In a few days from now, Finance Minister Nirmala Sitharaman will present an interim budget for the coming fiscal year 2024-25. Confident that the ruling Bharatiya Janata Party will return to power after the general elections, due in early spring, she is likely to stay the course and present a growth-oriented budget, avoiding overambitious promises that may have to be toned down when the regular budget is presented after the new government is constituted.
This does not rule out the possibility of some concessions being made to the voters to counter the lure of freebies, which every political party is expected to promise at the hustings, but the revenue-consuming government departments do not fit into this scheme of things. Accounting for about 13-14 per cent of the total Central Government Expenditure (CGE), the Ministry of Defence (MoD) falls in this category.
Some defence analysts would disagree with this characterisation. Defence expenditure, they would argue, spurs economic growth, especially if it is wisely channelised into the manufacturing and services sector. While there is some truth in this argument, defence expenditure cannot be the primary driver of economic growth; other sectors are equally, if not more, critical drivers of growth. Consequently, government expenditure has to be balanced between competing demands from growth-generating sectors, revenue-consuming departments, and social welfare schemes. This is unlikely to change in the coming years.
What does it mean for the armed forces and other departments such as the Defence Research and Development Organisation (DRDO), Indian Coast Guard (ICG), and Border Roads Organisation (BRO), which are funded by one or the other of MoD’s four Demands for Grant: MoD (Civil), Defence Services (Revenue), Capital Outlay on Defence Services, and Defence Pensions?
The most enduring criticism of the defence budget has been the inadequacy of the outlay set aside for the MoD as a whole, and for the armed forces, in particular. The gap between the requirement of funds projected by the armed forces in the run-up to formulation of the union budget, and the actual budgetary allocation went up progressively from Rs 23,014 crore in 2010-11 to Rs 1,01,678 crore in 2022-23, where after it fell sharply to Rs 33,214 crore in 2023-24.
The narrowing of the gap between the projection and allocation was on account of two factors. One, in an unprecedented move, the services toned down their projection, and two, there was a reasonable hike in the budgetary allocation. In the year 2022-23, the services demanded Rs 4,59,223 crore for revenue and capital expenditure. Instead of the requirement going up in 2023-24, it came down to Rs 4,38,631 crore.
Defence expenditure cannot be the primary driver of economic growth; other sectors are equally critical drivers of growth. So, government expenditure has to be balanced between competing demands from growth-generating sectors, revenue-consuming departments, and social welfare schemes. This is unlikely to change in the coming years
The toning down of the requirement was matched by a year-on-year increase of 13.41 per cent in the budgetary allocation to the armed forces, which is arguably as good as it can get, considering the multifarious demands on the resources, especially on account of growth-oriented capex and welfare schemes which originated during the Covid-19 pandemic.
This trend is likely to continue as the services have apparently realised the futility of making unrealistic demands with full knowledge that the Ministry of Finance (MoF) will not be able to meet them. Considering the buoyancy in revenue collection, low current account deficit, the likelihood of the fiscal deficit targets for the year being met, a promising outlook on economic growth in the coming fiscal, and a variety of other factors, the growth in budgetary allocation is also likely to be comparable with the increase in budgetary allocation for the current fiscal.
This analysis could go awry if the subdued demand for funds in 2022-23 was on account of the payment for imports from Russia being held up. According to some reports, payment worth $3-4 billion has accumulated in the ‘vostro’ account -the mutually agreed protocol to route payments in the Indian currency- and Russia growing weary of continuing with this arrangement for supplying platforms, equipment, spares, and services to India.
The equipment awaiting delivery from Russia, or finalisation of the contract, includes three of five Almaz-Antey S-400 Triumf self-propelled surface-to-air (SAM) missile systems, four Admiral Grigorovich Project 1135.6M frigates, of which two were to be built by Goa Shipyard Limited with transfer of technology from Russia, and 80,000-odd Kalashnikov AK-203 7.62×39 mm assault rifles, a majority of which were to be licence build at Korwa in Uttar Pradesh. The possible leasing of another Project 971 ‘Akula’ (Shchuka-B)-class nuclear-powered submarine (SSN) was also under consideration, and is now apparently on hold.
The requirement of funds for capital expenditure could also go up if the MoD expects other big projects such as the acquisition of the twin-engine Rafale aircraft for the Indian Navy, General Atomic MQ9 Reaper hunter-killer UAVs, and General Electric’s GE-414F engines for the Light Combat Aircraft, as also construction of submarines under Indian Navy’s Project 75(I), to go through during 2024-25, necessitating payment of advance money to the suppliers. As of now, the possibility of all these projects fructifying simultaneously in the coming fiscal seems remote, though.
Apart from the obligatory expenditure on salaries, ration, and clothing, the revenue budget also caters for operational expenditure on upkeep of the in-service equipment, procurement of ammunition and other ordnance stores, training, transportation of troops and material, and maintenance of the military infrastructure
Pragmatism in projecting the demand for capital expenditure also seems to have helped in more funds being made available by the MoF for revenue expenditure of the armed forces. The revenue budget has traditionally been under great stress because of a meagre annual increase, but the trend seems to be changing. The revenue budget of the forces went up by 15.6 per cent from Rs 2,23,178 crore in 2022-23 to Rs 2,58,002 crore in 2023-24.
It may not be too unrealistic to expect a similar jump in the revenue budget for 2024-25, but even if the increase is more modest, it should not be a cause for despair. The MoF has apparently overcome its traditional reluctance to allocate additional funds for revenue expenditure at the revised estimate (RE) stage, if needed by the armed forces. In 2022-23, the revenue budget was enhanced by 12 per cent at the RE stage. There is no reason why it should not be possible to do so in 2024-25 if the need arises.
The long-held view that capital expenditure must be prioritised over revenue expenditure, since the former spurs growth while the latter is only consumptive, is somewhat flawed in the context of the defence budget. Apart from the obligatory expenditure on salaries, ration, and clothing, the revenue budget also caters for operational expenditure on upkeep of the in-service equipment, procurement of ammunition and other ordnance stores, training, transportation of troops and material, and maintenance of the military infrastructure. From an operational perspective, it is as important to ensure adequate funds for this purpose, as it is to allocate funds for acquiring new equipment and capabilities.
Though the armed forces constitute its core, the defence budget is not all about them; other organisations, primarily DRDO, ICG, and BRO are equally important. While DRDO plays a pivotal role in realising the national aspiration of making India self-reliant in military technology, the other two organisations are vital for India’s interest in the Indo-Pacific region and checkmating the insidious Chinese expansionism in the Himalayas.
The DRDO is constantly, and often unfairly, targeted for not living up to expectations. It is pilloried for stalled projects (Kaveri Engine), developing prototypes which are not state-of-the-art (Arjun Tank), cost- and time-overrun (Light Combat Aircraft), and much more. Most of the criticism is valid, but the entire blame cannot be assigned to this organisation which has been the primary agency for defence R&D in the country in accordance with the government’s policy. Its performance has been affected by many factors, inadequate financial resources being one of them.
Defence Pensions remain an important constituent of the defence budget, accounting for more than 23 per cent of the total defence budget of 2023-24. With the payment of arrears on account of the second tranche of One Rank One Pension during the year, the RE for 2023-24 is likely to be higher than the initial budget estimates. The trend is likely to continue
The budgetary allocation for DRDO has come down from 0.68 per cent of the total CGE in 2019-20 to 0.52 per cent in 2023-24, while its share in the total defence budget has declined from 4.41 per cent to 3.92 per cent during the same period. The data for leading countries like the USA, Russia, France, and China are not readily available, but it is generally accepted that the allocation for defence R&D in India is too meagre to produce any spectacular results.
It was announced by Nirmala Sitharaman in her budget speech for 2022-23 that defence R&D will be opened to the industry, startups, and academia with 25 per cent of the defence R&D budget earmarked for this purpose. This was to encourage the private sector to take up the design and development of military platforms and equipment in collaboration with DRDO and other organisations through the Strategic Partnership Model. An independent nodal umbrella body was also to be set up to meet wide-ranging testing and certification requirements.
It’s not known if there has been any movement on this front in the last two years. None is expected in the immediate run. With the constitution of a nine-member committee in September 2023 to revamp DRDO, and its report still awaited, the status quo in terms of budgetary allocation seems more likely than any substantial increase in allocation.
Meanwhile, because of the focus on maritime security and infrastructure development in Ladakh, the outlay for ICG and BRO has grown at a reasonably healthy compound annual growth rate (CAGR) of 8.04 per cent and 14.23 per cent, respectively. There is no reason to expect any let-up in this momentum.
Defence Pensions remain an important constituent of the defence budget, accounting for more than 23 per cent of the total defence budget of 2023-24. With the payment of arrears on account of the second tranche of One Rank One Pension (OROP) during the year, the RE for 2023-24 is likely to be higher than the initial budget estimates. The trend is likely to continue next year, and thereafter because of the periodic increases on account of OROP. No one seems to have a clue about how to contain this expenditure. The beleaguered Agniveer scheme seems to be no solution, at least in the short and medium terms.
To sum up, the big thing in the next fiscal year will be the general elections to the 18th Lok Sabha. It is but natural that the budget will reflect the imperatives of electoral calculations, though without any major impact on the momentum built up over the past few years of increasing defence outlays. In statistical terms, it could mean earmarking of 13-14 per cent of the total CGE for defence expenditure, in keeping with the past trend. An increase beyond this range would be a bonus.
–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