India’s defence budget for this year has been increased to ₹6.21 lakh crore (approximately US $75 Billion), up from last year’s outlay of ₹5.94 lakh crore.
The allocation to MoD for FY 2024-25 is higher by approximately ₹one lakh crore (18.43%) than the allocation for FY 2022-23 and 4.79% more than the allocation of FY 2023-24, as per the Ministry of Defence (MoD).
However, two questions immediately spring-up, that how does our budget spending compares with our immediate neighbours and how it will be used for the defence sector by the MoD. Let’s take a look.
How does India’s budget spending compares with its immediate neighbours and how it will be used for the defence sector by the MoD are of paramount importance
In 2024, China has increased its defence budget by 7.2 percent compared to last year. In March, China announced a defence budget worth 1.66554 trillion yuan ($231.36 billion). China has seen an increase in defence budget for the ninth consecutive years since 2015, despite a slowdown in the Chinese economy.
In its Budget 2024-25, Pakistan earmarked ₹2,122 billion for the armed forces in 2024, an increase of 17.6 percent compared to last year’s budget. A report said that the boost in defence spending is the second-largest in six years.
However, according to Dawn News, major military acquisitions and funding for nuclear weapons and missile programmes are believed to be financed through separate channels hidden under a classified budget line.
Further, according to the MOD, the enhanced budgetary allocation will fulfil the requirement of annual cash outgo on planned Capital acquisitions aimed at equipping the Armed forces with state-of-the-art niche technology, lethal weapons, fighter aircraft, ships, submarines, platforms, unmanned aerial vehicles, drones, specialist vehicles etc.
As the Vice Chief of Air Staff (VCAS) A.P. Singh noted prior to the budget of 2024-25, ANB can not come at the cost of the country’s national defence and security. The lead times necessary to develop, produce and deploy critical technologies and weapons systems are considerable, because India’s adversaries are building capabilities at a rapid clip, and to keep pace with them domestic industry, and more generally the Indian defence ecosystem, has to deliver in time and optimally.
The enhanced budgetary allocation will fulfil the requirement of annual cash outgo on planned Capital acquisitions aimed at equipping the Armed forces with state-of-the-art niche technology, lethal weapons, fighter aircraft, ships, submarines, platforms, unmanned aerial vehicles, drones, specialist vehicles etc
According to a latest KPMG report on the subject, key takeaways for the space sector includes:
- The Department of Space (DoS) is allocated INR 13,043 crore (~USD 1.56 Bn) in the Budget 2024, out of which INR 5,568 crore (~USD 0.67 Bn) is earmarked towards the capital expenditure. There has been an increase in the overall budget of INR 1,973 crore (~USD 0.24 Bn) i.e. increase by 18 per cent as compared to the revised estimate of FY 2023-24.
- Major part of the space budget is earmarked for space technology with ~23 per cent increase in the space technology spending earmarked in FY 2024-25 over revised estimate of FY 2023-24.
- The budgetary allocation to New Space India Limited (NSIL) is retained at INR 1 crore which indicates the space sector Public Sector Undertaking (PSU) is expected to be self-reliant for its growth and to judiciously utilise the equity infusion of INR 900 crore (~USD 0.11 Bn) made in the PSU in FY 2021-22.
- With a continued emphasis on expanding the space economy by 5 times in the next 10 years, a venture capital fund of 1,000 crore (~USD 0.12 bn) is proposed to be set up.
- There has been a significant increase of ~19 per cent in the budget for the central government schemes/ projects in the space sector thereby indicating government’s intent towards promoting the sector. These include schemes specific to space technology, sciences, applications and satellite systems.
Major part of the space budget is earmarked for space technology with ~23 per cent increase in the space technology spending earmarked in FY 2024-25 over revised estimate of FY 2023-24
The report further analyses the key implications for the sector, saying:
- Re-affirming the allocations announced in the interim Defence budget in February, the Aerospace and Defence sector has yet again been provided the highest budget allocation (at 13 per cent of the overall budget) amongst all the sectors by the Indian Government. Though, the overall Defence budget only gets a 5 per cent y-o-y increase, the Defence budget crossed the INR 6 Lakh crore threshold this year for the first time (~USD 74.48 bn).
- While the proposed capital outlay at INR 1.72 Lakh crore (~USD 20.6 bn) has seen an increase in absolute on yearly basis, there has been nominal 6 per cent y-o-y increase (vis-à-vis ~9 per cent increase from revised estimates) and certainly misses industry expectations.
- The final budget also misses the detailed allocations for the three divisions of the Defence services i.e. Indian Army, Indian Navy and Indian Airforce. Key highlights of the capital budgetary allocations across various activities are as below:
Allocation towards ‘naval fleet’ has decreased from INR 24,200 crore (~USD 2.90 Bn) in FY 2023-24 to INR 23,800 crore (~USD 2.85 Bn) in FY 2024-25
— Allocation towards ‘aircraft and aeroengines’ has increased for all the services from INR 28,222 crore (~USD 3.40 Bn) in FY 2023-24 to INR 40,278 crore (~USD 4.82 Bn) in FY 2024-25. An increase of more than INR 12,056 crore (~USD 1.44 Bn/ ~43 per cent). This is likely linked to the procurement of platforms such as the C 295, Tejas Mk1, aeroengines and helicopters such as Prachand
— Allocation towards ‘naval fleet’ has decreased from INR 24,200 crore (~USD 2.90 Bn) in FY 2023-24 to INR 23,800 crore (~USD 2.85 Bn) in FY 2024-25. This marginal decrease of INR 400 crore (~USD 0.05 Bn/ ~2 per cent) typically does not reflect any reduction in budget allocation for future naval fleet acquisition programs. This may be attributable to minor variations in yearly outgo of committed liabilities, which are in-turn dependent on completion of stages of ongoing shipbuilding programs
— Expenditure on ‘Research & Development’ increased by INR 358 crore (~USD 0.04 Bn) over FY 2023-24, an increase of about 2.8 per cent.
— Allocation towards Rashtriya Rifles has increased from INR 100 crore (~USD 0.01 Bn) in FY 2023-24 to INR 200 crore (~USD 0.02 Bn) in FY 2024-25. 100 per cent increase indicates equipping of the forces to handle internal security issues.
- In the revenue procurement budget, majorly, expenditure on stores by the Army has reduced from INR 23,965 crore (~USD 2.87 Bn) in FY 2023-24 to INR 22,036 crore (~USD 2.64 Bn) in FY 2024-25. A decrease of INR 1,929 crore (~USD 0.23 Bn/ ~8 per cent).
The report also states that in the tax proposals, grant of BCD exemption on certain minerals critical to Defence and Space sector, extension of BCD exemptions concessions timeline etc. is a welcome move to boost in-country manufacturing. Other several key measures such as rationalisation of GST on import of components or parts to 5 per cent required for MRO activities, extension of time limit for re-importation and re-exportation extended for purpose of duty benefits etc. reflects government’s efforts to promote innovation, efficiency in order to develop a strong and efficient aviation industry.
India’s transition to the list of the top 25 arms exporter nations, aforementioned exclusions could be a deterrent to the Government’s ambitious vision of achieving a turnover of INR 175,000 crore (~ USD 20.96 Bn) including exports of INR 30,000 crore (~ USD 3.59 Bn) in Aerospace and Defence goods and services by FY 2024-25
It further says that while many constructive policy reforms have been announced in the defence sector (including introduction of multiple positive indigenisation lists for defence public sector undertakings as well as private companies, introduction of amendments to defence acquisition procedure, removal of restriction on wholly owned subsidiary being an Indian offset partner, first government approval to a company for 100 per cent FDI in Defence sector etc.), certain key asks of the industry are still a miss, such as: Introduction of production linked incentive scheme; Extension of the deadline of concessional tax rate for commencement of manufacturing activities; rationalisation of MRO rate currently appears to apply exclusively for civil MRO centres.
Although exemptions are already in place for Defence MROs (period for which has been extended), their applicability may not be universal. Hence, the issue of inverted tax structure might still persist for defence MRO centres; in the absence of any clarification/amendment to address the inconsistency in current definition of Indian vendor for defence acquisitions, Indian subsidiaries/JVs with 74% shareholding of OEMs are still not at par with Indian owned and controlled entities, for all capital acquisitions.
Lastly while, ‘Make in India’ continues to be at a centrestage, with the Defence production increasing to INR 1.27 Lakh crore (USD 15.21 bn) in FY 2023-24 and India’s transition to the list of the top 25 arms exporter nations, aforementioned exclusions could be a deterrent to the Government’s ambitious vision of achieving a turnover of INR 175,000 crore (~ USD 20.96 Bn) including exports of INR 30,000 crore (~ USD 3.59 Bn) in Aerospace and Defence goods and services by FY 2024-25.
It seems that the Modi 3.0 has reiterated its commitment to develop a robust domestic defence industry, which is amply reflected by the resource allocations it has made. But there are also inherent risks in increasing the capital outlay of the defence budget only marginally. Moreover, this balancing act of the government will continue to define the trajectory of its defence policy, in the future.
