IDSA COMMENT

India’s Defence Budget 2011-12

March 7, 2011

The union budget 2011-12, presented to the parliament on February 28, 2011, increased the defence allocation to Rs 1,64,415.49 crore ($36.03 billion). The allocation, which represents an 11.59 per cent growth over the previous year’s budget, is impressive at least on two accounts. First, the defence budget has not been unduly impacted by the government’s fiscal consolidation process. Second, the defence budget shows, at least on the face of it, the ministry of defence’s (MoD) ability to spend the resources, particularly the capital portion, within the stipulated time.

Fiscal Consolidation and Defence Budget

It was expected that the defence budget 2011-12 might be affected by the government’s fiscal austerity measures. Although the government has succeeded in bringing the estimated fiscal deficit down to 4.6 per cent of the GDP in 2011-12, the defence budget has been shielded from its effects. This is primarily because of the impressive turnaround made by the economy post the global financial crisis. The return to the pre-crisis nine per cent growth path has given the finance ministry the hope of stepping up its revenue collection. In fact, the government’s net revenue is expected to rise by nearly 16 per cent to Rs. 7,89,892 crore in the coming fiscal, mainly on account of increase in tax revenue which is projected to grow by 24 per cent to Rs. 6,64,457 crore. This buoyancy has made it possible for the finance ministry to simultaneously undertake fiscal consolidation and increase expenditure. This has in turn benefited many central ministries and departments including the Ministry of Defence (MoD), which has witnessed one of the highest growth rates in its budget in recent times.

Key Statistics of Defence Budget 2011-12

Although the defence budget for 2011-12 has been increased by 11.59 per cent over the previous year’s allocation, its growth rate comes down to 8.47 per cent over the revised estimate for 2010-11. In other words, the MoD has over spent its 2010-11 allocations (at the time of revised estimate) by Rs 4,237.69 crore . Unlike in previous years, this extra expenditure was, incurred on both the revenue and capital fronts; the former grew by Rs 3,404.43 core (3.9 per cent), and the latter marginally, but significantly, by Rs. 833.26 crore (1.4 per cent).

The announced increase in the defence budget has resulted in an additional allocation of Rs. 17,071.49 crore over the previous budget. Of this Rs. 7,872.68 crore is earmarked for revenue expenditure and the balance Rs. 9,198.81 for capital expenditure. In other words, revenue expenditure has grown by 9.01 per cent to Rs. 95,216.68 and the capital expenditure by 15.33 per cent to Rs. 69,198.81 crore. On the revenue side, although the growth has been necessitated by the increase in pay and allowances, there has also been an increase in the budgetary provision for other revenue items such as stores, transportation, etc.

The adequate increase in the defence budget has had a favourable impact on key statistics (see Table), except in terms of its share in total central government expenditure and GDP. The declining share of defence in these key parameters can be ascribed to the relatively faster growth of the Indian economy and the resultant increase in total central governmental expenditure. On the positive side, the ratio between revenue expenditure and capital expenditure has improved in favour of the latter, showing the government’s greater focus on the modernisation of the armed forces. The improvement is largely due to the hefty increase in the capital acquisition budget, which has grown by more than 25 per cent to Rs. 55,604 crore ($12.2 billion). Among the three services, the air force accounts for the largest share with an acquisition budget of Rs. 28,354.54 crore, followed by army (Rs. 14,100.44 crore) and navy (Rs. 13,149.02 crore).

It is noteworthy that the large provision under the capital acquisition budget is for some ‘big-ticket’ items such as the Medium Multi-Role Combat Aircraft (MMRCA) (for the air force), C-17 Globamaster (air force), advanced helicopter (for air force and army), and patrol vessels (for navy); contract for these are due to be signed in the coming fiscal year. Assuming that 60 per cent of the capital acquisition budget goes for committed liabilities, the MoD will have around Rs. 22,240 crore ($ 4.9 billion) to pay for new acquisitions.

Table: Key Statistics of Defence Budget, 2010-11 and 2011-12
  2010-11 2011-12
Defence Budget (Rs. in Crore) 1,47,344 1,64,415.49
Growth of Defence Budget (%) 3.98 11.59
Revenue Expenditure (Rs. in Crore) 87,344 95,216.68
Growth of Revenue Expenditure (%) 0.57 9.01
Share of Revenue Expenditure in Defence Budget (%) 59.28 57.91
Capital Expenditure (Rs. in Crore) 60,000 69,198.81
Growth of Capital Expenditure (%) 9.44 15.33
Share of Capital Expenditure in Defence Budget (%) 40.72 42.09
Share of Defence Budget in GDP (%) 2.12 1.83
Share of Defence Budget in Central Government Expenditure (%) 13.29 13.07

Share of Services

In 2011-12, the army, with an approximate budget of Rs. 83, 415 crore, accounts for 51 per cent of the total defence budget; at a distance follow the air force (Rs. 46,151.78 crore), navy (Rs. 25,246.89 crore), Defence Research and Development Organisation (DRDO) (Rs. 10,253.17 crore), and ordnance factories (OFs) (Rs. 776.79 crore). The major share for the army is because of the large scale provision under revenue expenditure, which is primarily driven by pay and allowances. In terms of capital expenditure, the air force with a budget of Rs. 30,223.83 crore is the most capital-intensive, followed by the army (Rs. 19,163.07 crore), navy (Rs. 14,657.83 crore), DRDO (Rs. 4,628.3 crore), and OFs (Rs. 399.96 crore).


Figure: Share of Defence Services in Defence Budget 2011-12

Note: The figure is based on total defence budget (Rs. 1,64,415.49 crore) minus Rs. 125.82 crore which is allocated under the heads of ‘Prototype development under ‘Make’ procedure’ and ‘Others’. Minus budget for the OFs because of their excess revenue over expenditure.

Re-appropriation in Capital Expenditure

As the new defence budget reveals, the MoD has spent more than its 2010-11 budgetary allocations under the capital head. On the face of it, the utilisation of the capital fund is creditable given the MoD’s past record of surrendering allocated funds. A closer examination of the budget, however, reveals that the spending has not been done as was intended in the original budget, leading to under utilisation in some heads and over utilisation in others. For instance, 30 per cent of allocation under the head of ‘Other Equipment’ has remained under utilised, whereas allocations under the ‘Air-craft and Aero-Engine’ and ‘Naval Fleet’ have been over utilised by 24 per cent and 11 per cent. But it is not clear whether the overspending was necessitated by a change in plans midway, or because of parking of funds with state-owned enterprises in an attempt to prevent the surrender of funds. (As regards parking of funds, there have been several occasions in the past, where the MoD deliberately transferred funds in excess of annual budgetary provisions to its production agencies.)

The readjustment (or re-appropriation as it is known in the budgetary parlance) allowed with certain conditions does not, however, free the MoD of its responsibility to stick to its plan to the extent possible. A deliberate digression from the plan in order to utilise the money is not always efficient or desirable. For instance, the budgetary provision to buy radars will lose its relevance if the said budget ended up buying missiles, which cannot be used without effective surveillance. In this context, the efficiency of the MoD lies not only in spending the capital head within the stipulated time period but also spending it as per the original plan.

Rise in Pay and Allowances

In 2011-12, total pay and allowances of the three services and the DRDO are estimated to grow by 10.3 per cent to Rs. 51,591.27 crore. (The pay and allowances of ordnance factories are not included in the calculation because of lack of data at the time of writing). This pay component represents 54.2 per cent of the total revenue expenditure and 31.4 per cent of the total defence budget; it is also responsible for 28 per cent of the increase in the total defence budget.

It is to be noted that pay and allowances are obligatory in nature and the government has little control over their growth, given the mandatory increase in annual pay and dearness allowances. Moreover, most of today’s pay and allowances constitute tomorrow’s defence pensions, over which also the government has little control. The uncontrollable growth in these two components have a great implication on other aspects of the defence budget. This is more so, given the government’s ceiling approach to defence allocation, which invariably affects the non-obligatory components of the budget, particularly capital acquisitions, stores, transportation and revenue works. Keeping this in view, there is a need to ensure that the pay component remains within certain limits. It is in this context that the MoD needs to adopt zero based budgeting (ZBB) and outcome budgeting, so as to ensure that some of the inefficiencies are done away with and precious resources diverted to important areas.

Conclusion

The defence budget 2011-12 is an impressive one. It has not only been shielded from the effects of the government’s fiscal consolidation process, but has also grown by nearly 12 per cent, the highest in recent years if one excludes the year 2009-10 when the budget was increased by 34 per cent mainly due to the increases in pay mandated by the sixth central pay commission. The growth in the defence budget has provided extra resources, particularly for the modernisation of the armed forces.