The hyped Union Budget 2017–18 is being adjudged as a delicate balancing act of the Central Government. Focusing on foundational requisites like poverty alleviation, infrastructure and rural employment, the Government has been successful in conveying how and why a disruptive reform like demonetisation drive has only transitional implications on India’s growth trajectory. Take a glance through it and you will see how the budget did not include additional grand schemes, in an attempt to circumvent the demonetisation effect.
The defence sector allocations in the previous budget had suffered the ignominy of being a pay and perk budget, but this year, it stands to change its image. The defence sector that got little mention in the last fiscal year seems to have had a hike in allocations at a cursory glance. There is an allocation of Rs 2,74,114 crore to the sector, excluding the defence pensions. This is six per cent more than the budget estimate of Rs 2,58,589 crore (excluding defence pensions) for 2016–17.
Table 1: Total Allocations to the Defence Sector
|Allocations||Budget Estimate 2016–17 (in crore)||Revised Estimate 2016–17 (in crore)||Budget Estimate 2017–18 (in crore)|
For obvious reasons, revenue expenditure will be on a higher end for the Ministry of Defence (MoD), but the allocation of Rs 86,488 crore to capital expenditure comes at a time when modernisation and equipment acquisition demands are inevitable. The reduction in capital estimates for this fiscal reveals the grave issue of under-spending of finances allocated for capital spending. In the last five years, MoD has surrendered Rs 41,974 crore of unused money from capital expenditure. Bloated revenue expenditure alongside defence pensions do not augur well for the future of the sector.
Graph 1: Capital Underspending in Percentage
The defence pensions have increased considerably over the last few years. From 2015-16 to this fiscal, the pension allocations have increased to the tune of Rs 2,55,503 crore and stands at Rs 85,740 crore. Last year, the increase in the pension allocation was on account of the payment of arrears due to the one-rank-one-pension scheme. This time, including the allocation to pensions, the total outlay would constitute 2.14 per cent of the GDP.
Take the case of allocations to the armed forces. It is obvious that capital spending has dwindled, which is reflected in the revised estimate for this year. From the estimated allocation, this year’s revised allocation across the forces for capital spending has decreased by Rs 7091 crore.
Table 2: Allocations to the Three Defence Forces
|Forces||Actuals 2015–16 (in crore)||Revised Estimate 2016–17 (in crore)||Budget Estimate 2017–18 (in crore)|
Study the numbers closely and you can find only a minimal increase in the percentage share of government spending for the defence sector. From 17.1 per cent in 2016–17, the allocation constituted 16.8 per cent in this fiscal. In terms of GDP, from 2.26 per cent in 2016–17, this year’s allocation stands at 2.14 per cent (including the defence pensions). This raises the question of whether the defence allocation is adhering to the three-per-cent-of-GDP mark prescribed by the Parliamentary Standing Committee on Defence. Yet, considering the under-spending trajectory of MoD, the argument for more allocations does not hold good, unless there is a substantial rebalancing of defence expenditure. The ministry would be mulling over the implementation of the recommendations of the Lieutenant General D B Shekatkar Committee. The committee looked into rebalancing the revenue and capital expenditure allocations for the sector. An increasing revenue expenditure continuing unabated is not a healthy sign. Therefore, it can be surmised that the ministry will be better prepared to implement a few of the recommendations by the next fiscal. This is will be a good step forward to boost its capital acquisition processes in the years down the line. Such efforts will also work in tandem with the overall initiatives to boost defence manufacturing and promote indigenisation (100 per cent FDI in defence, Defence Offset Policy and ‘Make in India’ programme) to limit the defence import dependence, which is presently 60 per cent.
The introduction of a centralised defence travel system that will enable soldiers to book tickets online and a web-based pension distribution system are other significant proposals in the budget. Defence veterans have welcomed these moves.
By lowering the corporate tax rate to 25 per cent and abolishing tax exemptions, the new proposal to apply this rate to Micro, Small and Medium Enterprises (MSMEs) with a turnover up to Rs 50 crore will prove to be a welcome sign for private players in defence manufacturing. But the budget does not state how the role of such players in the hyped ‘Make in India’ initiative will take shape. The revised allocation (2016-17) for Assistance for Prototype Development under the Make Procedure is pegged at Rs 154.6 crore for the Army and Rs 29 crore for the Air Force; while for this fiscal it is Rs 30 crore and Rs 14.5 crore respectively. It has to be seen how the ministry is planning to take up or aspire for more projects with such a limited allocation.
Though the budgetary allocation for defence shows a hike, upon scrutinising the nature of that increase, one can surmise that it is not a positive development. The sector is in need of reforms from within to equip itself for modern-day requirements. Only then can it streamline its expenditure, because an increase in revenue expenses at the cost of downsizing the capital expenses needs to be checked.With the slow yet steady progress of a slew of measures spearheaded by the ministry to overhaul itself, at least the groundwork for improving the fundamentals is being worked at.
*Vinny Davis is the Managing Associate of CPPR-Centre for Strategic Studies. Views expressed by the author is personal and does not represent the views of CPPR.
This article was first published in The Dialogue