IDSA COMMENT

India’s Interim Defence Budget 2014-15: An Appraisal

February 23, 2014

On February 17, 2014, the Finance Minister while presenting the Interim Union Budget 2014-15 to the Parliament, allocated Rs 2,24,000 crore (US$ 37.15 billion as per the prevailing average exchange rate) for the national defence. The interim defence allocation, which represents a 9.98 per cent increase over the 2013-14 defence budget is exclusive of Rs 53,582.15 crore for defence pension that includes Rs 500 crore on account of the government’s acceptance of the armed forces’ long-standing demand for One Rank One Pension (OROP) principle. Although the interim budget is relevant till the new government presents a regular budget after the 2014 general elections, it nonetheless sets a broad roadmap for various ministries and departments. Defence being a major charge on the central government budget, it is worthwhile to look at the interim allocation that impinges on the modernization and other needs of the Indian armed forces.

Interim Budget: Growth Factors and Key Elements

It is noteworthy that the 10 per cent hike in the interim defence budget is with respect to both budget estimate and revised estimate of 2013-14 allocation. In other words, there has been no upward or downward revision of the defence allocations provided in the previous budget. With the overall 2013-14 allocation remaining same, the capital expenditure has, however, been revised downward by 9.07 per cent or Rs.7868.48 crore, which has been added to the revenue expenditure. Around 46 per cent of upward revision of the revenue expenditure has been necessitated due to the increase in pay and allowances of the three armed forces.

The increase in the pay and allowances is also the main reason for bulk of the hike in the interim defence allocations. Suffice to mention that in the new budget, 48 per cent of the total increase is accounted for by the hike in armed forces salary component. Compared to this, the capital expenditure, which mainly caters to the modernisation requirement of the armed forces, has contributed to only 14 per cent of the total hike.

Table-1 below provides a comparative overview of the key elements of the interim defence budget 2014-15 and the defence budget of 2013-14. Among others, it brings out clearly that although the growth of the interim budget is higher than that of the previous year’s budget, the growth, as mentioned earlier, is consumed by swelling revenue expenditure. Consequently, the capital expenditure, its growth and its share in total defence budget cut an unimpressive outlook. An interesting aspect of the table is that the share of defence in GDP and total Central Government Expenditure (CGE) has moved on opposite direction. It is largely due to the difference in the growth projection of these two parameters. While the nominal GDP is assumed to grow by 13.4 per cent in 2014-15, the CGE is estimated to grow by 5.9 per cent.

Table 1: Comparative Statistics of Defence Budget: 2013-14 & 2014-15 (Interim)

  2013-14 2014-15 (I)
Defence Budget (Rs in Crore) 203672.12 224000.00
Growth of Defence Budget (%) 5.31 9.98
Revenue Expenditure (Rs in Crore) 116931.41 134412.05
Growth of Revenue Expenditure (%) 2.73 14.95
Share of Revenue Expenditure in Defence Budget (%) 57.41 60.01
Capital Expenditure (Rs in Crore) 86740.71 89587.95
Growth of Capital Expenditure (%) 9.00 3.28
Share of Capital Expenditure in Defence Budget (%) 42.59 39.99
Capital Acquisition (Rs in Crore) 73444.59 75779.66*
Growth of Capital Acquisition (%) 11.23 3.18*
Share of Defence Budget in GDP (%) 1.80 1.74
Share of Defence Budget in Central Government Expenditure (%) 12.23 12.70

Note: *: approximate figure. Rs 1.0 crore = Rs 10 million = US$ 165,852 (as per the average exchange rate for the first 10 months of 2013-14)

Interim Defence Budget: Share of Defence Services

Among the defence services, the Army with an approximate budget of Rs. 1,18,231 crore accounts for 53 per cent of the total interim defence budget, followed by the Air Force (Rs 54,262 crore; 24 per cent), Navy (Rs 37,627 crore; 17 per cent), the Defence Research and Development Organisation (DRDO) (Rs 11,960 crore, five per cent) and the Ordnance Factories (Rs 1,873 crore; one per cent) Among the three armed forces, Army has the highest (19 per cent) increase in the budget. While the Navy’s budget has been increase by a modest 3.5 per cent, the Air Force’s budget has been contracted by a 5.6 per cent. The DRDO on the other hand has got a 13 per cent hike in its budget.

Impact on Modernisation

The 10 per cent hike in the overall defence allocation notwithstanding, there has only been a marginal increase in the capital acquisition budget of the armed forces (Table II-V). Of the three armed forces, the Army is only service which has got an impressive hike in its modernisation budget. Much of its growth is however concentrated on ‘Other Equipment’ which caters to missiles and artillery guns among other. This may provide a cushion to the Army to finally sign to pursue its long-delayed procurement deals of ultra-light howitzer, Javelin anti-tank guided missile and night vision equipment.

Compared to the Army, both the Navy and the Air Force have witnessed a decline in the capital acquisition budget, with the latter bearing a heavy brunt. The sharp decline of the air forces modernisation budget, especially from the ‘Aircraft and Aero Engines’ head is surprising, given that it is on the verge of signing several multi-billion dollar deals including for medium multi-role combat aircraft (MMRCA) programme for which French Rafale has been declared winner way back in January 2012. Given that its budget has been reduced sharply, it is very unlikely that the Air Force could sign this much talked about fighter deal in 2014-15. Some of Air Force’s other programmes which are likely to be affected include the multi-role tanker aircraft and heavy and attack helicopters.

Table 2: Capital Acquisition

Armed Force BE 2013-14 (Rs in Cr) RE 2013-14 (Rs in Cr) Under/over Spending (Rs in Cr) Under/over Spending (%) Interim 2014-15 (Rs in Cr) % Growth of Interim 2014-15 over BE 2013-14
Army 13327.04 10801.22 2525.82 18.95 20900.20 56.83
Navy 23478.78 19864.31 3614.47 15.39 23020.86 -1.95
Air Force 37048.06 36016.54 1031.52 2.78 31817.89 -14.12
Total 73853.88 66682.07 7171.81 9.71 75738.95 2.55

Notes: The Capital acquisition figure is approximate and exclusive of funds for ‘Make’ projects in columns 4 and 5, plus figures denote under-utilization and minus figures over-utilization

Table 3: Army Capital Acquisition

  2013-14 (BE) (Rs in Cr) 2013-14 (RE) (Rs in Cr) 2014-15 (I) (Rs in Cr) % Growth of 2014-15 (I) over 2013-14 (BE)
Aircraft & Aero-Engine 1527.79 1182.32 2127.99 39.29
H&MV 2024.37 1480.94 2128.16 5.13
Other Equipment 9758.86 7889.47 16155.93 65.55
Rolling Stock 0 81.5 275.07  
Rashtriya Rifles 16.02 166.99 213.05 1229.90
Total Acquisition Expenditure Acq Exp 13327.04 10801.22 20900.2 56.83

Table 4: Navy Capital Acquisition

  2013-14 (BE) (Rs in Cr) 2013-14 (RE) (Rs in Cr) 2014-15 (I) (Rs in Cr) % Growth of 2014-15 (I) over 2013-14 (BE)
Aircraft & Aero-Engine 6708.71 7418.40 3330.69 -50.35
H&MV 53.74 3.90 34.27 -36.23
Other Equipment 2192.82 2514.87 4358.10 98.74
Joint Staff 740.08 619.27 828.87 12.00
Naval Fleet 11772.26 8757.87 12856.06 9.21
Naval Dockyard 2011.17 550.00 1612.87 -19.80
Total Acquisition Expenditure 23478.78 19864.31 23020.86 -1.95

Table 5: Air Force Acquisition

  2013-14 (BE) (Rs in Cr) 2013-14 (RE) (Rs in Cr) 2014-15 (I) (Rs in Cr) % Growth of 2014-15 (I) over 2013-14 (BE)
Aircraft & Aero-Engine 25539.59 28588.85 16271.43 -36.29
H&MV 2.82 36.14 194.29 6789.72
Other Equipment 11505.65 7391.55 15352.17 33.43
Total Acquisition Expenditure 37048.06 36016.54 31817.89 -14.12

Funds for ‘Make’ Projects

The interim defence budget has made a provision of Rs 35.7 crore for prototype development under the ‘Make’ procedure. The interim budget also shows an upward revision of 2013-14 allocation for ‘Make’ projects from Rs one crore to Rs 29.34 core. The higher allocation for Make projects notwithstanding, it is not clear as to what projects the funds are allocated for. The much talked about ‘Make’ projects - Tactical Communication System (TCS) and Future Infantry Combat System (FICV) - which were under the discussion for long time are now virtually in limbo, due to the indecisive on the part of the defence ministry and the complexity of the procedures. More importantly, the MoD is currently engaged in simplifying its ‘Make’ procedure, the implementation of which is unlikely to happen in 2014-15. Given this, the allocation under the ‘Make’ head seems to be unrealistic.

Conclusion

The 10 per cent growth in the interim defence budget although looks impressive from outside, it has a poor outlook on the modernisation front. Much of the hike in the interim budget is consumed by the increase in salary, leaving very little to meet the modernisation requirements, particularly of the Indian Air Force which has lined up several deals for contract signing. From a long term perspective what is of more relevance is that given the continuous steep rise in the pay and allowances of the 1.4 million strong Indian armed forces, the pressure on modernisation would be felt more acutely in the coming years. This is more so, given the given the prevailing poor economic outlook, increasing subsidy bill, growing demand from social sector on union budget, and limited fiscal space available with the government.

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