The threat levels we are faced with has climbed up a stiff graph. As China tests our resolve, Pakistan tests our patience. Under the circumstances will the budget presented enhance our capabilities for all eventualities? The article analyses the budget 2022-23 in terms of being a capability building instrument.
The year-on-year growth of 9.82 per cent in the defence budget for the financial year 2022-23 (FY23) is better than the corresponding growth of 1.45 per cent in the preceding year, but its share in the total central government expenditure has slid from 13.73% to 13.31%. As a percentage of the gross domestic product (GDP) also, it has dropped from 2.15% to 2.04%, much to the chagrin of those who want the defence budget pegged at 3% of the GDP.
India’s defence budget has been hovering around this level for quite some time. Consequently, there has been little change in the public discourse which remains centred on the inadequacy of resource allocation for defence and the possible ways of addressing this problem, overlooking some other aspects of budget management. It isn’t any different this year.
First, let us look at the paucity of funds and the much-awaited non-lapsable fund which is expected to mitigate this problem. Of the total defence budget of INR 5, 25,166.15 crore, the services have been allocated INR 3, 85,370.15 crore -INR 1, 52,369.61 crore for capital expenditure and INR 2, 33,000.54 crore for revenue expenditure- during the FY 23. A sum of INR 1, 19,696 crore has been allocated for defence pensions and INR 20,100 for the MoD’s secretariat and other organisations like the Borders Roads and Coast Guard.
The outlay for the services forms the core of the defence budget. Going by the past data, it can be said with reasonable certainty that the allocated amount of INR 3, 80,370.15 crore falls short of the requirement projected by the services. The gap has been widening for serval years, jumping from app INR 23,000 crore in 2010-11 to more than INR 1,25,000 crore in the FY22, of which INR 77,182 crore was under the capital segment of the budget.
If the estimates projected by the services to the fifteenth Finance Commission are any indication, the shortfall in the FY23 could be in the region of INR 2,81,000 crore, with the shortfall under the capital segment accounting for a little less than INR 1,62,000 crore. The finance minister could not possibly have bridged this gap in the union budget.
It was widely expected that the finance minister will announce the setting up of a non-lapsable Defence Modernisation Fund from which additional sums could be allocated for meeting the expenditure on modernisation of the armed forces if required during the year. Recommended by the fifteenth Finance Commission, virtually at the behest of the government, this fund has been in the works for almost a year.
Although it is somewhat surprising that the finance minister made no mention of it in her budget speech, there is little doubt that the said fund will be set up sooner or later. What is in doubt is whether it can help in meeting the annual shortfall in allocation vis-à-vis the estimated requirement.
According to the details disclosed by the MoD to the Standing Committee on Defence in March last year, the bulk of the capital for this fund will have to come from the Consolidated Fund of India, which is also the source of regular budgetary allocations and it will be possible to transfer sums out of the fund only through the regular budgetary process.
Additionally, the money transferred to the fund will lapse if not utilised within three years of the transfer, and appropriation from the fund for modernisation (and some other purposes) will be permitted only after the regular budgetary allocation has been exhausted by the MoD. These are tough conditions.
More importantly, the size of the fund is proposed to be INR 2, 38,354 crore for the period 2021-22 to 2025-26, including INR 50,000 crore for internal security, with a maximum of INR 51,000 crore being transferred to it every year. Keeping all these features in view, it is unclear how, and to what extent, the non-lapsable fund will be of help in bridging the estimated shortfall of INR 8,45,136 crore in allocation for capital expenditure during the aforesaid period. As for the shortfall of INR 6, 78,964 crore, it cannot anyway be met from the non-lapsable fund.
The focus on the shortfall in allocation and impending setting up of the non-lapsable fund for modernisation to address the problem should also not blind us to the fact that utilisation of the allocated budget itself is often a challenge. The revised estimates for FY22 show a reduction of INR 11,104.81 crore in the Army’s capital budget and INR 1,383.84 in the Air Force’s. This is an indication of the unlikelihood of these amounts being spent by them.
But for the fact that the Navy has mopped up these utilised funds, the underutilised amount would have lapsed at the end of the current financial year. There is a lesson to be learnt from this, especially because the unutilised amounts at the end of the year cannot be transferred to the proposed non-lapsable fund and the amount available in the latter can only be dipped into after the regular allocation has been exhausted each year. The services, especially Army which often struggles to utilise the allocated fund, will have to improve their performance in utilising the regular budgetary allocation.
A mention must be made of 68% of the capital procurement budget being earmarked for procurement from the domestic industry in the FY23. It is not known how much of this will go towards meeting committed liabilities arising from the ongoing contracts and what amount will be available for new purchases. While this may be music to the ears of the Indian industry, it sends some confusing signals to the foreign vendors, besides being of little help in dealing with the chronic paucity of funds.
The finance minister also announced that R&D will be opened for the industry, start-ups and academia and 25% per cent of the defence R&D budget will be earmarked to encourage them to take up design and development of military platforms and equipment in collaboration with the Defence Research & Development Organisation and other organizations. It is a desirable objective, but, like reservation of a portion of the capital budget for domestic purchases, it can be of little help in overcoming the challenge of funding defence modernisation.
Coming to the revenue budget of the services, it too is marked by inadequate budgetary allocation but throws up different challenges, the biggest of them being the growing expenditure on salaries. The proportion of salaries in the total revenue budget has risen from 61.98% in FY22 to 64.12% in FY23. A decade back in 2010-11, it accounted for 55.3% of the services’ total revenue budget.
In the case of Army, salaries account for an even higher share in the revenue budget. Between the current and coming fiscals it has gone up from 69.16% to 70.78%, while a decade back in 2010-11, it was 60.92%. To some extent it is understandable, as Army is a manpower intensive service which is mandated to physically defend the vast stretches of the disputed borders with two of the most hostile nations.
Despite this operational compulsion, then Chief of Army Staff General VP Malik (Retd), had announced in 1998 that the manpower will be reduced by 1.5 lakh in three years. The Kargil conflict very next year put paid to that intent. Another half-hearted attempt made in May 2020 when approximately 9,300 posts, probably lying vacant in the Military Engineer Service, were surrendered, ostensibly to ‘rationalise’ the manpower. Such measures cannot make much of a dent on the requirement of funds.
The high percentage of expenditure on salaries is important as it impacts the availability of funds for procurement of ordnance stores, including various types of ammunition, maintenance of equipment, and upkeep of infrastructure, training, and other related activities. What is left after providing for the obligatory expenses on ration and clothing, is inadequate for operational expenses, impacting serviceability of the equipment and state of repair of the military infrastructure. This has been the case for more than fifteen years, with no practical solution in sight.
This problem is best illustrated by the ‘stores’ budget head which caters for expenditure on ration, clothing, fuel, and other ordnance, medical, veterinary, engineer, aviation, and information technology stores, some of which are required for repair and maintenance. At INR 6,053.93 crore, the Navy’s allocation for FY 23 is the same as for FY22, while Army’s is INR 51 crore and Air Force’s INR 249.99 crore more than FY22’s budget allocation. Under the navy’s ‘Repair and Refit’ budget head, the allocation of INR 1,555.95 for the coming fiscal is the same as this year. The revenue budget for FY23 offers no respite on this count.
Lastly, a word about defence pensions and the budget outlay for other organisations like the Border Roads and Coast Guard. At INR 1, 19,696 crore, defence pensions account for 22.79 per cent of the defence budget for the coming fiscal. Although the growth in pensions budget has slowed down a little bit, it could be because the second up-gradation under the one-rank-one-pension is held up since 2019. Once the orders are issued, the expenditure is bound to rise.
Expenditure on pensions has grown significantly since 2000-01 when it was INR 12,000 and, therefore, it cannot be brushed aside as an insignificant component of the defence budget. As a matter of fact, the fifteenth FC had recommended that due to overall fiscal constraints, MoD should take immediate measures to ‘innovatively’ bring down the salaries and pensions liability. The finance minister made no mention of this in her budget speech which, for good reasons, was focused on increasing capital expenditure in infrastructure and other sectors which have the potential of spurring growth.
This leaves us with the Demand for Grant for MoD (Civil), the highlight of which is the enhanced allocation for the Border Roads and Coast Guard Organisations, which are integral to the defence architecture of the country. The gross budgetary support of INR 3,500 crore to the Border Roads for the FY23 is 40% higher than the current year’s allocation, while the Coast Guard’s capital budget for FY 23 has been increased by 60%, going up from INR 2,650 crore to INR 4,246.37 crore. This seems to indicate the government’s focus on developing road infrastructure along the northern borders and beefing up coastal security.
To sum up, while FY23’s defence budget is slightly better than the current year’s in terms of the growth in the outlay, it is likely to fall short of the requirement projected by the services, which has been the main problem for decades. The proposed non-lapsable fund cannot address the problem in its entirety. Consequently, the modernisation drive is unlikely to gather faster pace during the coming fiscal. The shortfall in the allocation for revenue expenditure remains unbridged, and unbridgeable in the coming fiscal and indeed in near future.
There has, however, been a reasonable increase in the allocation for the Border Roads and Coast Guard Organisations in a clear indication of the government’s priorities. The decision to earmark 25% of the R&D budget for promoting collaboration with the private industry will help in indigenous design and development of military capabilities, but ultimately substantially higher sums will be required for the armed forces to reap the benefit of such measures.