Union Budget 2019: With huge plans for modernisation in the pipeline, Finance Minister Piyush Goyal increased defence budget to over Rs 3 lakh cr for the financial year 2019-20 in the budget presented in Lok Sabha on Friday. However, in real terms the Defence Budget has gone down as the hike announced doesn’t even cater for inflation.
Defence budget as a percentage of GDP used to be above 1.8% till some years back. Now it is in the region of 1.5%. And this has impacted capital procurement and modernisation plans. After meeting Committed Liabilities for procurements contracted in earlier years, there is no money left for new equipment.
“We have already disbursed Rs 35,000 crore for our soldiers under ‘One Rank One Pension’; substantial hike in military service pay has been announced. Our soldiers are our pride and honour; ‘One Rank One Pension’, which was pending for the last 40 years, has been implemented by us,” he said in his speech. The minister also made it clear that additional funds are available for the Defence as and when required.
According to an official release from the Ministry of Defence (MoD), the Union Budget for the financial year 2019-20, presented today envisaged a total outlay of Rs 27,84,200 crore. Out of this Rs 3,18,931.22 crore has been earmarked for Defence (excluding Defence Pension).
For Defence Pension, an amount of Rs 1, 12,079.57 crore has been provided in BE 2019-20. Total Defence Allocation, including Defence Pension, accounts for 15.48% of the total Central Government expenditure for the year 2019-20.
The allocation of Rs 3, 18,931.22 crore represents a growth of 7.93% over Budget Estimates (Rs 2, 95,511.41 crore) and 6.87% over Revised Estimates (Rs 2, 98,418.72 crore), respectively for the financial year 2018-19.
Out of Rs. 3, 18,931.22 crore allocated for the financial year 2019-20, Rs 2, 10,682.42 crore for Revenue (Net) expenditure and Rs 1, 08,248.80 crore for Capital expenditure for the Defence Services and the Organisations/Departments under the Ministry of Defence.
The amount of Rs 1,08,248.80 crore allocated for Capital expenditure, includes modernisation related expenditure. The Capital Allocation of Ministry of Defence under BE 2019-20 is 32.19% of the total Central Government Capital Expenditure, which is Rs 3,36,293.00 crore.
Experts find such a small increase disturbing as it comes at a time when the Indian Armed forces is in the midst of a huge modernisation process, compared to its neighbours Pakistan and China who are already focussing on modernisation program.
The allocation of Rs 2, 95,511.41 crore for 2018-19 represented a growth of 7.81 per cent over budget estimates (Rs 2, 74,114.12 crore) and 5.91 per cent over revised estimates (Rs 2, 79,003.85 crore), respectively for the financial year 2017-18.
Sharing his views with the Financial Express Online on the Defence Budget for 2019-20, Air Marshal Nirdosh Tyagi, former Deputy Chief of Air Staff, said, “Last defence budget had increase of just about 7.7% over the previous year. Inflation and rupee depreciation more than neutralised this. Thus, no increase in real terms.”
“Committed liabilities will progressively come down as equipment contracted earlier is delivered. Around 20% of the capital budget must be spent in contracting new equipment every year. If committed liabilities come down abruptly, it would have adverse impact on Ministry of Defence (MoD)’s ability to fully utilise capital budget in future,” Tyagi added.
He also pointed out that, “Another argument is that share of MoD budget (not to be confused with the defence budget) in Central Government Expenditure has remained stable around 16.7%. It is so because MoD budget includes Defence Pensions, where increase has been fairly large. Focus should be on Capital Outlay for capability building. Pensions should be considered as a part of social welfare objectives.”
Capital budget as a % of total budget for the Air Force and the navy has been above 50%. There is no scope for cutting down Revenue expenditure. Stated objective of having capital budget at 60% of the total can only be achieved by increasing capital allocation.
The Defence Budget for 2019 announced is not really going to adequately fund the modernisation projects of the Indian Army, Air Force and Navy.
According to reports, the Indian Army has often pointed out that almost 68% of its equipment is out dated, and the world’s third largest army needs to urgently modernise its armaments and weapons system.
Presently, India is spending around 1.6% of its GDP on defence budget, which is far beyond China that spends 2.1% and Pakistan that’s spending even more at 2.36% of its GDP per annum. And, around 85% of the Defence budget is currently spent on meeting human resource expenses that leaves a very thin margin for up gradation of the defence equipments.
According to Amit Cowshish, former Financial Advisor (Acquisition), Ministry of Defence, “A like-to-like comparison with the last year’s budget shows that there is an increase of about 8 per cent in the overall defence budget, excluding pensions.
“It is difficult to say whether after meeting all the committed liabilities, adequate funds will be available for new purchases and meeting other operational requirements,” Cowshish added.
From an industry perspective: Baba N. Kalyani, Chairman & Managing Director, Bharat Forge Ltd., “The allocation for Defence, which for the first time has crossed the Rs 3 lakh crore threshold is encouraging. We hope that “Make in India” in Defence will result in greater role for the private industry in this critical sector of the country’s economy.”
Sudhindra Holla, Sales Director, Axis Communications India & SAARC, said, “Proposal towards raising the budget to Rs 3 lakh crore is a welcome move for protecting our soldiers at the borders who are the pride and honour of the nation. India is now definitely at the cusp of digital transformation and this infrastructural growth will augment its positioning globally.”
Make in India: Capability to produce defence equipment in India is an important strategic requirement. It results in cost savings, employment generation and reduces possibility of sanctions or denial by the supplier nations. But the Budget is not the appropriate tool to encourage this.
Services require suitable equipment to be ready to meet any operational contingency. Fulfilment of such requirements cannot be deferred to accommodate equipment which is still in design and development stage with uncertain outcome.
Since the Public sector has failed to progress beyond licensed production, the Private sector participation needs to be encouraged much more than what has been done so far.
According to Tyagi, large value weapon systems will have to be inducted through import route in foreseeable future. “Concerted effort is required for Make in India to make an impact in defence sector.”
Pointing out many success stories in the recent past, mainly due to effort of DRDO, the former deputy air chief said that, Aakash surface to air missile has been inducted in large numbers by the Air Force and the Army. “An ecosystem has been created wherein many MSMEs participate actively. Brahmos missile system has been indigenised much beyond the level of 50%. Astra Beyond-Visual-Range air to air missile is another success story. A large number of ground-based radars have been designed and manufactured in India. AEW&C, LCA, ALH and LCH deserve mention here. Most ships of the India Navy are manufactured in India.”
Shortage of funds is going to impact the Navy’s procurement of the projects in the pipeline including frigates from Russia, minesweepers from South Korea, a second indigenous aircraft carrier which is already stuck due to lack of funds, fighter aircraft for the carrier, and multi-role helicopters.
The IAF’s Capital allocations have proportionally dipped from 58 per cent to 49 per cent this year.
The IAF is in the process of paying Rs 5000 crore to Rs 7000 crore annual instalments for the French `Rafale’ fighter, which has hit the planned purchases like the single-engine fighter and a range of force multipliers like aerial refuellers that are in the pipeline.