Union budget for the financial year 2018-19, presented by the Finance Minister Arun Jaitley envisaged a total outlay of 24,42,213 crore. Out of this, 2,95,511.41 crore has been earmarked for Defence. This accounts for 12.10 per cent of the total Central Government expenditure for the year 2018-19.The allocation of 2,95,511.41 crore represents a growth of 7.81 per cent over budget Estimates (2,74,114.12 crore) and 5.91 per cent over Revised Estimates (2,79,003.85 crore), respectively for the financial year 2017-18.Out of 2,95,511.41 crore allocated for the financial year 2018-19, 1,95,947.55 crore has been allocated for Revenue (Net) expenditure and 99,563.86 crore for Capital expenditure for the Defence Services and the Organisations/Departments under the Ministry of Defence (MOD). 99,563.86 crore, allocated for Capital expenditure, includes modernisation-related expenditure. The Capital allocation for Ministry of Defence under BE 2018-19 is 33.1 per cent of the total Central Government Expenditure on Capital Account, which is 3,00,441 crore. For Defence Pension, which is over and above the outlay mentioned above, an amount of 1,08,853.30 crore has been provided in BE 2018-19. This is 26.6 per cent above the BE 2017-18 of 85,740 crore and 14.26 per cent over RE 2017-18 of 95,000 crore.

Implications

India’s defence budget hiked by 7.81 per cent to 2,95,511 crore from 2,74,114 crore from 2017, has once again dashed hopes of any major jump in military modernisation this year despite heightened tensions with both Pakistan and China. The armed forces, incidentally, had sought an allocation of 26.84 lakh crore+ over the next five years to ensure requisite military modernisation and maintenance. The annual defence budgets have shown a trend of declining modernisation outlays for new projects, with almost 80 per cent of the outlays earmarked for “committed liabilities” (instalments for arms deals inked in earlier years) and a skewed revenue to capital expenditure ratio. This has meant that the Army, Navy and the Indian Air Force (IAF) continue to manage with critical operational gaps on several fronts ranging from fighters, helicopters and submarines to howitzers and modern infantry weapons. India’s defence budget for 2018-19 will largely account for only inflation and currency fluctuations, despite the armed forces coveting the latest and the best hardware.

The stress on defence budget built up over the last two years has got compounded. If the allocation of last two years was insufficient and there are carried forward liabilities to be discharged, mere 7.81 per cent increase over last year is grossly insufficient because of the following:

• The impact of the custom duty on direct imports will be realised at the time of deliveries that begin 2018-19. The impact of this could be 18.5 to 29.74 per cent of the price.
• Similarly, the delivery of major platforms, which used material imported by DPSUs, OFB and domestic industry from 2015-16, will begin to attract custom duty from the year 2018.
• Petrol, diesel and aviation turbine fuel (ATF) are major consumption items and the world crude prices trend would add to the burden.
• The decline in the modernisation budget is a source of great concern, especially given the limited budgetary scope available for signing new contracts.

Modernisation

The defence five-year plans are formulated in consonance with existing threat perceptions, the “Raksha Mantri’s operational directives” and the 15-year Long-Term Integrated Perspective Plan (LTIPP). But they have not received much attention from successive governments, with the 10th (2002-07), 11th (2007-12) and 12th (2012-17) Plans failing to get approval from the finance ministry. As per the 13th Defence Plan, 12,88,654 crore has been projected for the capital outlay, while 13,95,271 crore for revenue expenditure. With an eye firmly on China, there is also a separate section in the plan on the “capability development” of the strategically-located tri-service Andaman and Nicobar Command, which was set up in October 2001, but has suffered from relative neglect, lack of infrastructure and turf wars.

One of the most widely held views about the slow pace of modernisation is that the procurement procedure is complex and archaic

Modernisation is a continuous ongoing process. Old and vintage platforms become a drain on the maintenance and need to be replaced both to upgrade capability, technology and to keep abreast with the potential threats. Defence acquisition is a complex long drawn process and the time gap between the Acceptance of Necessity (AoN) and the contract signing could be over 15 years. The methodology in the media is to assess the state of modernisation with reference to allocation and utilisation of the ‘capital acquisition budget’, a term used synonymously with the term ‘modernisation budget’. Not all expenditure incurred from this notional segment of the capital outlay goes into procurement and other activities aimed at ‘modernising’ the armed forces. Conversely, some expenditure that could arguably be viewed as being related to ‘modernisation’ gets incurred from the revenue budget also. Thus, it is erroneous to consider higher levels of expenditure from the capital acquisition budget as an indicator of greater modernisation of the armed forces and vice versa.

The MoD has utilised 90 per cent of the capital outlay and 82.6 per cent of the 2017-18 revenue budget. Nearly 1.42 lakh crore out of the total of 1.72 lakh crore of the revenue budget, has been spent which continues to rise on account of One Rank One Pension scheme. Also, 78,000 crore of 86,000 crore of the capital outlay has been utilised with the IAF fully utilising its entire acquisition budget. The IAF modernisation contracts which are likely to roll over to next financial year due to shortfall in new schemes cash outgo are most probably any of these. The figures in brackets below are the amount for the first year of contract and not the total cost of the project:

• Six flight refuelling aircraft (1,292.24 crore)
• Jaguar re-engine project (580.00 crore)
• Avionics UPG for IL-76/78/AWACS (612.17 crore)
• 38xPC & MK-II (264.90 crore)
• D-26EW system for MIG-29 (365.45 crore)
• 48 X MLH (1005.76 crore)
• 20X additional Hawk (549.99 crore)
• 56 x AVRO replacement (1,789.40 crore)
• 65 x Ka 226-T RSH (268 crore)
• LR SAM

It needs to be appreciated that the capital acquisition proposals are based on the Services Capital Acquisition Plan (SCAP) which is culled out from the FYPs and, according to successive editions of the DPP, these plans are required to be approved only by the DAC, which has been happening regularly. In the past, even CCPA/CCS approvals did not imply approval of all procurement programmes included in the plan or assurance of funds for those programmes. It is often said that the allocation for defence is grossly inadequate and that for ensuring credible defence preparedness, based upon modernisation of the armed forces in a compressed time frame, it is necessary to allocate three per cent of the gross domestic product (GDP) for defence consistently for the next 10 to 15 years. Even the LTIPP 2012–27 is based on the assumption that three per cent of the GDP will be earmarked for defence over the entire 15-year period.

It is true that most of the capital acquisition budget is getting utilized for meeting committed liabilities arising from the already signed contracts, but it does not imply that this leaves no money for the new procurements. In fact, most of the underutilisation is on account of the new procurements not going through. One also has to take into account the possibility that if the allocations were to be increased to three per cent of GDP, a large proportion of that would get diverted to the revenue segment. In fact, this is an area which requires greater attention, because some of the revenue expenditure is related to serviceability of the equipment and weapon systems, stocks of ammunition, etc, which in turn, has a bearing on the operational readiness of the armed forces.

One of the most widely held views about the slow pace of modernisation is that the procurement procedure is complex and archaic and to make matters worse, the civilian bureaucracy in the MoD keeps stonewalling procurement proposals. According to the DPP, there are at least 11 stages through which every procurement proposal must pass before it culminates in the award of a contract. While this creates the impression of the procedure being complex, no one has made out a convincing case for doing away with even one of these stages. There is possibly a lot of scope for improvement in the processes concerned. These processes are not very clearly defined, leaving room for indecision and even corruption. This is one of the several areas that need to be focussed upon and concrete suggestions made for improvement. Those handling public funds cannot be faulted for being cautious or even over cautious, while dealing with cases involving thousands of crore of public money. The public discourse is simply not focussed on this aspect.