It is customary for the Finance Ministers to make a mention of the allocation being made for defence in their budget speech. It was not to be this time when Finance Minister Arun Jaitley presented the union budget for the FY 2016-17 on February 29.
In his very first budget speech on July 10, 2014, after the NDA government came to power, the Finance Minister had talked about many things: one-rank-one pension, war memorial, defence technology fund, foreign direct investment (FDI), and development of rail network in the border areas, apart from promising urgent steps to streamline the procurement process which has been the bane of defence modernisation all these years.
The momentum was somewhat lost in the last year’s budget speech as he made just a cryptic reference to the push being given to ‘Make in India’ in defence to achieve self-reliance in defence.
This year, however, there has been no mention at all of the defence allocation in his budget speech. This seems quite unprecedented. If one were to guess, it could be on account of two reasons. For one thing, there has been a complete restructuring of the defence budget this year which complicates comparison between the current and next years’ budgets.
Secondly, the Budget Estimate (BE) of the coming fiscal represents an embarrassingly low growth with reference to the BE of the current year. This is bound to disappoint, notwithstanding the fact that the increase in the next year’s budget is not all that dismal if it is compared with the Revised Estimates (RE) of the current year.
Decoding the New Structure
The restructuring of the defence budget has reduced the number of Demands for Grant (DFG) which are presented by the Ministry of Defence (MoD) to the parliament. For several years now, MoD had been presenting eight DFGs, six of which were clubbed together in the document called the Defence Services Estimates (DSE), while the other two were the DFG for MoD (Civil) and Defence Pensions. The total net allocation made in the DSE was generally referred to as the ‘defence budget’. The allocation made in the other two DFGs was not considered a part of this defence budget.
Of the six DFGs in the DSE, five catered for the revenue expenditure of the three services, Director General of Ordnance Factories (DGOF) and the Defence Research & Development Organisation (DRDO). The seventh DFG catered for the capital expenditure of all of them. The DFG for MoD (Civil) catered for the revenue and capital expenditure of the MoD secretariat and other organisations, such as the Armed Forces Tribunal (AFT), Coast Guard (CG), Canteen Stores Department (CSD), Defence Estates Organisation (DEO), Defence Accounts Department (DAD) etc.
The Defence Pensions, as the name suggests, catered for the expenditure on pensions. From the FY 2016-17, seven of these DFGs have been compressed into three DFGs: MoD (Miscellaneous), Defence Services (Revenue), and Capital Outlay on Defence Services. The DFG for Defence Pensions remains unscathed. What will these DFGs now contain?
All organisations which were covered by the DFG for MoD (Civil) will continue to be a part of this DFG which has been rechristened as MoD (Miscellaneous). In addition, the entire revenue and capital budget of the DGOF and the DRDO has been taken out of the DSE and shifted to this DFG.
The revenue budget of five organisations – Military Farms (MFs), Ex-servicemen Health Scheme (ECHS), Inspection Organisation (IO), Rashtriya Rifles, and the National Cadet Corps (NCC) – used to be embedded in the DFG for Army and the capital budget of these organisations used to be a part of the last of the six DFGs that comprised the DSE. All this expenditure has also been taken out from there and brought under the DFG for MoD (Miscellaneous).
Defence Pensions. There is no change in this DFG.
Defence Services (Revenue). This DFG will now cater for the revenue expenditure of the three services and the Joint Staff.
Capital Outlay on Defence Services. This DFG will cater for the capital expenditure of the three services and the Joint Staff. It bears recalling that the capital expenditure includes capital acquisition budget, apart from expenditure on land, works, etc.
In a nutshell, the revenue and capital expenditure of the three services and the Joint Staff has been segregated from all other expenditure and compressed in two DFGS, one related to the revenue expenditure and the other to the capital expenditure. The revenue and capital expenditure of all other organisations which are under the administrative control of the MoD are now going to be clubbed under the DFG for MoD (Miscellaneous). The only DFG which remains unchanged is the DFG for Defence Pensions.
Comparison of the next Fiscal’s Defence Budget with the Current Year’s Allocation
There are two ways of making this comparison. One method would be to rearrange the allocation made in the DFG for MoD (Miscellaneous) in the coming year’s budget as it used to be till now. This will give the following result in regard to the defence budget, as we have known it all along:
These figures show that there has been a gross underutilisation of defence budget to the extent of Rs 22,091 crore which, surprisingly, includes underutilisation of Rs 8,903 crore under the revenue segment. This has brought down the defence budget from Rs 2,46,727 crore to Rs 2,24,636 crore at the RE stage. The budgetary allocation for the coming fiscal, had it been made the way it was being made till this year, would be 10.89 per cent higher than the RE. This is not unusual but the fact that BE-to-BE increase works out to a mere 0.96 per cent makes the increase look bad.
The other way of comparing the two budgets would be to rearrange the budget for FY 2015-16 as per the new scheme of DFGs, which, if done, would present the following picture:
The increase in the MoD (Miscellaneous) budget, with reference to the BE and the RE, seems to be largely on account of the impending implementation of the seventh pay commission recommendations and the one-rank-one-pension scheme. The increase in Defence Pensions budget, both with reference to the BE and RE, is also apparently on the same account as also because of the implementation of one-rank-one-pension.
The increase in the revenue budget of the services, both with reference to the BE and the RE of the current year, also seems to be largely on account of the additional requirement under pay and allowances.
But it is the decrease of 8.51 per cent in the next fiscal’s capital budget of the services with reference to the BE of the current year that really jars. It actually seems to overshadow the fact that with reference to the RE the increase is going to be 5.77 per cent.
In any case, the overall BE-to-BE increase of just 1.84 percent looks alarming. The increase of 5.77 per cent with reference to the RE is also not substantial enough to mitigate the concerns. That the allocation for revenue and capital expenditure of the services works out to just 1.47 per cent of the GDP and 11.24 per cent of the total central government expenditure (CGE) does not brighten the optics.
On the flip side, if all the four new demands are considered together as a part of the expenditure on defence, the total allocation of INR 3,40,922 crore would work out to 2.05 per cent of the GDP and 15.67 percent of the total CGE.
These figures are likely to rankle for quite some time, though what is equally important is to fix the malady that besets capability build-up of the armed forces, be it in regard to systems and procedures or decision-making. This comes in the way of full utilisation of whatever resources are allocated every year.