Why Finance Minister Jaitley Disappointed Defence Minister Jaitley

Summary: The finance minister hiked the total defence expenditure from Rs 203,672 crore in FY 2013-2014 to Rs 229,000 crore for FY 2014-2015. Though the increase appears substantial, it is insufficient to undertake the military modernisation necessary to meet the emerging threats. 
In the first Budget presented by Prime Minister Narendra Modi's National Democratic Alliance government, Union Finance Minister Arun Jaitley -- who also happens to be India's defence minister -- increased the allocation for defence by about 12.5 per cent over the revised estimates figures for the previous financial year, including a hike of Rs 5,000 crore on the capital account for military modernisation.
He also announced the government's intention to raise the Foreign Direct Investment limit for defence manufacture from 26 to 49 per cent. Though both of these are welcome developments, they fall short of the high expectations that had been generated as the Modi government was perceived to be more concerned about national security and about making India militarily strong than its predecessor.
The finance minister hiked the total defence expenditure from Rs 203,672 crore (revised estimates) in financial year 2013-2014 to Rs 229,000 crore (budgetary estimates) for FY 2014-2015. The increase of Rs 25,328 crore is 12.44 per cent more than the allocation for FY 2013-2014 and Rs 5,000 crore more than the allotment planned in the interim budget presented by the United Progressive Alliance government in February 2014.
Though on the face of it the increase appears to be substantial, it is insufficient to undertake the military modernisation that is necessary to meet the emerging threats and challenges and address the issues of 'critical hollowness' in defence preparedness raised by then army chief General V K Singh in March 2012 in a letter to the then prime minister.
Also, the 12.5 per cent increase will be partially neutralised by the high annual inflation rate that hovers between eight and nine per cent (8.28 per cent in May 2014). Similarly, the steep fall in the value of the rupee against the US dollar and the inflation in the prices of weapons and defence equipment -- that is normally between 12 to 15 per cent per annum -- together erode the value of any increase in the defence budget on the capital account.
The net effect is that the defence budget, which now stands at a low 1.74 per cent of India's projected GDP for FY 2014-2015 and 12.75 per cent of the country's total government expenditure, has been stagnating in real terms in recent years, even if it has not actually declined.
While presenting the Budget, the finance minister said, 'Modernisation of the armed forces is critical to enable them to play their role effectively in the defence of India's strategic interests. I, therefore, propose to increase the outlay for defence by Rs 5,000 crore over the amount provided for in the interim budget.'
However, the additional Rs 5,000 crore has gone almost completely to the Defence Research and Development Organisation for expenditure on the capital account. Rs 1,000 crore of this has been earmarked for 'accelerating the development of the railway system in the border areas', as 14 strategic rail projects have been pending due to resource constraints.
The additional allocation has resulted in a substantial increase in the DRDO budget from Rs 5,975 crore in the previous year to Rs 9,298 crore in this financial year. It is not clear how the DRDO will spend this windfall bonanza. It could be speculated that the additional amount will be utilised for the strategic weapons programme and for new technology demonstrator programmes.
The total revenue expenditure planned for the year 2014-2015 is Rs 134,412 crore (approximately 60% of the budget). This goes towards paying salaries and allowances and expenditure on rations, ammunition and transportation.
The remaining amount of Rs 94,588 crore (40 per cent of the budget) has been allotted on the capital account for the acquisition of modern weapon systems and equipment. Various consultancy firms have estimated that India will spend approximately $100 billion (about Rs 620,000 crore) over the 12th (2012-2017) and 13th (2017-2022) five-year defence plans on military modernisation.
The army has begun the raising of 17 Corps, which has been designated as a mountain strike corps, and will needs to be given the funds to arm and equip it. The raising of 17 Corps is expected to cost Rs 64,000 crore over seven years.
Major acquisitions of weapons platforms that have been pending for long include initial payments for 126 multi-mission, medium-range Rafale combat aircraft, 197 light helicopters, 145 ultra-light howitzers and C-17 heavy-lift aircraft.
India is also said to be close to purchasing 15 Apache attack helicopters and 22 CH-47F Chinook medium lift helicopters. This deal itself will cost about $2.5 billion (about Rs 15,500 crore).
Besides these immediate necessities, the armed forces must upgrade their command and control systems and substantially improve their intelligence and surveillance capabilities if they are to become capable of launching effects-based operations in a network-centric environment riddled with threats to cyber security.
The only policy decision of far-reaching importance in the defence sector announced by the finance minister in his Budget speech was the government's approval to raise the ceiling for FDI in joint ventures for the manufacture of weapons and defence equipment from the present 26 to 49 per cent.
This falls far short of the expectations of the defence MNCs who are expected to participate in these JVs and bring in cutting-edge technology. They would have preferred at least 51 per cent so that entering into defence manufacture in India would be worthwhile for them.
The Department of Industrial Policy and Promotion had proposed an increase in the FDI limit in the defence sector from 26 per cent to 49 per cent without transfer of technology, up to 74 per cent with (ToT), both with Foreign Investment Promotion Board approval, and up to 100 per cent in the case of the transfer of state-of-the-art technologies with prior approval of the Union Cabinet.
However, the ministry of defence, the defence PSUs and Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry, the two powerful of chambers of commerce, expressed their reservations against giving controlling interest to the MNCs.
Former defence minister A K Antony also took a conservative view and was opposed to allowing MNCs to have more than 49 per cent FDI on the grounds that it would be harmful for national security. Jaitley believes in the art of the possible in politics and felt -- as he told a television news channel after the Budget -- that as a first step it would be prudent to raise the limit only up to 49 per cent.
This step will further perpetuate the vested interests of the DPSUs and the private sector companies that are early entrants in the field. And, consequently, it is unlikely to enthuse the MNCs to bring in either technology or capital.
The finance minister also earmarked Rs 1,000 crore for one rank, one pension -- a long pending demand of ex-servicemen -- and announced the government’s intention to build a national war memorial at Prince's Park near India Gate at New Delhi. Both these decisions have met with widespread disagreement.
The veterans' associations are not convinced that Rs 1,000 crore is adequate to provide full OROP and have begun to doubt the government's intentions.
As for the war memorial, the three services have for long sought a war memorial at the central vista or India Gate and not near India Gate and are dissatisfied with the decision.
Gurmeet Kanwal is a Delhi-based strategic analyst.