IDSA COMMENT

India’s Defence Budget: Trends Beyond the Numbers

March 4, 2013

Amidst the commotion of the Agusta-Westland helicopter scam and a string of exposés on corruption-stained defence contracts, the defence budget for the fiscal year 2013-14 was predictably along expected lines. The defence expenditure and its components along with some other relevant data is given in Table 1 below.

  2011-12
Actual
2012-13
Budget
Estimate (BE)
2012-13
Revised
Estimate (RE)
2013-14
Budget
Estimate (BE)
  (A) (B) (C) (D)
1) Defence Rev Exp.
2) Defence Cap.Exp.
3) Total Def. Exp.         
4) Total CGE                
5) GDP (Rs Billion))
(3)/(4) %                      
(3)/(5) %                      
103011
67902
170913
1304365
89749
13.10
1.90
113829
79579
193408
1490925
101589
12.97
1.90
108925
69579
178504
1430825
100281
12.47
1.78
116931
86741
203672
1665297
113719
12.23
1.79

The revised estimates of defence expenditure and both its components, revenue and capital, for 2012-13 are less than the budget estimates. This should not be surprising since as early as May 2012 the Ministry of Finance had issued an Expenditure Control Order mandating a 10 per cent cut in all non-Plan expenditure excluding subsidies, interest payments, salaries, etc. Here, it must be noted that all of defence expenditure is non-Plan expenditure. As a result, while there was only a nominal reduction in defence revenue expenditure, the reduction in defence capital expenditure was substantial, amounting to Rs.10,000 crore. The bulk of the reduction on capital account – approximately Rs. 4,000 crore – was in respect of expenditure on aircraft and aeroengines by the Army and the Navy, while the Air Force suffered a minor reduction of about Rs. 1,000 crore.

As result of the cuts imposed during the last financial year, the revised estimate for defence in 2012-13 is only marginally higher at 4.5 per cent over that for 2011-12, instead of the earlier projection of a 13.5 per cent increase.

This is not the first time that the Ministry of Finance has arbitrarily reduced defence capital expenditure. The repeated reductions in defence capital expenditure was commented upon by the Parliamentary Standing Committee on Defence while examining the Demand for Grants for 2007-08 thus: “On being asked by the Committee whether the reduction was imposed by the Ministry of Finance or this is due to non-fructification of various projects, the Ministry in their written reply stated: ‘This reduction was not sought by the Ministry of Defence but imposed by Ministry of Finance at the RE [Revised Estimate] stage’.” During subsequent examination, “On the issue of allocation of funds and pattern of utilisation of capital expenditure by the Ministry of Defence, the representative of the Ministry of Defence during oral evidence stated: ‘The cut at RE stage is not done to our volition, but it was done by the Ministry of Finance, we were planning to spend the entire amount; the schemes were all at various stages of implementation; we would carry on and that additionally would have to be sought in the coming years’.”

The 2013-14 defence budget shows an increase in both revenue and capital expenditure over both the 2012-13 Budget and Revised estimates. This might seem contrary to the reported statement of the Defence Minister at Aero-India 2013 in Bengaluru, where he admitted that the defence budget for the coming financial year would see a cut both in the revenue and capital segments. However, the Defence Minister was correct in his statement. Although the budget estimate of defence expenditure for 2013-14 is slated to be higher at Rs. 2,03,672 crore as against the Budget estimate Rs. 1,93,408 crore for 2012-13, in terms of defence expenditure as a percentage of GDP it was lower at an estimated 1.79 per cent as against a budget estimate of 1.93 per cent of GDP for 2012-13.

While Budget estimates of both the defence expenditure and its components for 2013-14 are only marginally higher than the corresponding Budget estimates for 2012-13, in comparison with the 2012-13 revised estimates they are much higher especially the defence capital expenditure which is expected to grow by 24.66 per cent. However, how far this will be realised depends to a large extent on the growth of the economy as well as on how the other major components of the Government revenue expenditure grow during the year. During the current year, for example, the outlay on subsidies is expected to grow by 35.6 per cent from a Budget Estimate of Rs. 1,90,015 crore to a Revised Estimate of Rs. 2,57,654. If subsidies grow at a similar rate during the coming year, we can expect a massive reduction in defence capital expenditure.

How far these reductions in defence expenditure and the impact on defence acquisition and modernisation programme will affect India’s defence preparedness and its national security is anybody’s guess. However, it must be recognised that this budget has set a number of records.

First, the defence expenditure as a percentage of total central Government expenditure (CGE) is the lowest in independent India’s history. It has been declining steadily for more than three decades from about 22 to 25 per cent in the early 1970s to the historically lowest level of 12.47 per cent during the current year with a further decline in the coming year.

Secondly, the defence expenditure as a percentage of GDP is the lowest in 50 years since 1962-63 when it stood at 2.32 per cent. Even in that year, the original budget estimate for defence expenditure was initially only around 1.5 per cent of GDP. It was only after the Chinese attack on the inadequately armed Indian forces in October 1962 that the government sought and the House gave its unqualified approval for supplementary grants, within weeks of “the wanton aggression on our borders” as the then Finance Minister put it, which led to the defence expenditure for 1962-63 increasing to 2.3 per cent of GDP. Till then, the Indian defence expenditure had hovered around 1.5 to 1.6 per cent of GDP. It is to this level that India’s defence expenditure will sink if the Finance Minister continues with his obsession about reducing the deficit and coalition governments are unable to rein in wasteful governmental expenditure and electorally-determined increase in subsidies.

In the larger scheme of things, fiscal prudence is a good trait and the reduction in deficits desirable, yet an overtly ambitious approach of reducing deficits into a number game may lead to developments that may hurt us not only in the security arena but in economic growth as well.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.