Downward trend in defence allocation is a cause for concern
Government Budgets should be seen in the context of ground realities and future targets. The immediate context of the latest defence Budget is the stand-off between Indian and Chinese troops in eastern Ladakh. This stand-off has underlined the need to urgently equip India’s defence forces to manage the strategic challenge posed by China. More firepower than Pakistan can no longer be the end goal of defence planning.
The other important factor is Covid-19. Last year’s economic downturn further reduced the fiscal space and precluded a substantial rise in defence expenditure. Given that the government expects the economy to cross the pre-pandemic level in the upcoming financial year, it is worth comparing this year’s defence Budget with the pre-pandemic and preLadakh stand-off year, fiscal year (FY) 20. Comparing expenditures with last year — an anomaly on many counts — is not as helpful.
First, the overall trend in defence spending is not encouraging. The Ministry of Defence (MoD) expenditure now comprises 2.02% of the Gross Domestic Product (GDP) – down from 2.22% in FY20 – and 13.3% of central government expenditure, down from 16.7% in FY20. The more worrying part is that since FY10, the MoD’s expenditure as a proportion of government expenditure has been falling steadily. The parliamentary standing committee on defence’s exhortation that defence spending of 3% GDP is “optimal and necessary for ensuring the operational preparedness of the forces” hasn’t helped.
Next, the change in the composition of MoD expenditure reveals a lot about government priorities. There are some positive signs: The spending on defence pensions has declined relatively. It now comprises 22% of the MoD expenditure, down from 26% in FY20. One reason for this is that the previous years’ pension payments included some arrears.
However, the five-yearly revision of One Rank One Pension (OROP) is due, and when it gets approved, pension expenditure will swell again. Effective lateral entry mechanisms and a customised national pension scheme are the only long-term solutions for controlling pension spending.
Another component of the defence Budget is the pay and allowances for the armed forces personnel and defence civilians. Expenditure on this component has increased relative to other items. While salaries made up 29.9% of the MoD’s allocation in FY20, they are budgeted to be at 31.1% of MoD expenses in FY23.
The relative decline in pension expenditure has allowed some fiscal space for more capital expenditure on arms, ammunition, and platforms. Capital outlay now makes up 29% of MoD expenditure compared to 24.5% in FY20. The Navy’s share of this has increased to 35%, up from the 27% range between FY16 and FY20. This is significant because the response to China’s build-up in the mountains might well lie in building deterrence in the seas.
While the capital outlay has increased, it might not immediately translate into better hardware. That’s because the government has earmarked 68% of the procurement budget for domestic players. It will take a few years for Indian players to build local manufacturing expertise. Moreover, an umbrella of protectionism often disincentivises companies from making world-beating products. Aatmanirbharta (self-reliance) has its costs; at least in the short term, the armed forces will be bearing a significant chunk of this cost.
A disappointing miss is the dedicated nonlapsable fund for modernisation, recommended by the Fifteenth Finance Commission and accepted in principle by the government in FY22. This has been a demand of the MoD to make multi-year payments of defence equipment easier. However, there is no indication of the progress of this reform.
There are some much-needed compositional improvements in the defence Budget. However, the allocation to defence continues to hover around 2% GDP. With no significant jump in defence allocations likely, confronting the China challenge requires major doctrinal shifts in India’s military planning.