Apart from inflation, what would erode the value of the funds allocated for capital expenditure is the continuously depreciating Indian rupee against the US dollar
In the National Budget for financial year 2017-18 presented on February 1, 2017, by the Finance Minister Arun Jaitley, the allocation to the Ministry of Defence stands at Rs. 2,74,114 crore. This figure excludes expenditure on pension for retired defence personnel. Viewed against the revised budget estimate of Rs. 2,58,589 crore for the previous year, the increase provided in the defence budget for this year is to the tune of under 6 per cent. This allocation would not even be adequate to cater for annual inflation which is in the region of 10 per cent. Also, the allocation for defence works out to 12.77 per cent of the total provided for to cater for expenditure by the Central Government for the year 2017-18 which is pegged at Rs. 21,46,735 crore.
Of the sum allocated for fresh acquisitions or for capital acquisition during the financial year, the allocation for all the three Services is Rs. 86,488 crore which represents a 10 per cent hike from the allocation in the previous year which was at Rs. 78,586.68 crore. Over the last few years, the allocation for defence as a percentage of gross domestic product (GDP) has been steadily declining and in the latest budget, it stands at just 1.63 per cent of the projected GDP for the financial year 2017-18. This pitiful figure of 1.63 per cent which incidentally is the lowest since the war between India and China in 1962, is rather uninspiring especially when seen against the figure of 2.6 per cent of GDP in Pakistan and around 2 per cent of GDP in China. Experts are of the view that the expenditure on defence ought to be in the region of 3 per cent of GDP and in any case not lower than 2.5 per cent in order to make sure that the Indian armed forces are in a fit state to take on the two major adversaries especially if they join hands and pose a threat to the security of the nation in collusion.
Out of the total allocation towards capital expenditure which is Rs. 86,488.01 crore, the Ordnance Factory Board (OFB), the Defence Research and Development Organisation (DRDO) and the Directorate General of Quality Assurance (DGQA) together have been allocated a sum of Rs. 8,363.97 crore. The remaining amount of Rs. 78,124.04 crore falls in the share of the Indian Army, the Indian Navy and the Indian Air Force (IAF). While the allocation for capital expenditure would have been made on the basis of the committed liabilities, one cannot be very certain at this stage whether the allocation would be adequate for making advance payments against all the contracts that are likely to be concluded by the Ministry of Defence (MoD) during the financial year 2017-18. Apart from the factor of inflation, what would also erode the value of the funds allocated for capital expenditure is the continuously sliding value of the Indian rupee against the US dollar. As military hardware in the international market is priced in US dollars, the implications of decline in the value of the Indian rupee vis-à-vis the US dollar would be obvious.
THE GOVERNMENT SHOULD BE PREPARED TO MAKE ADDITIONAL ALLOCATIONS UNDER CAPITAL EXPENDITURE FOR THE IAF SHOULD THE DEALS FOR PROCUREMENT OF MILITARY HARDWARE PROGRESS FASTER THAN ANTICIPATED
As compared with the allocation made in the defence budget last year, which was Rs. 78,586 crore, this year the allocation of Rs. 86,488 crore is 10 per cent higher. The outlay on capital expenditure for the Indian Army has been enhanced from Rs. 23,709 crore to 25,175 crore this year amounting to an increase of 6.1 per cent. Similarly, the allocation for the IAF has been increased from Rs. 29,795 crore to Rs. 33,555 crore, a substantial increase by 18.9 per cent which compared to the other two Services does appear substantial. However, somewhat surprisingly, for the Indian Navy, there has been a reduction in the allocation for capital expenditure. As against Rs. 19,596 crore allotted in the budget last year, the allocation this year is Rs. 19,348 crore, a reduction by minus 1.2 per cent!
Another disenchanting aspect of the defence budget this year is the fact that the allocation under the budget head “Technology Development — Assistance” for prototype development under the ‘Make’ procedure, is rather insignificant. For the Indian Army, the allocation is Rs. 30.38 crore and for the IAF, it stands at a paltry Rs. 14.55 crore, This low level of allocation is inclined to raise serious doubts of the intention of the MoD to take up projects in the coming financial year under the ‘Make’ procedure.
Implications for the Indian Armed Forces
The enhancement of allocation in the defence budget for capital expenditure by more than 10 per cent for 2017-18 is obviously to enable the Indian armed forces to continue with their drive at modernisation though the speedy acquisition of the various platforms and weapon systems such as submarines, artillery guns, tanks and combat aircraft as also support other ongoing projects that are critical such as the raising of the Mountain Strike Corps. Progress on the raising of the Mountain Strike Corps which was sanctioned essentially to face any challenge from China in the likelihood of war in the mountainous regions along the borders in the north and the North East.
The sum of Rs. 33,555.62 crore allocated to the IAF under capital head which, as stated earlier, represents an increase of 18.9 per cent over the budgetary allocation in the last financial year. However, given the number of projects for acquisition of military aircraft in the pipeline, this increase may prove to be insignificant. On top of the list deals in the pipeline is the contract with Dassault of France for 36 Rafale jets for $8.85 billion ( Rs. 57,525 crore). Other projects include 22 Apache AH-64E attack helicopters and 15 CH-47 Chinook heavy-lift helicopters for $2.5 billion ( Rs. 16,250 crore) from Boeing, procurement of 56 Airbus C295 twin-engine medium-lift military transport aircraft for approximately $2 billion ( Rs. 13,000 crore), six KC 46 Pegasus flight refuelling aircraft valued at around $2 billion from Boeing, seven C-130J Super Hercules tactical transport aircraft for around $1.2 billion ( Rs. 7,800 crore) from Lockheed Martin, one C-17 Globemaster III for $500 million ( Rs. 2,250 crore) and a substantial part for the expenditure of $1 billion ( Rs. 6,500 crore) for the fleet of 200 Ka-226T helicopters from Russia to be manufactured in India. In all, the contracts will be worth over $16 billion ( Rs. 1,04,000 crore) and most of it which will be for the Indian Air Force, are already in the pipeline. The total requirement of funds for all the projects in the pipeline listed above, is equivalent to Rs. 1,04,000 crore, around three times the allocations for capital expenditure in the defence budget for 2017-18. It is quite understandable that the government will not be required to pay up the total value of contracts in the pipeline during this financial year. The financial burden on the account will depend on the progress in the finalisation and execution of contracts. The government, however, needs to be prepared to make additional allocations under capital expenditure for the IAF should the deals for procurement of military hardware progress faster than anticipated and are not catered for.
There is no doubt that the Indian armed forces and particularly the fleet of combat aircraft of the IAF have largely been overtaken by obsolescence. Lack of success in the efforts by the IAF and the government since the beginning of the last decade to procure combat platforms has in turn degraded the operational capability of the IAF in general and its combat fleet in particular. The IAF hopes that the lion’s share of the capital budget that the Finance Minister has been generous enough to allocate to the IAF will help redeem the situation at least partially. The IAF is however hopeful that the government will be forthcoming should there be a need for additional funds during the financial year 2017-18. However, in the long term, there is a need on the part of the government review and restructure the process of procurement of military hardware and streamline procedures in order to eliminate delays. Only then will the Indian armed forces be able to plan and execute procurement of military hardware in time so as to build up and maintain the capability to confront any challenge to national security that they may be called upon to do so.