Defence Budget 2011-12: A Pre-Budget Analysis

The Finance Minister (FM), Pranab Mukherjee, will present the Union Budget 2011-12 to Parliament on February 28, 2011. From the Indian strategic community’s point of view, the budgetary allocation for national defence is naturally of interest. More specifically, the centre of attraction would be the allocation under capital expenditure towards defence, much of which is meant for modernisation of the Indian armed forces. Given India’s sensitive neighbourhood, its aspirations in the global strategic arena, and, more importantly, with a robust and resilient economy, many would expect more than a double digit growth in the overall defence budget and a more liberal growth under capital expenditure.

Much of the expectation is however not likely to be met in the coming budget. There are two specific reasons to it. The first and foremost one flows from the recommendations of the Thirteenth Finance Commission (TFC), which has given a roadmap for defence spending for five years up to 2014-15. As per the TFC’s recommendation, the overall defence spending is projected to grow by an annual average of 8.3 per cent till 2014-15, with the revenue and capital expenditures increasing by 7.0 per cent and 10.0 per cent, respectively. What is significant about TFC is its acceptance by the Ministry of Finance, which is responsible for implementing the Commission’s recommendations.

Second, even if the FM tries to be benevolent to the Defence Ministry, his attempt is likely to be constrained because of India’s over-grown fiscal imbalance. As per the budget estimates for 2010-11, the central government’s revenue and fiscal deficits have reached 4.0 per cent and 5.5 per cent of the GDP, respectively. Since the government is committed to eliminate the former and bring back the latter to around three per cent of GDP at early a timeframe as possible, the FM would be constrained to allocate substantial rise in defence budget, which presently accounts of around two per cent of GDP and nearly one-sevenths of the total central government expenditure.

If the reasons as mentioned above loom large in the coming defence budget, the Defence Ministry would definitely face a tight budget. Nonetheless, assuming that the defence budget would grow by around 8.3 per cent in 2011-12, the MoD would have Rs 1,60,000 crore – or Rs 13,000 crore more than the current year’s total defence outlays. Further assuming that Revenue and Capital expenditures would grow as recommended by the TFC, Rs 94,000 crore would be available under the former and Rs 66,000 crore under the latter.

The amount under the revenue expenditure although looks voluminous, in reality it is too much under pressure. It is noteworthy that bulk of the revenue expenditure is accounted for by pay and allowances, while the remaining are spent on stores and equipment, revenue works, maintenance and transportations among others. Among all these heads of expenditure, pay and allowances constitute a mandatory expenditure, while others are bit flexible depending on how much resources are available. Because of hefty pay hike (after the 6th Pay Commission Recommendations), high inflation and annual three per cent increase in annual pay of government servants (including defence personnel), the pay and allowance has witnessed a sharp increase in past years, putting pressure on the remaining sub-heads under revenue expenditure. In fact, stores and equipment expenditure which is responsible for keeping the man and the machine in high-alert, has taken a sharp fall. Between 2007-08 and 2010-11, the expenditure on this head has decreased from to 36 per cent of total revenue expenditure to 23 per cent. The fact of the matter is that given the ceiling approach to defence budget and the mandatory increase in pay and allowance, the stores and equipment budget is bound to fall further in the coming budget, which does not augur well for India’s defence preparedness.

Under the capital head, of the Rs. 66,000 crore, nearly 70-80 per cent or Rs 46,200-52,800 crore would be for capital acquisition. The vital question is whether the capital acquisition budget would be enough to meet the requirements of the vast modernisation programme that is currently underway. The answerer to the question is sadly not as much about the adequacy rather the efficiency of the system which is meant for expeditious acquisition. As the past experience shows, because of the various lacunae, capital acquisition has not progressed in the desired manner, leading to surrender of funds year after year. Between 2005-06 and 2009-10 a cumulative total of over Rs .19,000 crore has been surrendered. The larger implication of such surrender of fund is that it not only restricts the pace of the modernisation, but also prevents a faster growth of the overall defence budget.

Historically, India’s defence budget is often fixated to the country’s fiscal prudence rather than its long-term strategic needs. A trend analysis of Indian and Chinese defence spending would probably testify to it. In comparison to Beijing’s sustained double digit growth in defence spending in the last two decades, New Delhi’s defence spending shows a high degree of ambivalence, growing by more than 10 per cent in nine times. Given that that defence budget constitutes the most vital part of national defence build-up, the Indian government needs to take a strategic view rather than being fixated to fiscal prudence. The defence budget 2011-12, which would be announced shortly, would make clear what path the government takes.

Laxman Kumar Behera is a Research Fellow at the Institute of Defence Studies and Analyses, (IDSA), New Delhi

(The views expressed in the article are that of the author and do not represent the views of the editorial committee or the centre for land warfare studies).