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INDIAN DEFENCE BUDGET 2021-22 – AN ANALYSIS

RITIKA BEHAL

India needs to increase its defence allocation and committed funding through substantial Budget allocation to cover the procurements of new weapons and equipment besides adequately cover for the inflation.

India's defence budget outlay for the financial year 2021-22 is pegged at Rs 4,78,195.62 Crores in the annual budget representing a growth of 1.48% over Budget Estimates (BE) of Rs 4,71,378 Crores for the financial year 2020-21. There means there has been an increase of measly Rs 6,817 Crores in the total Defence allocations over the financial year 2020-21. However, what is more disappointing is the fact that when we consider the Revised Estimates (RE) of 2020-21 which stands at Rs 4,84,736 Crores, then it would be in the negative. The modest escalation in defence spending comes at a time when the Defence Ministry has some big-ticket procurements in the pipeline already being in their final stages and expected to get materialized in this fiscal and, thus, seems inadequate.

Further, this year, the total Defence Budget accounts for 2.15% of the Gross Domestic Product (GDP) and 13.7% of the total Central Government’s budget the year 2020-21. Also, notably just like last year, there has been no mention at all of the defence outlay in the budget speech by the Finance Minister, the absence of which was conspicuously noticeable.

Source: Union Budget & Compiled by Q-Tech Synergy

Defence Budget 2020-21: Key Statistics

Considering the Rs 3,47,088 Crore that has been earmarked towards Defence Revenue & Capital part, which form the main components of the Defence Budget, a growth of merge 7.44% is seen over Budget Estimates of Rs 323053 Crores for the financial year 2020-21. However, the increase is paltry 2.1% in comparison to the Revised Budget Estimate of Rs 323053 Crores of the previous year’s allocation.

The comparative key statistics and their increase/decrease in the defence budget of 2021-22 as against 2020-21 is given in the Table.

Source: Union Budget & Compiled by Q-Tech Synergy

The Capital and Revenue Expenditure

Out of Rs 3,47088 Crores allocated for the financial year 2021-22, Rs 212027 Crores is for the Revenue expenditure and Rs 135061 Crores is for Capital expenditure for the Defence Services and for the Organizations/Departments under Ministry of Defence. The share of percentage of capital allocation in defence budget as compared to revenue allocation is 39:61 this time. In past few years, it is seen that the capital expenditure has been witnessing less than 40 percent of allocation almost every year which is definitely not a good indicator considering the modernization plans of the three-Armed Forces. Though this year there has been a jump in the ratio of capital share in relation to revenue share as compared to last year which stood at 35:65, but this needs to be maintained. It is high time that the Government should focus on this and take structural reforms of the acquisition process to address this issue.

The comparative sub allocation – revenue and capital expenditure - in the Defence Budget 2021-22 to the three defence services is as given in the Table.

Source: Union Budget & Compiled by Q-Tech Synergy

Like previous years, this fiscal also the Indian Army's total share has been maximum amongst the three-Armed Forces though witnessing a decline of 2% as compared to previous year followed by Indian Air Force and Navy respectively with both of them witnessing no increase or decline in their respective share.

Further, when we glance at the allocation for Research and Development (R&D), it is to be seen that there has been no increase or decrease in the allocation which stands at 6% like last year indicating Government’s stand on accentuating on indigenization of defence equipment. The pie diagrams depicted below gives the percentage shared by defence services and R&D Organizations in Defence Budget 2021-22.

Source: Union Budget & Compiled by Q-Tech Synergy

Capital Budget

Basically, the Capital Budget is divided into two notional categories: 'Capital Acquisition and 'Other-Than-Capital Acquisition'. While the capital acquisition budget is spent on acquiring new weapon systems and platforms required for modernization of the armed forces, the other than capital acquisition segment of the capital budget caters for expenditure on acquisition of land, development of civil infrastructure and the entire capital expenditure of the Research and Development (R&D) and the Ordnance Factories.

In the budget for 2021-22, the capital outlay has been clambered up to Rs 135061 Crores up from the capital expenditure of Rs 113734 Crores allocated in 2020-21 witnessing a substantial increase of 18.75% from last year, which as per the Ministry of Defence (MoD) has been the highest ever increase in capital outlay of Defence in the last 15 years. The budget documents depicts that the Armed Forces got an additional allocation of Rs 20,776 crore under capital expenditure in 2020-21 for emergency defence equipment procurements over and above the funds allocated for the purpose. However, considering the Revised Estimates of last year’s budget which was pegged at 134510 Crores, there is a just a measly increase of 0.41% in the capital budget seen. This comes to about Rs 550 Crores in financial terms. This definitely is not substantial considering the number of new defence equipment that the Armed Forces intend to purchase.

Amongst the three services, the Air Force has been allocated the largest share of the capital budget about Rs 53214.77 Crores witnessing an increase of Rs 9,932.86 Crores as compare to last year’s budget allocation of Rs 43281.91 Crores, followed by the Army's budget which stands at Rs 36481.90 Crores and then Navy's who has been allocated Rs 33253.55 Crores. The below given pie chart depicts the share of the defence services in the capital budget.

Source: Union Budget & Compiled by Q-Tech Synergy

Noteworthy, this time that there has been an increment in the Army, Navy and Air Force capital acquisition budgets. The good news for Army is that with a decent increase in Heavy & Medium Vehicle (H&MV) expenditure, there is scope for Army for procurement of more of these this year as there definitely is a long pending demand from Army’s end. Further, the increase in Naval Fleet budget is a much-desired move with perkier chances of Indian Navy having a better chance to go ahead in building a modernized Naval Fleet especially considering its depleting submarine fleet. However, the decrease in Aircraft & Aero-Engine expenditure of the Indian Air Force is quite disappointing given the various procurements that are in pipeline and are much required especially in wake of the fact that the IAF is down to just 30 fighter squadrons, against the assessed requirement of 42 squadrons. And, thus needs to fast pace the procurements. But, with less funds in disposal it will obstruct the modernization plans of the IAF.

Revenue Expenditure

The revenue expenditure, which caters to the 'operating' expenditure of the three services, is pegged at Rs 212027.56 Crores witnessing an increase of Rs 3417.24 Crores from previous Revised Budget allocation of Rs 209319 Crores in 2020-21. As always, the salary and wages for the Defence Force personnel accounts for about half of this budget. While the remaining is spent on stores and equipment, revenue works maintenance and transportations among others. Refer Table.

Source: Union Budget & Compiled by Q-Tech Synergy

Impact Analysis

The MoD’s overall budget allocation though is not sufficient to meet the requirements of the Armed Forces and definitely falls short of the expectations of the defence establishment, which is facing an acute resource constraint to meet all its expenses including on modernisation front. However, given the current economic and fiscal situation owing to the ongoing pandemic, the merger increase in defence budget should not considered on a much of negative note.

Undeniably, the overall defence allocation of 2021-22 will leave no room for any big-ticket weapons purchase. Further, as always, there has been a mismatch between projected resource requirement and allocated budget for Defence with the gap witnessing an increase year on year. For the fiscal 2021-22, against a projection of Rs 6,22,800.51 Crores for 2021-22 in Budget Estimates, Rs 4,78,195.62 Crores have been allocated for total Defence Budget, leading Armed Forces to face a shortfall of the tune of Rs 1,44,604.89 Crores. Notably, the three-Armed Forces were allocated Rs 1,23,000 Crores under the capital outlay, which is primarily meant for military modernization, against the projected requirement of Rs 1,99,553 Crores. Against the Army’s projected amount of Rs 51,492 crore for capital expenditure, Rs 36,531.90 crore has been allocated, which amounts to a shortfall of Rs 14,960.20. Similarly, for the Navy, the projected capital expenses were Rs 70,920.78 crore, but the allocated amount is Rs 33,253.55 crore – or a shortfall of Rs 37,667.23. For the Air Force, the gap between the projected and allocated capital expenses was Rs 23,925.79, as it had projected a requirement of Rs 77,140.56 crore but was given only Rs 53,214.77 crore.

Due to the shortage of funds, it is most likely that numerous defence contracts of the three-Armed Forces will experience delays or will be cut down from the required number they want. The tentative list could include of 2,600 Future Infantry Combat Vehicles, Carbines, Anti-Tank Guided Missiles, Apache helicopters for the Indian Army. As for the Indian Navy, it can see delay in programs such as Light Utility Helicopters, Multi-Role Helicopters, second indigenous aircraft carrier (IAC-2), nuclear- power submarines under Project 75-I. Coming to IAF, it is likely to face delays in signing of major deals such as 114 Multi Role Combat Aircrafts, Mid-air refuellers, Advanced Medium Combat Aircraft (AMCA) for Indian Air Force, Airborne Warning & Control System for Indian Air Force.

Given the fact that a considerable increase in defence allocation is unlikely to be provided in the near future, the need of the hour call for the MoD to find out a way out for managing its resources at the disposal in an optimal manner. This particularly is needed in lowering down the manpower cost and pensions, which in turn exhausts out the resources that could on the other hand have been used for the modernisation of the Armed Forces. Though, notably, one of the most prominent aspect of this year’s budget has been the significant decline in the mammoth defence pensions which have been surging year on year and takes a substantial chunk of the defence budget every year. However, unlike other years, this year Rs 1.15 lakh Crores has been allocated to defence pensions for 2021-22 as compared to Rs 1.33 lakh Crores in the Budget Estimate of 2020-21 to Rs 1.25 lakh Crores in the Revised Estimate of 2020-21, witnessing a decrease of Rs 10000 Crores which accounts to about 8 percent. Quite evidently, this is a welcoming move by the Government towards de-escalating the growing manpower costs and diverting more resources for modernisation which is the need of the hour. But this needs to be carried on every year.

Noteworthy, India is expected to spend around USD 130 billion for fleet modernisation in the next 5-7 years across all armed forces to meet their weapons and equipment requirements. As such, the country will need to hike its spending each year by 10 percent, the same has not been true. To achieve this, committed funding through substantial Budget allocation is the need of the hour which has not been the case and the insufficient funding this year as well as in line with previous year substantiates this fact. And, there is not much expectation of having substantial increase defence expenditure in coming two years to say the least, as but of course economy will take time to recover post-pandemic. Thus, the focus till then should be procuring on critical defence equipment required by the Armed Forces and also can consider leasing of equipment from foreign Original Equipment Manufacturers (OEMs) and streamlining teeth to tail ratio with the defence services to control the revenue expenditure especially salaries/wages and pensions. Also, it is recommendable that allocations for the Defence Budget at the Revised Estimates stage must be appropriately enhanced so that the planned Capital and Revenue expenditure for the Forces is not negatively affected by inflation.

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