High revenue spend weighs down defence capex

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Updated: Aug 05, 2020 1:38 PM

A slow reversal of the trend seems underway now, amid renewed concerns over the level of the country’s defence preparedness and arms and arsenal – capex turned out to be 24.6% of defence expenditure in FY20; indications are that the budgetted capex level of 24.1% for FY21 would at least be maintained, despite acute fiscal constraints.

To trim the manpower cost, Rawat recently pitched for raising the retirement age of select categories of armed forces personnel to 58 years.

 

The share of capital expenditure in India’s defence budget (inclusive of pensions) saw a sharp, secular decline of almost eight percentage points, to below 24% over the decade to FY19, despite a persistent state of tension with Pakistan and a Chinese threat that never really faded.

A slow reversal of the trend seems underway now, amid renewed concerns over the level of the country’s defence preparedness and arms and arsenal – capex turned out to be 24.6% of defence expenditure in FY20; indications are that the budgetted capex level of 24.1% for FY21 would at least be maintained, despite acute fiscal constraints.

The one-rank-one-pension scheme has further inflated the already-high revenue expenditure on defence since FY16, accelerating the capex decline. While overall defence spending rose by over 132%, in absolute term, between FY11 and FY20 to Rs 4.52 lakh crore, the capital expenditure rose by just 79% to Rs 1.11 lakh crore, according to the provisional data sourced from the Controller General of Accounts and Budget documents. In fact, between FY16 and FY20, the defence pension bill almost doubled from Rs 60,238 crore to Rs 1,17,810 crore, beating capital expenditure for defence services for a fourth straight year.

Clearly, elevated revenue expenditure has crimped a resource-starved government’s ability to boost capex and undermined efforts towards defence modernisation. It also explains why chief of defence staff Bipin Rawat, earlier this year, termed the surge in outlay for defence pension “unsustainable”.

Of course, the actual defence spending could be higher by a fifth or so over what the Budget papers show. Budget heads on paramilitary forces (under the ministry of home affairs), border roads, coast guard and parts of the spending on nuclear energy (which are for nuclear weapons) and space could actually be counted among defence expenditure. Still, India spends relatively less of its public expenditure or gross domestic product (GDP) on defence, compared with many other countries, including Pakistan, the US, Russia or Israel.

So, while the overall defence spending level, including the pension bill, has dropped from 2.5% of nominal GDP in FY11 to 2.2% in FY20, the decline in the capex is more dramatic even on a much lower base — from 0.8% of GDP to 0.5% over the past decade.

In fact, over the horizon of the last three decades, Budgeted defence spending has declined, against the size of the GDP. Even excluding pensions, defence expenditure had hovered around 2.5% of GDP during the fifteen years to FY05.

Of course, the share of overall defence spending in the government’s budgetary expenditure has risen marginally from 16.3% in FY11 to 16.8% last fiscal.

Following the tension with China along the Line of Actual Control, the government has expedited procurement of several weapons, which may cause a temporary blip in the share of capital spending in the overall defence expenditure this fiscal. According to a report in The Print, armed forces are working on over 100 emergency procurement contracts — with a maximum ceiling of Rs 500 crore each. This procurement is set to be much higher than the Rs 11,000 crore worth of contracts signed after the Uri terror attack in 2016, it says.

In a feature titled “Bang for Buck: India’s Defence Expenditure in Wider Perspective”, Laxman Kumar Behera, research fellow at the Manohar Parrikar Institute for Defence Studies and Analyses, says: “While it is true that given India’s vast unsettled borders, the manpower cost will remain a big item of defence expenditure, it is also a fact that the rise in manpower cost has come at a significant cost to modernisation and operations and maintenance…. Needless to reiterate, rationalising the manpower cost will go a long way in improving the combat capability of the defence forces and help obtain the proverbial bang for the buck.”

His report points out that 71% (or Rs 1,83,905 crore) of the rise in overall defence spending between FY12 and FY21 (Budget estimate) is due to the combined increase in pay and allowance of existing staff and pension (the contribution of pension alone has been 37%, or Rs 96,256 crore). On the other hand, capital acquisition has contributed only 13% (Rs 34,012 crore) to the overall increase and R&D 4% (Rs 9,434 crore).

It’s noteworthy that the share of capex in defence spending rose by a percentage point in FY20 from a year before to 24.6%, partly due to a more than doubling of expenses on certain equipment for the Air Force from Rs 8,459 crore to Rs 19,876 crore. However, it was more an exception than a norm in the past decade.

To be sure, the defence expenditure, compiled here from the numbers specified in Budget documents across three broad heads –allocations for the ministry of defence (civil); defence services and defence pension–doesn’t capture all the defence-related spending that are incurred outside the officially-stated allocation for the defence ministry. Also, there are no publicly-available data on a range of areas, including select strategic programmes with security dimensions or expenditure on intelligence gatherings by non-defence agencies, which are viewed as defence spending in some other countries.

To trim the manpower cost, Rawat recently pitched for raising the retirement age of select categories of armed forces personnel to 58 years. The government, too, has taken a raft of measures to address this issue. It has decided to scrap 9,304 civilian posts in the Military Engineer Services. Also, it has announced its decision to corporatise the Ordnance Factory Board in a bid to improve operational efficiency, including labour productivity.

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