1 March 2015

Defence budget up marginally, after having failed to spend current year’s allocations

By Ajai Shukla
Business Standard, 1st March 2015

Underlining the National Democratic Alliance (NDA) government’s focus on job creation and development, the finance minister on Saturday allocated Rs 2,46,727 crore ($40 billion) towards the defence budget for 2015-16, a rise of 10.95 per cent over the revised estimates for the previous year.

At 1.75 per cent of the estimated Gross Domestic Product (GDP) for the coming year, this continues a steady decline over the last two years. In percentage terms, this is similar to the allocations made in the lead up to 1962.

Even this modest rise was possible because the government failed to spend Rs 2,29,000 crore that it had allocated for 2014-15. The revised estimates of Rs 2,22,370 crore for the current year indicate the defence budget remained underspent by Rs 6,630 crore.

That spending shortfall came entirely in the crucial capital procurement head, where the defence ministry spent only Rs 81,965 crore, of the current year’s capital allocation of Rs 94,588 crore --- a shortfall of 12,623 crore.

Besides the Rs 6,630 crore that will be returned unspent from the capital head, the defence ministry transferred another Rs 6,000 crore from the capital to the revenue head.
This record underspend on equipment modernisation comes after Defence Minister Manohar Parrikar twice claimed before the media that sticking to procurement targets was “his specialty”.

The coming year’s capital budget is Rs 94,588 crore, coincidentally the same figure as last year’s capital allocation. The revenue budget, meanwhile, has gone up from Rs 1,34,412 to Rs 1,52,139, a rise of Rs 17,727 crore, or 13 per cent.
Amongst the three services, the air force has been allocated the lion’s share of the capital budget --- Rs 31,481 crore, compared to the navy’s Rs 23,910 crore and the army’s Rs 21,574 crore. Even so, the air force allocation remains stagnant, indicating that the government has not budgeted for buying the Rafale medium fighter --- which would have required about Rs 15,000 crore as the signing amount.

Interestingly, the allocation for defence pensions has risen by Rs 4,500 crore to Rs 54,500 crore for the coming year. It remains unclear how the government will implement the One Rank One Pension (OROP) scheme that the defence ministry sanctioned last week. OROP has been variously estimated to require Rs 8-12,000 crore to implement.
The army, which has been allocated over 50 per cent of the overall defence budget remains the smallest spender on equipment modernization. Its salary budget has risen from 68,871 crore to Rs 74,119 crore, almost 60 per cent of its overall Rs 1,25,733 crore allocation.

In contrast, the navy will spend Rs 23,910 crore on new equipment, a healthy 60 per cent of its overall Rs 39,436 crore allocation. The air force enjoys a similar ratio, spending Rs 31,481 crore on modernization out of an overall allocation of Rs 54,481 crore.
An interesting feature of the budget that suggests the defence ministry intends to push indigenous equipment projects, is the allocation of Rs 144 crore for “Make procedure” projects. Under this, indigenous industry-led consortia develop cutting-edge defence equipment with the MoD paying 80 per cent of the development costs. During the current year, a mere Rs 50 lakhs had been allocated under this head.

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Source: Extrapolated from Budget documents