Budget Crunch Bogging down Defence Modernisation

“The Committee are deeply concerned to note that the Ministry of Defence was compelled to surrender funds to the tune of Rs. 5,000 crore, Rs. 9,000 crore and Rs. 5,000 crore at the Revised Estimates stage of 2001-02, 2002-03 and 2003-04, respectively, to meet the deficits. The budgetary ceilings imposed by the Ministry of Finance in the year 2005-06 have led to the downsizing of the total projected capital requirements of the Defence Services from adequately (sic) Rs. 44123.86 crore to Rs. 34375.14 crore, which fails to address the security concerns of the nation. The arbitrary caps on budget utilization over a period of time have taken a toll of almost all sectors of Defence…”

-- Standing Committee on Defence, Fourteenth Lok Sabha, Second report, Demand for Grants, April 2005)

India is among the largest spenders in the global arms market. It is expected to spend US$ 50 billion on arms procurement over the 11th Defence Plan period 2007-12 despite the fact that its defence budget is pegged at less than 2.0 per cent of the GDP. Even as the threats and challenges to national security have burgeoned in recent decades, the modernisation plans of the armed forces have been stagnating as large amounts of unspent funds on the capital account are surrendered each year, bureaucratic red tape slows down the acquisition process and defence procurement is dependent almost entirely on imports as the Indian defence industry has not yet come of age. The defence procurement process has been laborious and tardy despite recent policy reforms and is only now beginning to come out of the morass that it was languishing in.

The amount budgeted for defence in the current financial year (FY) 2009-10 is Rs 1,41,703 crore (US$ 32 billion). This is 34 per cent higher than the budget estimates (BE) for FY 2008-09. Of this, the amount earmarked for expenditure on the capital account, which provides funds for modernisation, is Rs 54,824 crore (US$ 12 billion) as against Rs 48,007 crore (US$ 10.5 billion) in FY 2008-09. However, this increased amount will not enable the Ministry of Defence (MoD) to initiate new schemes for weapons and equipment acquisitions as carried forward contractual obligations and inflation in the international prices of weapons systems, ammunition and defence equipment, usually between 10 to 12 per cent per annum, will neutralise most of the increase. Consequently, plans for defence modernisation will continue to stagnate. 

By whichever parameter one examines the allocations made for defence, the results are disappointing. As a percentage of the country’s GDP, the defence budget has steadily come down. It was 3.4 per cent in FY 1987-88, 2.30 per cent in FY 2004-05 and 2.10 per cent in 2006-07. It appears to have now stabilised at a little below 2.0 per cent of the GDP. It is a moot point that the last time that India’s defence expenditure had fallen below 2.0 per cent of the GDP was in the period shortly before the 1962 war with China, the emotional baggage of which still weighs down India’s political and military leadership. The Standing Committee on Defence in Parliament has repeatedly recommended that the outlay for defence should be increased to at least 3.0 per cent of GDP. “The Committee… strongly recommend that the Ministry of Defence should take up the matter with the Ministry of Finance for providing a minimum 3.0 per cent of GDP for Defence Services every year in order to ensure a fixed amount to carry out their modernisation, capital acquisition and R&D programme and fulfil the need based requirements of the Defence Forces.” (Standing Committee on Defence, Fourteenth Lok Sabha, Demand for Grants 2007-08, Sixteenth Report, April 2007.) The 11th Finance Commission, a constitutionally mandated authority, had suggested that defence expenditure should go up progressively to at least 3.0 per cent of the GDP by 2004.

The average defence expenditure was pegged at 16.48 per cent of Central Government expenditure during the decade of the 1980s. This share came down to 14.63 per cent in the next decade up to the turn of the century. Similarly, defence expenditure as a ratio of total (Central plus state) government expenditure came down from 10.5 per cent during the 1980s to 7.75 per cent during the 1990s, a period during which the rupee depreciated against the dollar from about Rs 16 to a dollar to Rs 46 to a dollar. Taking inflation of seven to eight per cent also into account, the defence budget declined in terms of constant rupees by over 10 per cent per annum. Consequently, this led to a decline in India’s conventional defence capability and preparedness for war and emboldened Pakistan to launch its ill-fated intrusions into the Kargil sector of Jammu and Kashmir in May 1999.

China and Pakistan, India’s major military adversaries, and countries with which India not only still has unresolved territorial and boundary disputes but has also fought several wars, spend 3.5 and 4.5 per cent, respectively, of their GDP on national security. In fact, according to the MoD Annual report of 2008-09, China’s defence expenditure has shown a blistering double digit rate of growth for the last 20 years. There is already a quantitative gap between the 2.5 million strong People’s Liberation Army of China and India’s armed forces, which number 1.325 million. As China is modernising its armed forces at a rapid pace and India’s modernisation can at best be described as being undertaken in fits and starts, the present quantitative gap will soon become a qualitative gap as well. If the present slow pace of modernisation is allowed to continue, by the end of India’s 13th Defence Plan (2017-2022), China will become militarily strong enough to force India to accept a solution to the territorial and boundary dispute on China’s terms. 

The request for allotment of funds projected by the three Services every year is routinely pared down the MoD in the projections that the MoD makes to the Ministry of Finance (MoF). The MoF treats the MoD’s projections as a “wish list” and reduces them further by an average of almost 25 per cent. As an illustration, during FY 2004-05, the Services projected a requirement of approximately Rs 103,000 crore; the MoD reduced it to about Rs 87,000 crore; and, the MoF allotted Rs 77,000 crore, a shortfall of 26 per cent. This reduction is effected arbitrarily and usually without consultation with the armed forces so that almost till the day of the budget, the Services are uncertain of their likely budgetary allocation for the next financial year. It is unbelievable that such a situation should exist after over half a century of experience with national five-year plans and defence planning. It is clearly indicative of the disinclination of successive governments to closely involve and integrate the senior leadership of the armed forces in national security decision-making and does not augur well for long-term perspective planning.

The worst impact of the steadily declining defence budget in terms of constant rupees adjusted for inflation and foreign exchange fluctuation is on the modernisation plans of the armed forces and the replacement of obsolescent weapons systems and equipment. The ongoing revolution in military affairs (RMA) has passed the armed forces by. The Indian Army, for example, desperately needs new 155mm self-propelled and towed guns for the plains and the mountains and reconnaissance helicopters, besides modern weapons and equipment for counter-insurgency operations. The air force needs to replace its obsolete MiG-21 aircraft with more modern fighter-bombers, acquire more AWACS aircraft and upgrade its air defence radar grid. The navy is still many decades away from acquiring genuine blue water capability that is crucially necessary for safeguarding India’s maritime security and international trade interests. The coast guard needs many more fast patrol craft and helicopters to secure India’s long coastline and the large exclusive economic zone (EEZ). Maritime reconnaissance capabilities also need to be considerably enhanced if a repeat of the Mumbai terror attacks is to be avoided.

As if this was not bad enough, a large chunk of the funds earmarked for capital expenditure, which goes towards modernisation, is surrendered year after year.  Successive Finance Ministers have been using reductions in the defence budget at the Revised Estimates (RE) stage as one of the tools to manage the country’s burgeoning fiscal deficit. The Standing Committee on Defence has observed: “The Committee also observe that every year the annual budgetary allocation for the armed forces, particularly for capital acquisition, is being reduced at RE stage as a result of which a number of schemes do not fructify, which causes delay and cost overruns in the modernisation of the armed forces.” Funds also remain unspent due to bureaucratic red tape and the fear of strictures being passed by the Central Vigilance Commissioner for tardy defence procurement procedures. The MoD has not even been able to ensure that at least the reduced funds are spent fully. An average of as much as 14 per cent of the budgeted amount, varying between Rs 5,000 to 9,000 crore, remained unspent every year from FY 1999-2000 onwards till this was arrested in FY 2004-05. This year, FY 2009-09, the revised estimates (RE) figures are lower than the BE figures by the unspent amount of approximately Rs 7,000 crore. 

Year BE RE Actuals Shortfall (RE-Actual)
(Rs crore) (Rs crore) (Rs crore) (Rs crore)

2002-03 65000.00 56000.00 55661.83 338.17
2003-04 65300.00 60300.00 60065.85 234.15
2004-05 77000.00 77000.00 75855.92 1144.08
2005-06 83000.00 81700.00 80548.98 1151.02
2006-07 89000.00 86000.00 85494.64 505.36
2007-08 96000.00 92500.00 - -

Figures in the above table show that although budgeted allocation has been revised downwards every year (except during 2004-05), the MoD could not fully utilise even the reduced allocation in any of the years. (Standing Committee on Defence, Fourteenth Lok Sabha, Demand for Grants 2008-09, Twenty ninth Report, April 2008.)

Steadily declining defence budgets in terms of constant rupees are gradually eroding national security capabilities. Continuous deployment of the armed forces, particularly the Indian Army, for various operational commitments and the almost complete lack of genuine modernisation are undermining preparedness for war and eating into the slender qualitative edge that they have enjoyed over India’s military adversaries. With the economy growing at the compound rate of seven to eight per cent annually, surely the nation can afford to invest 3.0 to 3.5 per cent of its GDP as an insurance premium for national security, especially when a huge amount of over Rs 150,000 crore is earmarked for wasteful subsidies that seldom reach the poor for whom these are intended. The government of the day must show the concern and political courage necessary to safeguard national security interests by making adequate financial provisions for the modernisation of the armed forces. The results of not doing so will be shockingly horrendous. 

The writer is Director, Centre for Land Warfare Studies (CLAWS), New Delhi.