the sector has been recording minimal increase in its budgetary allocations.

Table 1 shows the allocation of defence budget from 2012 onwards.

Table 1: Allocation of Defence Budget

Year Defence budget (in crore) Per cent of total Central Government expenditure
2012–13 1,93,407.29 12.97
2013–14 2,03,672.12 12.23
2014–15 229000.0 12.8
2015–16 246727.0 13.9
2016–17 249099.0 12.6

 

However, the defence budget of 2016–17 was more about pays and perks, as defence pensions took up a major share of Rs 82,000 crore with One Rank One Pension (OROP) in operation. This needs to be read along with the fact that the defence budgetary allocation for 2016–17 constituted only 1.71 per cent (excluding defence pensions) of the Gross Domestic Product (GDP).

The situation seems even grave, in view of how the Long Term Integrated Perspective Plan for the sector prioritises the procurement over the next 15 years. The Parliamentary Standing Committee on Defence has recommended allocations in the sector to constitute three per cent of total GDP; only when we add up the defence pensions does the allocation of the previous budget reaches 2.26 per cent of GDP. The Committee further recommends the equipment profile of the forces to constitute 30:40:30 (30 per cent state-of-the-art, 40 per cent current and 30 per cent nearing obsolescence) ratio. But the present equipment profile stands at 15:45:40. Considering the overall constraints faced by the sector, this trend will only widen the gap in defence structures as far as capital acquisitions and modernisation demands of equipment are concerned. The 2017–18 budget will reveal how much of the budgeted allocation was utilised. In this backdrop, a significant development in the sector deserves a mention.

Recent Initiatives by MoD

Keeping the above concerns in mind, the Ministry of Defence (MoD) sought recommendations from an 11-member Lieutenant General D B Shekatkar Committee. The intent was to find means to enhance the combat potential of the armed forces and study prospects of rebalancing defence expenditure for streamlining its long-term priorities. The Committee looked into rebalancing the revenue and capital expenditure allocations for defence; albeit, the timing of its submission of report to MoD could have been earlier to better implement some of the recommendations. Since it is one of the first attempts by the sector to look into the pros and cons of its increasing revenue expenditure, one can surmise that there is an increasing understanding as to how the capital acquisition processes are getting affected over the years.

The dwindling share over the years reveals some prevalent systemic issues. The argument of MoD is elusive, as this is justified on the grounds that under-spending by a few agencies balances overspending by a few others.

The previous budget witnessed some changes in the long-established format of resource allocation among the three defence forces (army, navy and air force) and other establishments under MoD. The budget document halved the eight demands for grant of defence budget to four by means of rearranging them into Defence Services (Revenue Outlay), Defence Services (Capital Outlay), Defence Pensions and other miscellaneous expenses (Revenue and Capital). This was the first step towards justifying the budget-making process – to study the allocations provided to the three forces separately from the allocations made to other organisations under MoD. In line with this development, the Shekatkar Committee recommended to review the financial management system of MoD along with its allied organisations.

The Prime Minister, while addressing the Army, Naval and Air Commanders Force (December 2015), articulated the need to have a new approach for the forces – give primacy to technology rather than blindly increase the size of the forces. Securing the borders alone will not solve the issues. Technological innovations are the need of the hour to address second-generation threats to national security. In tandem with this fresh insight, the Shekatkar Committee recommended a review of the need for the redeployment of manpower in the army. It is only natural that the revenue expenditure of the armed forces is high with 1.4 million active armed personnel, but that should not be a factor in demanding a hike in allocations towards revenue expenditure by downsizing the capital requirements.

Another issue that is how the defence sector budget often falls short of the Parliamentary Standing Committee recommendations. But this demand needs to be studied in depth. Over the years, a recurring trend is that of underutilisation of allotted funds for capital acquisition. The Parliamentary Defence Committee report highlights this scenario. Table 2 illustrates this better.

Table 2: Trends in Capital Expenditure Under-spending

Year Budget estimate (in crore) Actual (in crore) Under-spending (in crore) Under-spending (in per cent)
2012–13 66,032 58,769 7,263 11
2013–14 73,445 66,850 6,594 9
2014–15 75,148 65,582 9,566 13
2015–16 77,407 65,742 11,665 15

 

The dwindling share over the years reveals some prevalent systemic issues. The argument of MoD is elusive, as this is justified on the grounds that under-spending by a few agencies balances overspending by a few others. In most cases, it is evident that the unutilised budgetary allocation is diverted to non-priority or nonessential heads of account and shown as not-lapsed, when funds have often lapsed. The suggestion of introducing roll-on plans for acquisitions (a target is rolled to the subsequent year to evade lapses in meeting targets) to counter under-spent funds has been a practice. This was tested and failed at the organisation level itself – Ordnance Factory Board (OFB) failed to adhere to its targets, despite a roll-on, after it failed to utilise funds for manufacture ammunition requirements. This is largely because of lack of a concerted planning at the agency level and broader organisational level. More than paucity of funds, often, an integrated planning is missing – be it in estimating the requirements or prioritising the budgeting. These do not reflect a need to demand more funds, at least now, unless existing issues are corrected.

It is expected that the forthcoming budget may give priority to capital acquisition. Unless efforts are undertaken to utilise it efficiently and give equal opportunity to private players to have a better share in defence manufacturing, it may not yield desired outcomes. Nevertheless, since the sector has been acknowledging its systemic inefficiencies and seems open to rebalance the defence expenditure, there is a lot of room for bringing in the required changes.

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Vinny Davis is currently a Managing Associate for Centre for Strategic Studies at Centre for Public Policy Research. She is a key member of CPPR and presently leads the Centre for Strategic Studies wing of the organization. She completed her Master of Philosophy in Politics and International Relations from Mahatma Gandhi University. She has presented papers in national and international conferences and has authored several publications