Business Today

For want of a nail: defence budget

For the financial year 2016, India allocated about 1.73 per cent of its gross domestic product (GDP) towards defence spending, of which 38.34 per cent was allocated to capital acquisitions.

Rajiv Chib        Last Updated: February 18, 2016  | 13:28 IST

Rajiv Chib, Director - Aerospace & Defence, PwC India
For the financial year 2016, India allocated about 1.73 per cent of its gross domestic product (GDP) towards defence spending, of which 38.34 per cent was allocated to capital acquisitions. As a percentage of GDP, this capital outlay was the lowest since 1962. The forthcoming Budget will again need to attend to a diversity of interests, at a time when the government has to live up to its promise regarding the implementation of the Seventh Pay Commission. Further, there exists a dip in the overall kitty with the recommendation of the 14th Finance Commission to raise the share of the States in the Central taxes to 42 per cent.

In the neighbourhood, Pakistan's defence budget has constantly been showing a double-digit growth while China maintains a defence budget three times the size of India. China has been often detected snooping around the Andaman Islands and the Indian Ocean region. Incidents of border stand-offs in the North and claiming of Aksai Chin are major irritants. Besides, India's traditional strategy to combat insurgency and terrorism remains military oriented. Combined with the ambition to extend our maritime sphere of interest, these potential threats will require India to loosen its purse strings.

One area that has been neglected in the preceding budgets is the capital outlay segment. On the whole it saw a downward revision in the financial year 2014/15 and a moderate increase in 2015/16. This segment is bound to be under pressure of earlier 'committed liabilities', which are going to magnify in today's fluctuating foreign exchange scenario, leaving less than 10 per cent for new schemes.

The forthcoming Budget will have to cater for immediate payments to be made for the Apache and Chinook deals, the Rafael fighter, the tanker aircraft, anti-tank guided missiles, naval multi role helicopters, which are already on the priority list and then make space to accommodate raising of 17 Corps, medium range surface-to-air missiles, M777 howitzers, targeting pods, tactical control systems and light helicopters.

Delaying negotiations does not solve the problem and instead increases the burden on the exchequer with the annual inflation in international prices of defence equipment being in the range of 4-8 per cent. The cost escalation is even higher for critical weapon systems, which are technology intensive and produced in small quantities. To cap it all, barring an odd year, funds from the capital budget are surrendered. It is likely to be the same story this year as 40 per cent of the capital outlay was lying unutilised in the beginning of the year 2016.

There is a growing gap between what we expect of our military and what it can realistically accomplish given the present equipment. The present ad hoc-ism of laying down priorities in a reactive mode needs to be avoided -for example, procuring surveillance radars, electro-optic sensors and 16-metre fast interceptor crafts after the Mumbai attack and deciding to spend Rs 6,000 crore for smart surveillance systems and UAVs to secure all air bases, post the raid in Pathankot.

To bring the defence modernisation plan back on track, the gap between the requirements of funds projected by MoD and the actual budgetary allocation needs to be reduced. Simultaneously, to better utilise the limited capital outlay, we need to commence a process of working out inter-service priorities - a difficult task with each service working in its own watertight compartment, in the absence of a National Security Council or a CDS. Otherwise, we increase the risk of our procurements becoming lopsided, with one segment of a service working at 30 per cent efficiency. Landing up with tanks without armour piercing rounds, missiles without vehicles, ammunition without fuses or submarines without torpedoes, do not present a pretty picture.

As far as revenue expenditure is concerned, the 14th Finance Commission report recommends a growth of 13.5 per cent per year till 2019-20. The revenue expenditure can be kept under check by carefully evaluating the need for expansion of the Defence Research and Development Organisation and the Ordnance Factories, who already have a combined manpower strength in excess of 1,90,000 non uniformed personnel.

It is hoped the new DPP also brings in accountability to reduce procurement delays. A deft balancing act will be required in the forthcoming budget to stretch the rupee to meet expectations of various stakeholders.

(The author is Director - Aerospace & Defence, PwC India)


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