The primary, if not the only, expectation the armed forces have from the union budget is that the finance minister will pull a rabbit out of the hat and allocate whatever funds are demanded by them for defraying the expenditure on acquisition and maintenance of equipment, platforms, weapon systems, ammunition, and other military capabilities, as planned. The actual budget outlays, however, keep belying this expectation year after year.
It is hazardous to second-guess what Finance Minister Nirmala Sitharaman will do this time, but the situation is unlikely to be any different when she presents the union budget for the coming fiscal year 2023-24 on the 1st of February. For sure, going by the past trend, the allocation may go up by 10-12 per cent over the current fiscal year’s budget estimates (BE), but in all probability, it will be much less than the sum demanded by the armed forces.
Curiously, the enduring disappointment with the budget outlays has not prevented the armed forces from projecting unrealistic budgetary requirements, knowing fully well that the Ministry of Finance (MoF) will not be able to fulfil them. The consequent gap between the demand for funds and the budgetary allocation has been steadily widening.
Huge gap
In the current fiscal year (2022-23) there was a gap of Rs 1,01,678 crore at the BE stage. Of this, more than 62 per cent, or approximately Rs 63,228 crore, was in the capital segment of the budget which caters for all major acquisitions and infrastructure development. In 2010-11, the overall gap was just about Rs 23,000 crore.
It is not difficult to imagine the impact of this financial deprivation on the country’s defence preparedness, though it is unfair to argue, as many defence analysts do, that the allocation of an inadequate budget indicates the imperviousness of the politico-bureaucratic setup to the security concerns. A lot of energy is spent by these analysts in making out a case for a steep hike in the defence budget in the face of the collusive threat from China and Pakistan.
It is wrong to assume that the financial constraints faced by the armed forces are because of the lack of understanding on the part of the politicians and the bureaucracy of the security threats. It is more than obvious that the real challenge is the magnitude of the requirement and the constraints faced by the successive governments in meeting it, almost entirely because of inadequate resource generation.
Based on the data furnished by the armed forces through the Ministry of Defence (MoD), the fifteenth Finance Commission (FC) recorded in its report of October 2020 that there is likely to be a shortfall of Rs 15,24,100 crore between the armed forces’ requirement of funds and the budgetary allocation over five years from 2021-22 to 2025-26, after factoring in yearly growth in the allocations for revenue and capital expenditure at the rate of 7 per cent and 16 per cent per annum respectively.
This works out to a shortfall of more than Rs 3 lakh crore per annum, or roughly 75 per cent of the average annual allocation in the past four or five years. Nothing short of a miracle can bridge this budgetary gap which, going by the FC report, is expected to be Rs 3,02,119 crore in 2023-24, which includes the shortfall of Rs 1,69,784 in the capital outlay, while the remaining Rs 1,32,335 crore is expected under the revenue segment of the defence budget.
A question that the defence planners need to ask themselves is if making such financially unviable demands on the exchequer serves any useful purpose.
Budget speech
For sure, the government keeps proclaiming from time to time – and there was a time when the finance ministers would do this routinely while delivering the budget speech – that there is no dearth of funds for the armed forces, but no one ever explained why, in that case, the allocation never matched the demand projected by the services. Be that as it may, the hard-nosed defence planners ought to know better than to fall for such vacuous grandstanding.
This raises serious concerns about the wisdom of formulating financially unviable plans, again and again. The tenth five-year defence plan (2002-07) fizzled out because the MoD and MoF could not agree on the financial outlay for the plan. The eleventh plan (2007-12), though formulated almost a year in advance, also fell prey to the same conflict.
Nothing much is known about the fate of the twelfth and subsequent defence plans, except for the media reports in July 2017 that the services had sought an allocation of Rs 26,83,294 crore for the next five years for modernisation and other operational expenses. This plan was a non-starter as the demand could not be met except by more than doubling the annual allocation for the armed forces – a virtual impossibility. Surely the defence planners would have known this when they formulated the plan.
To put it in perspective, the projected plan outlay of Rs 26.84 lakh crore did not include the funds required by other organisations like the Coast Guard and Border Roads, and for defraying the burgeoning expenditure on defence pensions which has grown tenfold over the past two decades, from Rs 12,000 crore in 2000-01 to Rs 1,19,696 crore in the current financial year.
Revenue generation
Ultimately, all this boils down to one question in the context of the coming budget: whether the finance minister will be able to generate enough revenue to be able to hike the defence budget by a higher percentage than has been the case in recent years. As mentioned earlier, it seems unlikely, for reasons which are not difficult to understand.
The main sources of the government’s revenue are taxes and borrowings, followed by other miscellaneous income from dividends and disinvestment, etc. While the tax collection, especially the Goods and Services Tax, has been very promising in the current financial year, and this trend is expected to continue into the coming year, the tax revenue alone will not give enough elbow room to the finance minister to allocate an additional Rs 3.02 lakh crore for the next fiscal year, as projected in the FC report.
It cannot be argued that the defence expenditure must take precedence over all other government expenditures. There are other equally important sectors such as health, education, agriculture, power, infrastructure development, and rural development, just to name a few. Post-pandemic, the government has done well to focus on capital expenditure as a means of revitalising the economy, but the focus is – as it ought to be – on investment in the revenue-generating sectors, which defence is not.
Budgeting is a zero-sum game. Enhanced spending – including the expenditure on defence – cannot be sustained by raising taxes or unfettered borrowing by the government. The former has political and social implications, especially with nine assembly elections lined up this year, while the latter can be ruinous for the economy as the experience of two of our immediate neighbours indicates. Income from other sources like disinvestment in the public sector is anyway too unpredictable and insignificant to make a major impact on the government’s revenues.
Government’s priorities
Providing a glimpse into what to expect from the budget, Finance Minister Nirmala Sitharaman said on January 15 that the ‘government is firm on doubling farmers’ income, continuing to provide amenities to the aspiring middle class, giving necessary support to the poor through budgetary means, and focussing on capital expenditure for asset creation’.
Though her statement does not reflect the government’s priorities in their entirety, it is a very good indication of what to expect from the union budget. The armed forces will have to introspect and synchronise defence plans with the enduring fiscal reality. Disregarding this fundamental principle of planning has been the bane of defence preparedness all these years.
– The writer is a Ex-Financial Advisor (Acquisition), Ministry of Defence. The views expressed are personal and do not necessarily reflect the views of Raksha Anirveda
