Separate budget for domestic defence purchases requires more clarity

February 24, 2021 3:41 PM

The putative capital acquisition budget is a fictional sub-set of the total capital outlay and broadly caters for procurement of aircraft and aero engines, heavy and medium vehicles, and other equipment of the three services, naval fleet/projects, and special projects of the Indian Air Force.

Going by the recent trend of the committed liabilities crowding out the space for new acquisition contracts, it may not be much.

By Amit Cowshish,

At a webinar organised by the Ministry of Defence (MoD) on February 22, Defence Minister Rajnath Singh announced bifurcation of the capital procurement budget into domestic and foreign ‘routes’ to ensure more procurement from the domestic industry.

The Press Information Bureau’s release of the even date says that the MoD plans to invest about 63% of the outlay for the Financial Year (FY) 2021-22 on domestic procurement. It works out to an impressive Rs 70,221 crore.

To put this stratagem in perspective, Finance Minister Nirmala Sitharaman had announced a slew of measures on May 16 last year to revive the pandemic-hit economy. One of these was to provide a separate budget for domestic capital procurement, apart from corporatisation of the Ordnance Factory Board, raising of the limit on Foreign Direct Investment to 74% through the automatic route, and promulgation of a negative list prohibiting import of various defence products.

She did not clarify -though it seemed highly unlikely even then- whether the funds under this category will be provided in addition to the allocation already made in the union budget for the FY 2020-21, which is what could have truly made a big impact on rejuvenating the domestic defence industry.

It, however, became clear when the union budget for the FY 2021-22 was presented on February 1that the expectation was misplaced. The intention was not to augment the capital outlay but to parcel out a portion of that to defray expenditure on procurement from the domestic sources.The defence minister’s announcement on February 22, therefore, did not come as a surprise, although it created an air of gaiety at the webinar.

Quick calculations indicate that the parcelled-out amount of Rs 70,221 crore is 63% of the ‘capital acquisition’, or ‘modernisation’ budget, of approximately Rs 1,11,462 crore, leaving Rs 41,241 crore for procurement from overseas vendors.

The putative capital acquisition budget is a fictional sub-set of the total capital outlay and broadly caters for procurement of aircraft and aero engines, heavy and medium vehicles, and other equipment of the three services, naval fleet/projects, and special projects of the Indian Air Force.

While earmarking of separate funds for procurement from the domestic sources certainly sounds encouraging, it also calls for a reality check.

Persistent inadequacy of the capital budget is no secret. The gap between the total requirement for revenue and capital expenditure projected by the armed forces and the actual budgetary allocation has steadily widened, going up from Rs 23,014 crore in 2010-11 to Rs 1, 03,536 crore in 2020-21, of which Rs 59,417 crore was for capital expenditure; most of this is incurred on capital acquisitions.

Though the figures for the FY 2021-22 are not available yet, it will be surprising if the gap between the projected requirement and the allocation narrows down. That being the case, it is difficult to visualise how parcelling out of a segment of the inadequate budgetary allocation would ‘enhance domestic procurement’ as announced at the webinar.

The scepticism also arises from the fact that lately the committed liabilities -payments to be made against ongoing contracts- have been crowding out the funds that can be used for signing new contracts. In the FY 2018-19, then Indian Army’s Vice-chief had candidly admitted before the Standing Committee on Defence (SCoD) that the allocation was insufficient even to cater for the committed liabilities.

The following year there was a gap of Rs 33,000 crore in committed expenditure category. It prompted the SCoD to caution MoD about the adverse consequences of defaulting on making contractual payments.The caution was repeated by SCoD last year (FY 2020-21). It remains unknown if any steps have been taken to check the steep rise in the committed liabilities.

This raises serious questions about how much of the Rs 70,221 crore, set aside for domestic procurements, would be available for awarding new contracts. Going by the recent trend of the committed liabilities crowding out the space for new acquisition contracts, it may not be much. The MoD must allay this apprehension, which was also expressed at the webinar.

Most importantly, between FY 2014-15 and FY 2017-18 the expenditure on procurement from the foreign vendors accounted for an average of approximately 38.5% of the total expenditure, with the remaining 61.5% being spent on procurement from the Indian sources. The expenditure on imports jumped to 48.67% in the FY 2018-19, but it seems to have been an aberration, as in the FY 2019-20 (up to the end of December 2019), the total expenditure on foreign procurements had again come down to 38.36%.

Viewed in this background, earmarking of 63% of the ‘capital acquisition’ budget for domestic procurements is, at best, in keeping with the past trend and by no means a game-changing measure. It is difficult to say how much of a multiplier effect it will have on the industry, including the Micro, Small and Medium Enterprises and start-ups or on generation of employment, which was projected at the webinar as the underlying objective of the exercise.

(The author is a former Financial Advisor (Acquisition), Ministry of Defence. Views are personal.)

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