By Amit Cowshish
With the general elections for the 18thLok Sabha due early next year, Finance Minister Nirmala Sitharamanis expected to present an interim Budget for the coming fiscal on February 1, 2024.
Some concessions can, however, be expected to be made to generate a feel-good effect among the voters and counter the promises of freebies and other sops. If the race between various political parties to restore the old pension scheme is any indicator, the possibility of their making outrageous and economically unviable promises cannot be ruled out. The party, expecting to assume, or resume power, has to be more cautious than its challengers in this game of one-upmanship.
Whether the armed forces stand to gain from this electoral gimmick is difficult to say, but the trend of budgetary allocation over the past five years and the current focus on economic development as well as welfarism do not indicate the possibility of any substantial increase in the outlay, whether in terms of its ratio to the Gross Domestic Product (GDP) or as a percentage of the total Central Government Expenditure (CGE).
In the absence of any credible estimates of how much money needs to be allocated to the Ministry of Defence (MoD), defence outlay’s correlation with the GDP and CGE are the two main parameters on which its adequacy has traditionally been judged both by the Standing Committee on Defence (SCoD) and the defence analysts. On both these counts, any substantial deviation from the past trend seems improbable.
The allocation for the defence services accounted for 1.45 and 1.44 per cent of the GDP in 2019-20 and 2020-21 respectively. It went up slightly the following year to 1.56 per cent to help beef up security following the skirmish with the Chinese PLA in the Galwan Valley in June 2020, but thereafter it came down progressively to 1.49 and 1.43 per cent in the last two years.
The overall defence budget which, apart from the outlay for armed forces and Defence Research and Development Organisation (DRDO), includes the outlay on defence pensions, Coast Guard (CG) and Border Roads Organisation (BRO), also came down correspondingly from 2.04 per cent in 2019-20 to 1.97 per cent in 2023-24. This, despite the buoyancy in revenue collection and a reasonably healthy economic growth.
The SCoD and a cross-section of defence experts have argued for long, albeit with decreasing fervour, that the defence outlay should be pegged at 3 percent of the GDP. They may be disappointed again as a 50 per cent increase in the outlay to reach that mark is unlikely.
Way back in 2007, a finance ministry official had stated before the SCoD that GDP was an ‘external parameter’, reflective of the rate of economic growth, adding that it could be argued whether ‘in a country like India which has a large segment of disadvantaged, not included in the growth process, as the GDP grows a larger amount should be allocated to the welfare of those people rather than spending it more on arms and ammunitions’.
This does not go down well with the armed forces, but this is the reality. It is a hard political choice every government has had to make, without ever succeeding in meeting the armed forces’ expectations. The sustained focus on economic development in recent years has necessitated huge investment in infrastructure development, social welfare schemes, agriculture, health, and education.
This has meant a substantial increase in the total CGE which went up from ₹ 27,86,349 crore in 2019-20 to ₹ 45,03,097 crore in 2023-24. But an increasing proportion of this expenditure is being met through borrowings, which jumped from 25.26 per cent to 39.68 per cent during the same period. There has been a corresponding increase in the capital expenditure of the government, which jumped from ₹ 3,38,569 crore to ₹ 10,79,971 crore.
From the government’s point of view, this approach has paid dividends with India becoming the fifth largest economy in the world. Finance Minister Sitharaman can be expected to stay the course when she presents the next budget.
From an economic perspective, the expenditure on defence is more consumptive than growth oriented. True, increased local manufacturing of defence equipment contributes to economic growth, but it is equally true that defence being a monopsony, the government has to allocate sufficient funds to buy the locally produced goods and services. This is where the rub lies.
The progressive decline in the defence outlay as a percentage of the CGE from 15.47 per cent in 2019-20 to 13.18 per cent in the current fiscal is worrisome as it may have generated some scepticism in the local defence industry about the prospects of an increasing flow of purchase orders and contracts from the MoD.
For sure, decline in defence outlay as a percentage of the total CGE notwithstanding, the capital outlay has witnessed a handsome increase from ₹ 1,03,394 crore in 2019-20 to ₹ 1,62,000 crore during the current fiscal, but there is no telling whether the yearly allocations are commensurate with the acquisition projects worth thousands of crores being approved in principle by the Defence Acquisition Council on regular intervals.
It is also a fact that the preponderance of committed and obligatory expenditure has impacted the availability of funds for not only new capital acquisitions, but also varied operational matters, including maintenance of in-service equipment and infrastructure, and training. The move to set up a non-lapsable pool of funds for modernisation of the armed forces was an oblique admission by the government that funds were a problem.
While the fund has not materialised, probably because of the realisation that it would be of little use as eventually the money had to come from the government’s kitty anyway, there is no getting away from the fact that the armed forces, and other organisations like DRDO, CG and BRO, need substantially higher allocations.
Amidst all the uncertainty over the extent to which the defence outlay may go up in the coming budget, one thing is certain: there will be no dearth of funds for meeting obligatory expenditure on salaries, pensions, ration, clothing, etc., and honouring the contractual obligations against the already signed contracts. The MoD has managed to avoid any crisis on this count so far, and there is no reason to entertain any fear that the coming year may be any different.
The author is Former Financial Advisor (Acquisition), Ministry of Defence.
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