- Not as Rosy as it Looks
Without taking the credit from Mrs Sitharaman-led Finance Ministry for having presented one of the best and well-balanced national budgets in recent decades for FY2023-24, one is rather skeptical whether all aspects had been considered to meet the urgent requirements of the armed forces, as far as the defence budget is concerned. Even though it looks rather impressive on paper at Rs 5.94 lakh crore from the last year’s allocation of Rs 5.25 lakh crore – ostensibly an increase of nearly 13% – but, in reality it’s not as rosy as it looks, especially when it is seen in dollar terms and through the prism of rupee devaluation. Last year, at the time of budget announcement, the rupee was trading at 75 to a dollar which translated to a $70 billion defence budget. However, the rupee now stands at 82 to a dollar, which at the present exchange rate works out to $72 billion – an increase of only 3% over the last year. It is obvious that the rupee exchange rate would have profound impact on at least the capital expenses as, notwithstanding the laudable push for self-reliance, most of the big-ticket defence items are still being imported or have a big percentage of foreign content even if they are produced within the country.
But first, let’s look at the overall picture. As announced in Parliament by the finance minister, the Union Budget for the Financial Year 2023-24 envisages a total outlay of Rs 45,03,097 crore ($550 billion – at the current exchange rate). Of this, Ministry of Defence has been allocated a total Budget of Rs 5,93,537.64 crore ($72 billion), which is 13.18% of the GoI Budget.
Out of the total defence outlay, revenue expenditure has been pegged at Rs 4,22,162 crore ($51.3 billion) that includes Rs 1,38,205 crore ($17 billion) for defence pensions, Rs 2,70,120 crore ($33 billion) for defence services and Rs 13,837 crore ($1.7 billion) for the Ministry of Defence (Civil).
Out of a total allocation for capital expenses of Rs 1,62,000 crore ($19.75 billion), the overall outlay for the capital-intensive Indian Air Force (IAF) has been pegged at Rs 57,137.09 crore ($7 billion) that includes Rs 15,721 crore ($2 billion) for procurement of aircraft and aero engines and Rs 36,223.13 crore ($5 billion) for other equipment.
A substantial amount of Rs 52,804 crore ($6.5 billion) has been set aside as the capital outlay for the Indian Navy to cater to the ever-growing challenges of PLAN (Chinese Navy) in the Indian Ocean. Indian Army, on the other hand, gets a capital outlay of Rs 37,241 crore ($4.5 billion) which includes Rs 5,500 crore for procurement of aircraft and aero-engines and Rs 21,300 for other equipment.
As far as the revenue expenditure of the armed forces is concerned, Army gets the lion’s share at Rs 1,82,649 crore ($22.5 billion), IAF Rs 44,345.58 crore ($5.5 billion) and the smallest of the three services, Navy Rs 32,284.20 crore ($4 billion)
The normal trend in defence budgets amongst all the modern high-tech armed forces in the world revolves around 60:40 ratio between the capital and revenue budgets. However, in India’s case the norm has been the other way round, generally around 60:40 between the capital and revenue segments of the budget. This year too at Rs 2,59,479 crore vs. Rs 1,62,000 crore for revenue and capital outlays, the ratio works out to be the same, in fact, a bit worse at 62:38. The biggest contributor to the skewed ratio is of course the manpower heavy Army with a 20:80 ratio between its capital and revenue budgets. In contrast, While the IAF has been able to maintain close to the international norm of 60:40, it’s the Navy that has done even better with a 62:38 ratio. This shows that both IAF and IN have been able to balance their revenue expenses well, with just the right size of human resources. Army on the other hand, needs to optimise its human resource management to be able to balance the capital/revenue ratio a little better.
This year’s defence budget does reflect Government’s resolve and focus towards maintaining a high level of Operational Preparedness of the Defence Services to face current and future challenges. The Non-Salary Revenue/operational allocation has been given a boost of Rs 27,570 Crore, with the budgetary outlay under this segment augmented from Rs 62,431 crore ($7.6 billion) in BE 2022-23 to Rs 90,000 crore ($10.97 billion) in BE 2023-24. This will cater to sustenance of Weapon Systems, Platforms including Ships/Aircrafts & their logistics; boost fleet serviceability; emergency procurement of critical ammunition and spares; procuring/hiring of niche capabilities to mitigate capability gaps wherever required; progress stocking of military reserves, strengthening forward defences, amongst others. This is indeed a very positive step. In addition, the BRO budget has also been augmented by 43% to Rs 5,000 crore ($610 million) to better plug the gaps in infrastructure in the remote areas, especially in India’s northern borders.
The problem area however, continues to be the inadequacy of funds for capital expenditure which comes as a hinderance for the services to remain on track for the timebound acquisition/augmentation of state-of-the-art weapons in their inventories as per the ongoing and sanctioned projects. The $18 billion allocation for capital acquisitions of the three services combined, while showing a welcome growth trend is still not sufficient to meet the services’ requirements. For example, the IAF alone needs a minimum of $10-12 billion every year for at least the next decade and a half, to come anywhere close to building its fast depleting combat squadrons’ strength to the approved 42 squadrons level in addition to going ahead with its other vital modernisation plans.
Having already achieved the status of the 5th largest in the world, Indian economy is well-poised to shrug its sluggishness of the Covid pandemic period and grow at a healthy 7.5 to 8 per cent this year – the fastest amongst the major economies in the world. The government could easily earmark at least $5 billion more for capital expenditure of the armed forces. Notably, even with the extra allocation overall defence budget would still stay below 2% of the projected GDP. This would greatly help services to progress projects that have been stalled for lack of funds, certainly the IAF whose much needed 114-aircraft MMRCA 2 project has been languishing at the AON/RFI stage for years now.
In the final analysis, a firm commitment from the government through an act of Parliament to link the defence budget to 2 % of GDP would go a long way in ensuring India can meet its multi-faceted security challenges in the 21st Century.
– Air Marshal VK ‘Jimmy’ Bhatia (Retd)
