Budget 2023’s allocation for defence manufacturing and R&D is insufficient say India Inc

The government is in the midst of several key projects for the military. Has the capital budget addressed the expectations of the defence sector as inflation will neutralise the capital increase in the budget? Low incentives in R&D will be a serious impediment in undertaking high-risk platform-level development of technologies and equipment.

Indian Army’s Artillery getting modernized
K9-Vajra self-propelled howitzer which weighs around 50 tonnes has been deployed by the Indian Army. Images Credit: DRDO

In India’s Union Budget 2023, the allocation for defence has been increased by 12.5 percent over last year to Rs 5.94 lakh crore for 2023-24 from Rs 5.25 lakh crore. Of the total budget for defence, the government has allocated Rs 1.62 lakh crore as capital outlay meant for the purchase of new military equipment, which is an increase of 7 percent over the current fiscal’s capital budget of Rs 1.52 lakh crore. 

However, with the average rate of inflation remaining around 6 percent throughout the current fiscal year, the capital budget remains unchanged in absolute terms.

The government is in the midst of several key projects for the military. The government’s military modernisation drive has already earmarked several big-ticket capital acquisition programmes like fighter jets, submarines, and new light tanks among others.

In addition, many mega military projects are underway, including the procuring of fifth-generation Advanced Medium Combat Aircraft (AMCA), Twin Engine Deck-Based Fighter (TEDBF), Tejas Mk2 and a critical design and development programme for an aero engine. 

The Indian Navy’s acquisition plans include 27 fighter jets for its new aircraft carrier, the indigenously developed INS Vikrant. 

The modernisation drive for the Indian army has been pending for two decades. There is an urgent need for light tanks for deployment in high-altitude mountainous ranges along the line of actual control (LAC) in Eastern Ladakh, as well as the replacement of INSAS rifles that have been in service for over two decades. 

The Indian Army’s immediate plans include prioritised procurement of the indigenous light tank, named ‘Zorawar’. The army has also put forth a list which includes High-Altitude Area (HHR) unmanned aerial vehicles (UAVs)s for Intelligence, Surveillance and Reconnaissance (ISR). Recently, Army Chief General Manoj Pande clarified that the AK-203 assault rifles, which will be licensed-manufactured in India by Indo-Russian Rifles Private Limited, will be delivered by March 2023.

Such initiatives totally depend on research and development (R&D) in defence. 

Emphasising on R&D, Jayant Patil, Member of the executive committee of management, Larsen &Toubro, highlights:Our Atmanirbhar vision needs to be standing on a firm foundation of R&D and indigenous design and development. The R&D in the Industry needs to be brought into serious focus by the government.”

So, has the capital budget addressed the expectations of the defence sector?  

Defence budget unchanged 

The defence budget comes amidst a wave of high inflation, the shock of the pandemic and the looming recession worldwide. While India’s annual retail price inflation eased to 5.88 percent in November 2022, the average rate of inflation remains around 6 percent throughout the current fiscal year.

“Expected inflation will neutralise the capital increase in the budget for next year. This increased allocation, therefore, gives no push to our modernisation plans,” says former Army Chief General Ved Malik in a conversation with Financial Express.

Interestingly, while the defence capex allocation has risen in absolute terms on a yearly basis, the incremental percentage in the past three years has seen a downward trend. 

“This year’s budget has a nominal capital outlay increase of 7 per cent as compared to last year’s increase of 13 per cent and an increase of approximately 19 per cent in the 2021-22 budget. On top of it, the government has budgeted an increase of 33 per cent in overall capital expenditure commitment in this year’s budget, but the defence sector only gets an increase of 7 per cent as defence capex,” points out Gaurav Mehndiratta, Partner and Head, Aerospace and Defence, KPMG in India

In 2021-2022, the government allocated Rs 5.25 lakh crore to the ministry of defence (MoD). Last year, the budget allocated to the defence sector was the highest among all the ministries in the federal government.

As the capital defence budget also caters to the sustenance of weapon systems, a significant part – unspecified, however—will go out into platforms including ships, aircraft and their logistics, boosting fleet serviceability. 

What is then left, will be utilized for the emergency procurement of ammunition and spares; procuring and hiring of niche capabilities to mitigate capability gaps wherever required; progress stocking of military reserves, and strengthening forward defences, amongst others.

However, for the Indian Air Force, there is an increase of about Rs 9,599 crore (~$1.17 Billion) in capital outlay under ‘Other equipment – Air Force’ as compared to the revised estimates of the financial year 2022-23. 

This increase in outlay is likely because of the committed payments towards the induction of S-400 Triumf air-defence missile systems which India has procured from Russia.

Particulars Allocations % of total capital outlay
Army INR 37,242 (~USD 4.54 Bn) 23% 
Navy INR 52,805 (~USD 6.44 Bn) 32%
Airforce INR 57,137 (~USD 6.97 Bn) 35%
Others (Research & Development  (‘R&D’), Inspection, Technology  development, etc.)INR 15,417 (~USD 1.88 Bn) 10% 
Total capital expenditure INR 162,600 (~USD 19.83 Bn)

But the allocation of the budget towards aircraft and aero-engines for the Air Force has reduced by about Rs 7,991 crore (~USD 0.97 Bn) as compared to the revised estimates of FY 2022-23,” clarified Gaurav Mehndiratta.

Research and Development in Defence & Aerospace

The allocation to the Defence Research and Development Organization (DRDO) has been enhanced by 9 percent, with a total allocation of Rs 23,264 crore in 2023-24.

The defence budget has also focused on a technology development fund. The MoD has specified its funding for the Innovations for Defence Excellence (iDEX) and the Defence Testing Infrastructure Scheme (DTIS) which is Rs 116 crore and Rs 45 crore respectively, representing an enhancement of 93 percent for iDEX and 95 percent for DTIS over 2022-23. 

However, in the capital outlay on research and development, assistance for prototype development under “Make” procedure, Rs 1,132 crore (~$ 0.14 billion) has been allocated for the Air Force and Rs 100 crore (~$0.012 billion) has been allocated to the Army. 

Experts point out the lack of sufficient budget for prototype development as the IAF is leading on multiple platforms, including the next-generation jets among others. 

“On the other hand, the industry in general, while exceptions exist, is neither incentivised to undertake in-house R&D nor funded by GoI to undertake high-risk platform-level development of technologies and design and development of Indian equipment and platforms,” explains Patil. 

Also, the government had announced an allocation of 25 percent of the defence R&D budget to Industry, startups and academia in the 2022-23 budget, it has not yet been operationalised for industrial R&D towards the development of indigenous products and platforms with IP control.

While the government has also embarked on defence reforms and built a new set of policies and structures for the defence industry, it did miss out on certain key policy recommendations from the industry. The biggest link is the introduction of the production-linked incentive (PLI) scheme for private players and global investors as well.

“The government has certain key asks of the industry, such as the introduction of a PLI scheme, an extension of the deadline of the concessional tax rate for commencement of manufacturing activities get a miss in the budget this year,” echoes Gaurav Mehndiratta, sighting a similar concern for the defence manufacturing.  

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First published on: 03-02-2023 at 16:47 IST