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India’s Defence Budget 2011-12: An Analysis

 

 
 
By Laxman Kumar Behera
Published: March 2011
 
 
 
 
 
 

New Delhi. The Indian Budget 2011-12, presented to the Parliament on February 28, 2011, has allocated Rs. 1,64,415.49 crore ($36.03 billion) for the Defence Services that include three services (Army, Navy and Air Force), Defence Research and Development Organisation and Ordnance Factories (OFs). This is apart from Rs. 38,156.81 crore which has been earmarked to defray civil expenditures of Ministry of Defence (MoD) and its affiliated organisations, including, the Coast Guard, and for defence pension (Rs. 34,000 crore).

 

New Delhi. The Indian Budget 2011-12, presented to the Parliament on February 28, 2011, has allocated Rs. 1,64,415.49 crore ($36 billion) for the Defence Services that include three services (Army, Navy and Air Force), Defence Research and Development Organisation and Ordnance Factories (OFs). This is apart from Rs. 38,156.81 crore ($8.4 billion) which has been earmarked to defray civil expenditures of Ministry of Defence (MoD) and its affiliated organisations, including, the Coast Guard, and for defence pension (Rs. 34,000 crore or $7.5 billion).

In other words, the total amount available for the MoD and its various establishments is Rs. 2,025,72.3 crore ($44.4 billion). By convention, only budgetary provisions for the Defence Services (i.e., Army, Navy, Air Force, DRDO and OFs) constitute India’s defence budget.

Key Statistics

As compared to the defence budget 2010-11, the new budget has grown by 11.59 per cent. However the growth rate comes down to 8.47 per cent over the revised estimate for 2010-11. That means the Ministry of Defence (MoD) has overspent (at the time of revised estimate) Rs. 4,237.69 crore ($0.9 billion) from the original allocations made in 2010-11. However, the overspending unlike in the previous years is on both the sides of revenue and capital expenditure (while the former has grown by Rs 3,404.43 crore (3.9 per cent) from the original allocation, the capital expenditure has grown marginally, but significantly by Rs 833.26 crore (1.4 per cent)).

The 12 per cent growth in the defence budget has resulted in an additional allocation of Rs. 17,071.49 crore ($3.7 billion) over the previous budget.

Of the additional amount Rs 7,872.68 crore ($1.7 billion) is earmarked for Revenue Expenditure and the balance Rs. 9,198.81 crore ($2.0 billion) for Capital Expenditure, the latter means the money allocated for acquisitions and modernisation.

The Revenue Expenditure therefore has grown by 9.01 per cent to Rs 95,216.68 crore ($20.9 billion) and the capital by 15.33 per cent to Rs. 69,198.81 crore ($15.2 billion). On the revenue side, the growth has although been necessitated because of the increase in pay and allowances, yet there has been an increase in budgetary provision for other revenue items such as stores, transportation, etc.

The decent increase in the defence budget has a favorable impact on key statistics (see Table), except for its shares in total central government expenditure and GDP.

The declining share of defence in these key parameters can be ascribed to relatively faster growth of Indian economy and the resultant increase in total central governmental expenditure. On the positive side, the ratio between Revenue Expenditure and Capital Expenditure has been further improved towards the latter, showing a greater focus of the government towards modernisation of the armed forces.

Share of Services

In 2011-12, the Army with an approximate budget of Rs. 83, 415 crore ($18.3 billion) accounts for 51 per cent of total defence budget, distantly followed by Air Force (Rs. 46,151.78 crore or $10.1 billion), Navy (Rs. 25,246.89 crore or 5.5 billion), Defence Research and Development (DRDO) (Rs 10,253.17 crore or $2.2 billion), and Ordnance Factories (OFs) (Rs -776.79 crore or -$0.2 billion).

The Minus budget for the OFs is because of their excess earnings over expenditure.

The majority share for the Army is because of large scale provision under Revenue Expenditure, which is primarily driven by pay and allowances.

In terms of capital expenditure, the Air Force with a budget of Rs 30,223.83 crore ($6.6 billlion) is the most capital-intensive, followed by the Army (Rs. 19,163.07 crore or $4.2 billion), Navy (Rs 14,657.83 crore or $3.2 billion), DRDO (Rs. 4,628.3 crore or $1.0 billion), and OFs (Rs. 399.96 crore or $0.1 billion)

Re-appropriation in Capital Expenditure

As the new defence budget reveals, the MoD has spent more than its 2010-11 budgetary allocations under the capital head.

On the face of it, the utilisation of capital fund is credible given the MoD’s past record of surrendering funds. However a closer examination of the budget reveals that the spending has not been done as intended in the original budget, leading to underutilisation in some heads and overutilization in others.

For instance, 30 per cent of allocation under the head of ‘Other Equipment’ has remained underutilised, whereas the allocations under the ‘Aircraft and Aero-Engine’ and ‘Naval Fleet’ have over-utilised by 24 per cent and 11 per cent respectively. It is however not clear whether the overspending is necessitated due to change of plan midway, or because of parking of funds with the state-owned enterprises so as not to surrender funds. (As regards parking of funds, there have been several occasions in the past, where the MoD deliberately transferred funds in excess of annual budgetary provisions to its production agencies.)

The readjustment (or re-appropriation as it is known in the budgetary parlance) is allowed with certain conditions, but it does not however absolves the MoD of its responsibility to stick to its plan to the extent possible.

A deliberate digression from the plan in order to utilise the money is not always efficient or desirable. For instance, the budgetary provision to buy radars would lose its relevance if the said budget is ended up buying missiles, which can not be used without effective surveillance. In this context, the efficiency of the MoD lies not only in spending the capital head in stipulated time period but also spending it as the per the original plan. .

Rise in Pay and Allowances

In 2011-12, total pay and allowances of the three services (Army, Navy and Air Force) and the DRDO are estimated to grow by 10.3 per cent to Rs. 51,591.27 crore ($11.3 billion). (The pay and allowance of Ordnance Factories is not included in the calculation because of lack of availability of data at the time of writing). This pay component represents 54.2 per cent of the total Revenue Expenditure, 31.4 per cent of the total defence budget, and is responsible for 28 per cent of the total defence budget’s growth.

It is noteworthy that pay and allowances are obligatory in nature and the government has little control over its growth, given the mandatory increase in annual pay and dearness allowances.

Moreover most of the pay and allowances today constitute tomorrow’s defence pension, on which the government has also little control. The uncontrollable growth of these components (pay and allowances and defence pension) has however vital implication on others aspects of the defence budget.

This is more so, given the government’s ceiling approach to defence allocation, which invariably affect the non-obligatory components of the budget, particularly the capital acquisition, stores, transportation and revenue works. Keeping this in view, there is a need to ensure that the pay component remains within the controllable limits.

It is in this context, the MoD needs to bring in concepts of Zero Based Budgeting (ZBB) and outcome budgeting in its budgeting process, so as to ensure that some of the inefficient activities are done away with and precious resources diverted to needed areas.

Impact on Modernisation

India lives in a difficult neighbourhood, infested by state-sponsored terrorism. To meet the myriad security challenges, the defence forces need to modernise their assets on a continuous basis, so that the defence preparedness of the country is one step ahead of its adversaries.

However as reported by various oversight agencies, such as Comptroller and Auditor General of India (CAG) and Parliamentary Standing Committee on Defence, there are glaring voids in defence preparedness, which need urgent attention.

For instance, the CAG in a recent report mentions that the submarine force of the Indian Navy, a key component of naval warfare, is below the expected force level. It also mentions that the Indian Air Force, which is already down to less than 30 combat squadrons from the authorised level of 39.5, also does not possess adequate number of surveillance radars needed for providing efficient and reliable detection capabilities for ensuring credible air defence. The Army has glaring deficiencies in its artillery force and night fighting capabilities, and shortages of even in its stock of bullet proof jackets.

In this backdrop, it is pertinent whether defence allocation for 2011-12 is enough to fill up the capability gap that exists today.

The answer to the above question however does not lie in one year’s budget figures, as capability build-up is a long-drawn process requiring a steady and sustained level of funding on a continuous basis. But building futuristic capabilities, by a mix or indigenous and imported solutions, is a must, with emphasis on the former.

From the perspective of the new defence budget, there has been a modest attempt to step up the modernisation process.

This is evident from the size of the capital acquisition budget, which has been increased by more than 25 per cent to Rs. 55,604 crore ($12.2 billion). Among the services, the Air Force has been given the largest share (Rs. 28,354.54 crore or $6.2 billion), followed by Army (Rs. 14,100.44 crore or $3.1 billion) and Navy (Rs. 13,149.02 crore or $2.9 billion).

Assuming that 60 per cent of the capital acquisition budget goes for committed liabilities, the MoD would have around Rs. 22,240 crore ($ 4.9 billion) to pay for new acquisitions including the Medium Multi-Role Combat Aircraft (MMRCA) (for Air Force), C-17 Globamaster (Air Force), and advanced helicopter (for Air Force and Army), and patrol vessels (for Navy).

Conclusion

The defence budget 2011-12 is nonetheless an impressive one.

Its growth of 12 per cent is in fact one of the highest in recent years, if one excludes the year 2009-10 when the budget was increased by 34 per cent, due mainly to the effects of the Sixth Central Pay Commission.

The hike in the defence budget has provided extra resources, particularly for the modernisation of the armed forces. The growth of over 25 per cent capital acquisition budget to Rs. 55,604 crore ($12.2 billion) would provide the much needed resources for some of new acquisitions such as MMRCA, and C-17 Globemaster, among others.

On the revenue side also, the budget has made increased provisions for pay and allowances (which are obligatory in nature) and also for other items such as stores, transportation and other revenue items.

The impressive growth in the defence budget notwithstanding, there are some concern areas.

Although, the MoD has been able to over-spend its 2010-11 capital budget, it is not clear why it was necessitated. As the budget reveals, the spending has not been done as per the plan in the original budget. Keeping in view the past instance of parking of funds with state-owned enterprises, it is doubtful whether the over-spending was necessitated due to genuine mid-way change in the plan. Given the hefty increase in the capital acquisition budget in 2011-12, the MoD’s challenges therefore lie not only in spending it in the stipulated timeframe but also spending it for the purposes intended in the budget.

Another concern area is the hefty growth in pay and allowances of the defence services. In the new budget alone, the pay and allowances of the three services and DRDO has grown by more than 10 per cent and is responsible for 28 per cent of total defence budget’s growth. Given the size of pay and allowances, its mandatory annual increase and its implication on other components of the defence budget, there is a need to need to ensure that this component remains within the controllable limits.

The author is a Research Fellow at the Institute for Defence Studies and Analysis (IDSA), New Delhi.

Download: DPP 2011

 
     
     
   
 
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