Understanding India’s defence expenditure and likely budgetary trends

The allocation for the ministry is the largest among the various ministries of the central government in India. It accounts for over 13% of the central government's total expenditure. In 2021, due to Russia-Ukraine war, India was ranked third among the world's top military spenders, after China and the US. However, its defence budget decreased as a share of the country's total budget. And China's defence budget is 3.5 times bigger than that of India, even though it spends less on defence than the latter. While India continues to be one of the world's top spenders on its military, the Ministry of Defence's expenditure has continuously declined over the years. The lower allocation for the ministry is also due to the different requirements of the armed forces, such as the purchase of weapons and the payment of salaries and benefits. In 2022-23, the government gave the armed forces less than what they asked for, amounting to a 28% decrease. The shortfall in the allocation for the capital budget has been higher than for the revenue budget.

In response to the concerns of the ministry, the 15th Finance Commission was informed that the government would be able to provide adequate funding through various sources. According to the ministry, the government's inadequate allocation has affected its ability to fund large-scale defence acquisitions. The ministry noted that the continuous underfunding of the defence budget has resulted in various capability gaps, such as the reduction in the operational readiness of the three services. Due to the lack of funds, the ministry has resorted to using ad-hoc measures, such as delaying payments and postponing procurements.

The finance commission suggested that the government should establish a Modernization Fund for Defence and Internal Security to address the defence budget's gap. The fund will be non-lapsable, and its proceeds will be used for the modernization of the armed forces and the state police. The fund can be allocated using different sources of incremental funding. Some of these include the transfer of funds from the Consolidated Fund of India and the disinvestment proceeds of public sector enterprises. It can also be obtained from the monetization of surplus land and the receipt of receipts from the defence land that will be given to state governments. The finance commission estimated that the fund's total size could be around Rs.23.8 lakh crore over the 2021-22 financial years. According to reports, the finance ministry has rejected the 15^th Finance Commission's funding pattern. The ministry is exploring other funding methods due to its concerns that the use of money directly from the non-lapsable account violates parliamentary procedure. In 2017, the parliamentary committee for defence noted that the establishment of a non-lapsable fund for defence needs to be prioritized to enhance the military's operational preparedness. The establishment of a fund for defence would help ensure that the procurement of ammunition and equipment would not be affected by the lack of funds.

Therefore, the government is currently considering the establishment of a non-lapsable fund for defence. The appropriate mechanism for its functioning will be worked out in collaboration with the finance ministry. The committee suggested that the fund be immediately established to enable the procurement of weapons and equipment without relying on additional grants or supplementary funds. The allocation for the Ministry of Defence in the 2023-24 financial year is 1.5% higher than the revised estimates. However, this is lower than the government's projection of a 7.5% increase in its total expenditure. The pension component of the defence budget is also expected to decrease by 10%. Around 52% of the defence budget's total expenditure is allocated for salaries and pensions. This figure does not include the salaries of various state-run organizations such as the National Cadet Corps, the Joint Staff, and the Rashtriya Rifles. The capital budget, which is the portion of the total expenditure that covers the acquisition of weapons and equipment, is also expected to increase by 8%.

A significant portion of the defence budget is allocated for the pension of retired defence personnel. This includes the payment of various benefits, such as service, family, disability, and commuted pension. Between 2013 and 2023, the defence pension's expenditure has increased at a steady rate of 12%. This is higher than the Ministry's overall budget's annual growth rate of 9%. For the upcoming financial year, the pension fund's expenditure is expected to decrease by 10%. The increase in pension expenditure was mainly due to the payment of the One-Rank-One-Pension arrears amounting to Rs 28,137 crore during the 2022-23 fiscal year. During the 2019-20 and 2022-23 fiscal years, the pension expenditure made up 26% of the ministry's total budget.

In 2015, the government implemented the One-Rank-one-Pension (OROP) scheme. This benefit provided a pension of the same rank to service personnel who retired after serving for a certain length of time. This new system applies to all retired military personnel. Since the implementation of the OROP scheme, almost Rs 57,000 crore has been spent on it. In December 2022, the government approved the pension's revision. The annual cost of implementing the new system is estimated at around Rs 8,000 crore. Furthermore, in response to the recommendations of the 15th Finance Commission, the Ministry has been looking into various reforms related to the pension system of the armed forces. Some of these include bringing the services' existing pension scheme into the new one, increasing the retirement age for personnel below the rank of an officer, and transferring those who have already retired to other services. One of the measures that the government has taken to reduce the pension expenditure is the recruitment drive known as the Agnipath scheme, which was launched to recruit sailors, airmen, and soldiers. This program has also helped in keeping the capital budget under 30% of the defence budget. The capital budget for the defence ministry includes the various construction projects and machinery that the armed forces need. It also includes the development of border roads and research facilities. In 2014, around 32% of the budget was allocated for capital outlay. From 2014 to 2023, the share of the capital budget that the defence ministry uses for projects has decreased. It is estimated that the ministry will spend around 29% of its total budget on capital outlay in 2023-24. The Navy and Air Force are expected to spend more than half of their allocated capital budget. Whereas, the government's revised estimates for the capital budget for the next fiscal year indicate that the expenditure for the armed forces is expected to increase by 11%. On the other hand, the Air Force's capital budget is expected to decrease by 5%. And the Army's capital budget is expected to increase by 15. The armed forces' capital budget is composed of two components: committed liabilities and new schemes. The former refers to the payments that the armed forces receive from the previous year's contracts, while the latter are expected during the upcoming financial year. New schemes are projects that are currently in the approval stage and are expected to be implemented in the future. The data related to the committed liabilities of the armed forces have not been made public for years following 2019. A committee of the defence ministry has expressed its concerns over the lack of adequate allocation for the new schemes and committed liabilities of the military. It warned that the country might default on its contractual obligations. It has recommended that the government create a dedicated fund for these projects. Although the funds have not yet been created, the committee noted that they could help ensure that the military's commitments are not delayed. In 2022, the committee suggested that a separate fund be established to ensure that the payments are made on time.

Defence Service Structure

The three defence services' combined budget for the period from 2023 to 2024 is about Rs 5,54,875 crore, which is around 93% of the ministry's total budget. The Army is the biggest contributor to the budget, accounting for over 50%. The Navy and Air Force come next with 17% and 19% respectively.

The combined expenditure of the three services is in the ratio of 3.4:1, with the Army having the biggest pension obligation. Excluding this component, the expenditure of the Navy, Air Force, and Army is in the ratio of 2.4:1:1.1 during the 2023-24 period. The government's allocation for the Army is expected to stay the same as last year, while that for the Navy and Air Force is expected to increase. The total allocation for the three services' combined budget for the period from 2023 to 2024 is about Rs 5,54,875 crore, which is around 93% of the ministry's total budget.

Army: Significant expenditures on wages and pensions leave limited room for modernization funding.

The Army is the biggest contributor to the budget, accounting for over 50%. The Navy and Air Force come next with 17% and 19% respectively. The size of the Army is significant both in terms of its budget and the number of troops it has. As of July 2022, it has an authorized strength of over 13.03 lakh personnel, including soldiers and officers. In 2023-24, the government has allocated over Rs 3,40,000 crore for the Army, of which around 70% is allocated for salaries and benefits.

The modernization process involves acquiring new weapons systems and technologies to improve the defence capabilities of the armed forces. In 2023-24, about 9% of the budget of the Army will be used for this purpose, as the pension and salaries obligations reduce the available funds for the unit. Modernization funds have decreased from 2016-17 to 2023-24, decreasing the share of these in the overall allocation for the three services. The Army, on the other hand, received a total of 23% of these funds during the period.

In 2018, a parliamentary committee noted that modern forces should have one-third of their equipment in vintage, current, and state-of-art categories. However, the Indian Army, which is in the former category, had 68% of the equipment, while the latter 24%, and 8% in state-of-art status. Furthermore, the Committee noted that the Army has a significant deficiency of ammunition, weapons, and stores. A report noted that the government did not provide adequate attention to the modernization of the armed forces' armory.

Navy: Significant rise in modernization funding during the previous decade

In the budget for 2023-24, the Navy has received a total allocation of almost Rs 99,062 crore, including the cost of the coast guard and pension. Almost half of the budget is allocated for modernization. Out of this, around Rs 24,200 crore is for the naval fleet, while another Rs 6,725 is for projects related to the naval dockyard. The estimated cost of naval dockyard projects and modernization works is expected to increase by about 49% during 2023-24 over the 2022-23 estimates. Between 2013 and 2023, the modernization expenditure of the Navy increased at a steady rate of 10% annually. The increase in the expenditure during the period was mainly due to a sharp rise in it in 2019 and 2020. Also, in July 2021, the Defence Ministry issued a request for proposals for the procurement of six submarines under Project 75. The cost of the project is estimated to be around Rs 40,000 crore. This increased the Navy's share of the overall defence budget to 38% in 2021.

Air Force: Experienced the slowest growth in modernization spending.

The Air Force received a total allocation of over Rs 1,14,723 crore for 2023-24, including the cost of the pension for retired personnel. About 48% of the budget is allocated for modernization, which is the lowest among the three services. The modernization expenditure of the Air Force has been increasing annually at a low rate. Air Force has consistently been the biggest spender on the modernization budget, accounting for more than 41% of the total budget during the period.

The Comptroller and Auditor General (CAG) have been raising various issues about the procurement process of the IAF. In its report released in 2019, the auditor noted that the current system for acquiring capital assets was not able to support the organization's operational preparedness. It also recommended that the Defence Ministry carry out structural reforms to improve the process. In 2018, the Estimates Committee of the Parliament had noted that the Air Force should maintain a 70% serviceability of its aircrafts. However, as of 2015, the figure had dropped to 60%. Serviceability refers to the number of aircraft that can perform their missions at a given time.

Production of defence equipment in the country:

According to data released by the Stockholm International Peace Research Institute (SIPRI), India has been the biggest importer of arms from 2011 to 2021. It was followed by China, Saudi Arabia, and Australia, and accounted for a 12% share of the total arms imports from 2011 to 2021. The Standing Committee on Defence had also raised concerns about the increasing number of weapons and equipment imports. From 2017-18 to 2021, about 87 out of the 388 contracts for the procurement of military hardware worth over Rs 1.18 lakh crore were signed with foreign firms. Some of the equipment that India has imported include helicopters, aircrafts, guns, missiles, and simulators. The imports of capital equipment by the defence services increased at a rate of 7.2% from 2011 to 2020. During the same period, the acquisition of indigenous equipment went up at a rate of 9.7% annually. In 2020, 35% of the total acquisition was carried out from foreign sources, which is higher than the 40% in 2011. From 2021 to 2022, India imported around 39% of its defence services' capital requirements.

The import dependence of the country's other defence services has also varied. For instance, the IAF and the Navy are more capital-intensive and may require foreign supplies if the domestic market is not able to provide them with the necessary equipment. Between 2011 and 2020, the annual expenditure on imported equipment for the army increased by 29%. The Navy's expenditure on imported capital goods increased by 11% annually. This is higher than the 8% yearly increase that it had acquired from indigenous sources. According to the Standing Committee of Defence, the value of imports has continued to increase since 2016-17. It suggested that the government and private sectors work together to manufacture alternative equipment and increase India's export potential.

According to the Estimates Committee of 2018, India's reliance on foreign suppliers for military hardware poses a threat to its security due to how they may not be able to provide the country with the required spares or weapons during critical situations. To address the issue of import dependence, the government has issued three positive indigenization lists. These include 310 items that will be placed under a staggered import embargo. It has also released three lists of 1,238 items, of which 266 have been indigenised. The Defence Acquisition Procedure, 2020, seeks to increase the indigenous content of the manufacturing process of defence equipment. One of the ways that the government can address this issue is by allowing leasing of assets. This can be a cost-effective acquisition method that can replace the initial capital outlays. Table 10 shows the various categories of procurement that are included in the procedure. Among these are Buy (Indian), Buy and Make (Indian), and Indian-IDDM. Defence exports have increased significantly in recent years, mostly due to the private sector's efforts. India's defence exports surged at a 53% annual pace between 2016-17 and 2021-22. The private sector's share in defence exports expanded dramatically, at an average annual rate of 114%.

Conclusion:

The global military expenditure increased by 3.7% in real terms in 2022, reaching a record high of $2240 billion. The United States, China, Russia, India, and Saudi Arabia were the five biggest spenders, accounting for 63% of world military spending. Europe saw its steepest year-on-year increase in military expenditure in at least 30 years. The United States, China, and Russia were the three largest spenders, accounting for 56% of the world total. Russia’s invasion of Ukraine was a major driver of the growth in spending last year. China continued to spend more on defence than India, with a spending of $292 billion in 2022. India was the fourth biggest military spender, with a spending of $81.4 billion, up 6% from 2021 and 47% from 2013. Equipment upgrades and strengthening military infrastructure along its disputed border with China accounted for 23% of India's total military spending in 2022. Salaries and pensions remained the largest expenditure category in the Indian military budget, accounting for around half of all military spending. In February 2023, India set aside Rs. 5.93 lakh crore for defence spending, including a capital outlay of Rs.1.62 lakh crore for the military’s modernisation. The budget also includes a revenue expenditure of Rs.2.7 lakh crore and a pension outlay of Rs. 1.38 lakh crore. India's arms imports fell 11% between 2013-17 and 2018-22, but the country is still the world’s top importer of military hardware. India has taken several measures over the past few years to boost self-reliance in defence, such as creating a separate budget for buying locally made military hardware and increasing foreign direct investment (FDI) from 49% to 74%.

However, the defence budget of India has decreased as a share of the country's total budget, and the Ministry's expenditure has continuously declined over the years. The shortfall in the allocation for the capital budget has been higher than for the revenue budget, affecting the armed forces' operational readiness. The above analysis also suggests the need to establish a non-lapsable fund for defense to ensure that the procurement of ammunition and equipment is not affected by the lack of funds.

Pic Courtsey-Indian navy

(The views expressed are those of the author and do not represent views of CESCUBE.)