De­fence mod­erni­sa­tion bud­get rises just 5% each year in real terms

With cus­toms du­ties im­posed on de­fence in 2016 and GST in 2017, capex has fallen even more

Business Standard - - ISSUES AND INSIGHTS - AJAI SHUKLA & DEVANGSHU DATTA

ABusi­ness Stan­dard anal­y­sis of de­fence cap­i­tal al­lo­ca­tions, the cru­cial com­po­nent of the de­fence bud­get that buys new weapons and equip­ment, re­veals that it has risen by barely 5 per cent in real terms each year, in the last decade. This is af­ter ac­count­ing for in­fla­tion and for­eign ex­change rate vari­a­tion (FERV).

Thus, the mil­i­tary’s mod­erni­sa­tion bud­get has trailed far be­hind growth in the Gross Do­mes­tic Prod­uct (GDP), which has risen at 6-8 per cent an­nu­ally for that pe­riod.

Twice dur­ing this pe­riod, in 201213 and 2015-16, the ad­justed cap­i­tal bud­get was lower than the pre­vi­ous year’s al­lo­ca­tions.

There were large hikes of 23.38 per cent (2009-10) and 18.98 per cent (2010-11) in the first two years of the sec­ond United Pro­gres­sive Al­liance (UPA-2) govern­ment. Af­ter those two boosts, the an­nu­alised in­crease over the next eight years amounts to only 1.6 per cent with forex spend­ing up from around $6.97 bil­lion in 2010-11 to $7.73 bil­lion in 2018-19 and do­mes­tic capex in con­stant ru­pees go­ing from ~343 bil­lion (2011-12) to ~398 bil­lion (2018-19).

Busi­ness Stan­dard needed to com­pile al­lo­ca­tions scat­tered across var­i­ous bud­get heads and De­mands for Grants in or­der to cal­cu­late the cap­i­tal al­lo­ca­tions. For ex­am­ple, in the 201920 bud­get, the cap­i­tal al­lo­ca­tions for bor­der road con­struc­tion is not in the cap­i­tal bud­get (De­mand No 21), but buried as De­mand No 19 un­der the Min­istry of De­fence head. It’s sim­i­lar for the Coast Guard. Un­til 2016-17, cap­i­tal al­lo­ca­tions for the De­fence R&D Or­gan­i­sa­tion and Ord­nance Fac­tory Board were also part of the Min­istry of De­fence bud­get. These scat­tered cap­i­tal al­lo­ca­tions have been com­piled and in­cluded in capex.

Each year’s bud­get is then ad­justed. We have as­sumed that half of the cap­i­tal Bud­get is spent do­mes­ti­cally and the rest, abroad in forex. The do­mes­tic spend­ing is pre­sented in con­stant 2011-12 ru­pees to ad­just for in­fla­tion, us­ing the de­fla­tor given when the Bud­get is pre­sented.

The de­fla­tor is a ra­tio of the value at cur­rent prices of all the goods and ser­vices in the econ­omy in a given year to the value dur­ing the base year, which is 2011-12.The capex fig­ures for 2009-10 and 2010-11 have been ad­justed “for­wards”. The do­mes­tic sources of equip­ment, in­clude the 41 Ord­nance Fac­to­ries (OFs), eight de­fence pub­lic sec­tor un­der­tak­ings (DPSUs) and In­dian pri­vate firms.

The other 50 per cent, which is as­sumed to be spent in for­eign ex­change, is ad­justed for FERV, us­ing the me­dian US dol­lar ex­change rate of the re­spec­tive fi­nan­cial year. While some equip­ment is paid for in Eu­ros, most in­ter­na­tional de­fence trans­ac­tions — even with Rus­sia and Is­rael — are in­voiced in US dol­lars.

Com­par­i­son over UPA-2 and Na­tional Demo­cratic Al­liance (NDA) tenures

The UPA-2 in­creased do­mes­tic cap­i­tal al­lo­ca­tions in real terms by about 5.99 per cent an­nu­ally. The NDA has in­creased do­mes­tic cap­i­tal spend­ing by about 2.62 per cent an­nu­ally. The UPA-2 in­creased FERV-ad­justed cap­i­tal al­lo­ca­tions by 8.8 per cent an­nu­ally, while the NDA govern­ment has in­creased FERV-ad­justed cap­i­tal al­lo­ca­tions by 3.46 per cent. Dou­ble whammy: Cus­toms du­ties and goods and ser­vice tax (GST) Two re­cent tax mea­sures have cut into these al­ready mea­gre cap­i­tal al­lo­ca­tions. In April 2016, cus­toms duty of 10.3 per cent was im­posed on de­fence im­ports. Since 50 per cent or more of the cap­i­tal bud­get is spent on im­ports, cus­toms du­ties amount to five per cent of the cap­i­tal Bud­get.

An even big­ger blow came in July 2017, when goods and ser­vice tax (GST) was levied on de­fence cap­i­tal pur­chases. Most mil­i­tary equip­ment com­prises “high end engi­neer­ing goods” and falls in ei­ther the 18 per cent or 28 per cent bracket. As the end-user, the de­fence min­istry can­not re­cover the GST paid out. This has im­pacted the cap­i­tal bud­get in the last two fis­cals.

Iron­i­cally, cus­toms du­ties were im­posed for a laud­able ob­jec­tive — to pro­vide a level play­ing field to the pri­vate sec­tor vis-à-vis DPSUs, OFs and for­eign orig­i­nal equip­ment man­u­fac­tur­ers (FOEMs). Be­fore 2016, DPSUs en­joyed cus­toms duty ex­emp­tions, while im­ports from FOEMs were tax-free. Only pri­vate sec­tor firms were li­able for cus­toms du­ties and lo­cal taxes. Now ev­ery­one pays cus­toms duty.

Be­fore GST, the cap­i­tal bud­get paid only the ba­sic cost of do­mes­tic de­fence equip­ment. The de­fence firms paid ex­cise duty and val­ueadded tax (VAT), which were re­im­bursed, on the ba­sis of ev­i­dence. But GST is col­lected be­fore de­fence equip­ment is shipped out by a firm. The de­fence min­istry doesn’t re­ceive re­im­burse­ment for GST. Hence, this is an out­flow from the cap­i­tal bud­get.

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