Defence budget must reflect reality!!

[ravinderpalrulez]

By Ajai Shukla

Business Standard, 16th Feb 16


Since October the military has been negotiating with the defence and finance ministries to finalise financial allocations for the coming financial year, 2016-17. Unfailingly unimaginative, the military’s various departments have taken the current year’s allocations, upped them by five to 10 per cent and projected that as next year’s requirements. As usual, the finance ministry has arbitrarily cut those requests. Like always, when revised estimates are prepared at the end of the year, the capital allocation (for equipment modernisation) will be slashed further since revenue expenditure, particularly salaries, must be paid on priority. Year after year the military ends up spending money quite differently from what had been allocated.

Every military financial planner admits the services are consistently under-budget in both the revenue and capital heads. Weaponry sanctioned under the 15-year Long Term Integrated Perspective Plan requires significantly higher capital allocations. Yet, like a child that has been consistently underfed for years, the military no longer dares to ask for a full meal. To stretch this analogy further, were the military to be given that full meal, it would probably be incapable of digesting it. Yet, if only as an academic exercise, it is worth reflecting on what a realistic allocation might be for the military.

Projected Budget for 2016-17==>


Revenue budget( IN CRORE)

Salary payroll=

83581 2014-15(BE)

86574 2014-15(RE)

93216 2015-16(BE)

111860 2016-17 (PROJECTED)*


Other revenue expenditure=


50831 2014-15(BE)

53831 2014-15(RE)

58923 2015-16(BE)

67761 2016-17 (PROJECTED) **



Total Revenue allocation=

134412 2014-15(BE)

140405 2014-15(RE)

152139 2015-16(BE)

179621 2016-17 (PROJECTED)



Capital budget=



Army

20630 2014-15(BE)

16868 2014-15(RE)

21574 2015-16(BE)

39713 2016-17 (PROJECTED)


Navy

22312 2014-15(BE)

17471 2014-15(RE)

23911 2015-16(BE)

53591 2016-17 (PROJECTED)


IAF

31818 2014-15(BE)

31818 2014-15(RE)

31481 2015-16(BE)

48741 2016-17 (PROJECTED)



Defence R&D Org

9298 2014-15(BE)

7148 2014-15(RE)

7788 2015-16(RE)

11682 2016-17 (PROJECTED)



Other heads=

10530 2014-15(BE)

8660 2014-15(RE)

9834 2015-16(BE)

9834 2016-17 (PROJECTED)



Total Capital allocation=

94588 2014-15(BE)

81965 2014-15(RE)

94588 2015-16(BE)

163561 2016-17 (PROJECTED)



Total budget allocation=

229000 2014-15 (BE)

222370 2014-15(RE)

246727 2015-16(BE)

343182 2016-17 (PROJECTED)



Total government spending=

1794892 2014-15 (BE)

1681158 2014-15 (RE)

1777477 2015-16 (BE)

1884125 2016-17 (PROJECTED)@



Gross domestic production=

12876653 2014-15 (BE)

12653762 2014-15(RE)

14108945 2015-16 ( BE)

15167116 2016-17 (PROJECTED)#



% of total spending=

12.75% 2014-15 (BE)

13.25% 2014-15(RE)

13.85% 2015-16 (BE)

18.25% 2016-17 (PROJECTED)



% of GDP=

1.78% 2014-15 (BE)

1.76% 2014-15 (RE)

1.75% 2015-16 (BE)

2.25% 2016-17 (PROJECTED)

* Estimating salary increase of 20 per cent across the board

** Non-salary expenditure increase of 15 per cent

@ Estimated govt spending rise 6 per cent, against 5.5 per cent in 2015-16

# Estimated GDP rise by 7.5 per cent, against 11.5 per cent in 2015-16

In the revenue head the payroll is growing, with the government bound to accept most recommendations of the 7th Central Pay Commission. A modest increase of 20 per cent over the current year’s salary allocation and a 15 per cent increase on non-salary spending would boost the revenue allocation to Rs 1,79,621 crore ($26.6 billion).

The capital budget would grow even more. The army, while a relatively low-tech, manpower-intensive service, badly needs new equipment --- including artillery, air defence missiles, new-generation personal weapons and battlefield communication systems. Equipment worth Rs 1,81,450 crore ($26.9 billion) is already sanctioned. Assuming these contracts divide payment into ten equal annual instalments, this year requires Rs 18,145 crore over and above the Rs 21,574 crore committed last year, which would cover liabilities committed earlier. That would take up the army’s capital allocation to Rs 39,713 crore ($5.9 billion).

Army acquisitions=

Cost (Rs crore)

Artillery gun procurements (sanctioned)=28450

2 regiments Pinaka rocket launchers=5000

Short and medium range surface-to-air missiles=30000

Short range surface-to-air missiles=30000

Tactical Communications System (Make project)=20000

Battlefield Management System (Make project)=50000

Rifles, carbines, machine guns and sights
=12000

Unmanned Aerial Vehicles=6000

Total new army acquisitions=1,81,450

Urgent naval procurements include submarines, stealth frigates, logistic support vessels, anti-submarine and counter-mine vessels and, most crucially, ship-borne helicopters. This adds up to Rs 2,96,800 crore ($44 billion), of which one-tenth must be provisioned for in this budget. Catering for committed liabilities, the navy’s capital allocation must rise to Rs 53,591 crore ($8 billion).


Navy acquisitions=

Cost (Rs crore)

Six conventional submarines (Project 75 I)=60000

Lease of second nuclear sub from Russia=5400

Seven stealth frigates (Project 17A)=45400

Six fleet support ships=24000

150 naval utility helicopters=15000

139 naval multi-role helicopters=60000

4 Boeing P8-I maritime aircraft=7000

4-6 landing platform docks=16000

24 mine counter measure vessels=36000

2 midget submarines for special operations
=2000

Refit of 10 submarines=10000

16 anti-sub shallow water craft=16000

Total new Navy acquisitions=2,96,800


The air force, which traditionally receives the highest capital allocation, is looking to conclude contracts for the (vastly overpriced) Rafale fighter, extending the Jaguar fighter’s service life, and a range of helicopters. Contracts worth Rs 1,72,600 crore ($25.5 billion) require urgent conclusion, with Rs 17,260 crore payable this year. That takes the air force’s capital allocation to Rs 48,741 crore ($7.2 billion).

Air Force acquisitions=

Cost (Rs crore)

36 Rafale medium fighter=63000

125 Jaguar re-engining and upgrade=20000

Indo-Russian fifth generation fighter=25000

56 Avro aircraft replacement aircraft=15000

20 Hawk advanced jet trainers=2000

22 Apache AH-64E attack helicopters=8500

15 Chinook CH-47F heavy lift helicopters
=6600

384 Light Utility Helicopters (LuH)=13500

Surface-to-air missiles=30000

Total new Air Force acquisitions=1,72,600

Acquisitions (all services)=6,50,850

All this would take the capital allocation to Rs 1,63,561 crore ($24.2 billion), slightly less than the revenue allocation. That would boost the defence budget by almost 40 per cent from the current Rs 2,46,727 crore ($36.5 billion), to Rs 3,43,182 crore ($50.8 billion). As a share of government spending, defence would rise from 13.85 to 18.25 per cent; and from 1.75 to 2.25 per cent of the gross national product (GDP).

Can India spend 2.25 per cent of GDP on defence, given the government’s fiscal deficit targets, and the pressing need to boost spending on healthcare, education and food for the poor? That is a political call. India’s on-going border disputes with China and Pakistan, several long-running insurgencies, and the army’s frequent employment on natural disasters require high preparedness. If the government decides it cannot spend more on defence than it already does, national strategy and the military’s tasking must reflect the realities of our pocket.



Broadsword.

 

[Abba_Dabba_Jabba]

Very nice and precise Budget outlay by Shiv Aroor.

Actually the Revised Estimate of all the Capital Expenditure has been reduced which is never a good sign, the Army needs proper Revenue & Capital Expenditure balance. Otherwise we will end up spending all the money on maintenance and salaries.

 

[Ankit Kumar]

@Abingdonboy and @PARIKRAMA

I really used to wish that We allocate more budget each year. But I was actually unaware that a very big portion is remained unutilised , we retired 5 billions this year.
I would be very happy if they are actually able to fully use the 40 billion dollars, than allocate 50 and return 15.

 

[Masterhunter]

@Abingdonboy and @PARIKRAMA

I really used to wish that We allocate more budget each year. But I was actually unaware that a very big portion is remained unutilised , we retired 5 billions this year.
I would be very happy if they are actually able to fully use the 40 billion dollars, than allocate 50 and return 15.

See, the problem is tedious DPP which takes so many things and about a year even if u have to buy something worth 50 lakhs leave about spending 50,000 crore.... DPP has to become more streamlined.. Hopefully it will as DM is trying its level best. And I think DPP for capex/G2G deals should totally be different from routine defence services procurement line buying computers etc.. It should be a national committee for Capex of all three services and it be should on priority to avoid those protracted negotiations that ran through years..as an example, If rafale deal would have been signed at republic day... We would have been able to made advance payment of 50% and this 5 billion returned could have been utilised..
Or else Capex budget should be five yearly due to lengthy negiations... So that money should not be elapsed with each financial year.. The amount can be deposited in an account with RBI as Capex account and services can use them whenever the deal is done... That way we can prevent elapsing of Capex budget and it will be utilised over a period of time....
The underutilised defence budget always helps FM to reduce the deficit of budget and Finance ministry looks into it and withdraw it by Dec/Jan...

 

[raktaka]

If 100% of Defence equipments is Made in India, I can assure you all that Modi will allocate 50 Billion $ as Defence budget.

No point in allocating 10 billion $ more if all you want to do is hand it over to Americans, Russians and Europeans.

But sadly common sense is not so common.

Because common sense will dictate we first focus on Make In India and THEN increase the budget when MII is fully implemented.

 

[knight11]

Pls allocate 10 Billion for turbo fan research and development, that will save 100 billion in future.

One question for OP 25000 Crore for fifth Gen fighter plane -- AMCA for 1 year ??

 

[Abingdonboy]

If 100% of Defence equipments is Made in India, I can assure you all that Modi will allocate 50 Billion $ as Defence budget.

No point in allocating 10 billion $ more if all you want to do is hand it over to Americans, Russians and Europeans.

But sadly common sense is not so common.

Because common sense will dictate we first focus on Make In India and THEN increase the budget when MII is fully implemented.

WIth a larger budget there would naturally be a lot more bought and given the quanties the Indian military buys in, there would be a lot more "Make in India" deals. But the problem that @Ankit Kumar points out is valid- the Military isn't even fully spending its full allocation today so increasing the budget will not be fully reflected in more defence deals. We have dicussed this issue to death and the more I think about it the harder it gets to swallow when you consider how pathetically equipped some elements of the military continue to be. As I have pointed out in the past, the true cost of ever $1USD not spent on defence today is actually greater than $1USD, it's Present Value (PV) is around $5-10USD because large procurements have long pay back periods and only require 10-15% paid upfront.


It's criminal, what more can I say?


@PARIKRAMA @Taygibay @anant_s @Vauban @Levina @mkb95 @knight11 @Skull and Bones @Water Car Engineer

Can India spend 2.25 per cent of GDP on defence,

I think the GoI should set defence spending at 2% and promise to maintain this level for the forseeable future. Once it dipped to 1.78% in 2013/14 (at that time the lowest in GDP terms since 1962) it hasn't returned to >2% as used to be the case in the past. 2% of GDP is a perfectly reasonable and justifiable outlay considering the threats India faces and the state the armed forces are in.

 

[anant_s]

WIth a larger budget there would naturally be a lot more bought and given the quanties the Indian military buys in, there would be a lot more "Make in India" deals. But the problem that @Ankit Kumar points out is valid- the Military isn't even fully spending its full allocation today so increasing the budget will not be fully reflected in more defence deals. We have dicussed this issue to death and the more I think about it the harder it gets to swallow when you consider how pathetically equipped some elements of the military continue to be. As I have pointed out in the past, the true cost of ever $1USD not spent on defence today is actually greater than $1USD, it's Present Value (PV) is around $5-10USD because large procurements have long pay back periods and only require 10-15% paid upfront.

There are two aspects of the issue.
One, even when there are funds, we find it difficult to spend them and among other reasons, primary culprit are our procedures. Too often in past we have seen tenders getting cancelled or re-tendered simply because someone finds some fault in the whole issue. Why can't we take a call based on ground reality and see that we lose precious time in bargain to get everything as per rules. I don't say we overlook procedures, but at the same time must revisit the whole setup and see if it is serving our greater interests in longer runs.
Second, given our past experience, we must think realistically in terms of domestic capabilities and customer needs. Indian defence contracts are some of the most protractedly negotiated agreements. I guess interests of customer (the armed forces) must be kept above anything else.

In this context when we talk of country's willingness to spend hundreds of billion dollars in next decade on capital expenditure and modernization, its important to get bureaucratic system in order first.

 

[Abingdonboy]

One, even when there are funds, we find it difficult to spend them and among other reasons, primary culprit are our procedures. Too often in past we have seen tenders getting cancelled or re-tendered simply because someone finds some fault in the whole issue.

This is something the DM has addressed a few times since entering the MoD 18 months ago (which his predecessro was silent on for >10 years). And according to him, this was a prolific issue that had the devestaed procurement process, if you beleive what he has said this is no not tolerated and he will take decsions on complaints based on the merit of the complaint. He is not going to put procurements on hold as a result of an anonymous letter and investigations will be condtucted in parrelel as the procurement progresses.

Attatched to this are two other elemnts- blacklisting and "middle men".

On both the DM has said to have taken steps to address issues- a framework will be established to regulate "middle men" instead of the past system that entirely refused to acknowledge their existence. And on the blacklisting front, this highly counter-intuitive blanket policy has been abandoned entirely.

Second, given our past experience, we must think realistically in terms of domestic capabilities and customer needs. Indian defence contracts are some of the most protractedly negotiated agreements. I guess interests of customer (the armed forces) must be kept above anything else.

The new DPP-2016 should address this to a great degree, it incentivies SMEs and contracts the RFP to induction schedule (on paper at least).

God dammit, it makes me so angry to think about how much the previous government(s) have screwed the Indian military (and the nation as a result). It almost seems like they engineered a system that worked against the users and crippled the decsion making process. Incompetence or intentional is immaterial- both are a form of dereliction of duty and yet the culprits have got off scott free. @PARIKRAMA @Levina @Star Wars @ranjeet @Taygibay @kbd-raaf @Parul @Echo_419 @Koovie @AUSTERLITZ @MilSpec @nair

 

[Taygibay]

primary culprit are our procedures.

Much respect for that starkly realistic appraisal, mate!

And those are cultural! If the mil procurement was smoothed out by learning to streamline the decision
process, which can be learned even through a civilian partnership as it's work attitude driving efficiency,
with the sums available in India for defence, soldiers should be swimming in top gear.
Again, how many Tejas could have been bought with the cash squandered on the inconclusive MMRCA?
And that's keeping the whole IAF eval too, just what was spent in committees and useless negotiations.
Do those guys that drew impossible rules and computed bad margins on the LCC still work for the State, BTW?

Every rupee saved in process can be reverted to the troops. Let's do that?

Just sayin' Tay.

P.S. Small consolation, it happens elsewhere in different ways, *F-35, cough cough*.

 

[PARIKRAMA]

In all practical sense i cant advocate the scope for a defense budget increase..
You see there are multiple bottlenecks to our economy's expansion.. We have to address that and still continue the maintain same % in defence allocation..

Unless and untill we fire up the engines of our growth the economy wont sustain such meagre % too..

Just take a look at Public sector banks declaring stressed assets and write offs... You will see a deep contagion effect of that versus the new credit advances..

Indian Banks have written off close to Rs 1,14,000 Crs (Just Public Sector Banks) in last 1 year.. Thats like a 8-10 year timeline of growth for any PSB Credit advances..

This contagion fallout will be less new advances to already problematic sectors like Energy (mining, power generation, transmission, distribution ect), Infrastructure, Roads, Highways, housing etc etc. Without adequate new advances and reforms this sector will remain sluggish and our economic revival is not possible to sustain.

On top government must infuse new capital for Basel 3 norms for capitalization requirement for Public sector bank estimated to be required a massive Rs 5,00,000 Crs as per Assocham.

Add more issues like Fiscal deficit, Fiscal prudence implying not too much capital spending's beyond a deficit target as it hits our ratings.

When we see all these issues, i cannot fathom a defense budget increase atm.. Unless we address the issue of firing growth engine properly, its difficult to maintain same % level also..

 

[anant_s]

"middle men"

I've said this in past and repeating here again. The concept of hiring agents by armament corporations (or any other MNCs) is an internationally accepted practice. Unfortunately in India, this has become a taboo word (Bofors deal and its effect on our psychology might have something to do).
The point is large corporations don't deal directly and rather do it through their appointed agents just the way smaller companies would hire salesman.
You would notice a lot of tenders got cancelled owing to role of middlemen. If we try to analyse this with an open mind, we'll find that our interests would've been served much better had we allowed Agents to deal in fair manner. let us put down their commission and make things transparent.
Crude analogy, but if we see sports betting, in India it is banned but still huge black money transactions occur on sports betting (mostly cricket) leading to not only loss of revenue to government but other malices as well. In England, betting is legalized and we know how fair things are.
So why not allow agents to deal in fair manner and get things done faster. This imho will also prevent corruption and prevent some decision making people to take favors backhand.