Military & Aerospace

Major Structural Reform for Defence Modernization
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Issue Net Edition | Date : 27 Feb , 2021


The Union Budget 2021-22 has come in the backdrop of severe economic crisis, induced by a global Covid-19 pandemic. The Indian economy, whose growth was already decelerating in 2019-20,seems to be witnessing a major contraction of the economy to by 7.7%, as assessed by the Economic Survey. Independent analysts like Prof. Arun Kumar believe that the GDP decline would be far more acute this year as the unorganised sector which account for 450 million workers were severely affected by the total lock down. While the CMIE has assessed the unemployment figure as 122 million, including 12.8 million in the organised sector, Prof. Arun Kumar has assessed it to be of the order 200 million. The only sector which has witnessed an increase in employment isagriculture where 7 million have gained employment. This sector has witnessed 3.4% growth and has been a real saviour in terms of providing food security to its beleaguered population. The Finance Minister had unleashed a slew of fiscal stimulus initiatives in the months of April and May, like PM Garib Kalyan Yojana, support to MSME through collateral free loan. The government has also substantially hikedallocation for the MGNREGA programme (Rs.50,000/- crore), helping the migrant workers to be engaged. Accordingly, it was apprehended that the fiscal deficit for the year 2020-21 would be much higher than the budget estimate of 3.5%. The FM has unleashed a real surprise by upping the fiscal deficit antennae to an unprecedented level of 9.5%. This includes clearing FCI’s debt to Small Saving Fund to the tune of Rs.2-18 lakh crore. On the external security front, China has been making discordant noises while Pakistan has been generally less pugnacious and intrusive. In this backdrop every defence analysist was carefully watching whether the FM is going to allocate adequate resources to the defence services; particularly for its modernisation plan.

Defence Outlay

An analysis of MoDs overall expenditure during 2011 to 2021 would reveal, that it has increased a compound annual growth rate of 9.2%, of which the hike in pension and pay & allowances contribute 71%. On the contrary, the capital budget has increased by a mere 13%.The FM has made an allocation of $65.6 billion to the MoD, accounting for an increase of 1.4% over the last year’s budget and around 2.38% of India’s GDP and 14% of CGE. The major surprise has been accepting a major recommendation of the 15th Finance Commission to create a Non-lapsable Defence Capital Outlay Fund. This has been a recurring demand by the Defence Services, in view of a perception that the requirement of modernization for the three services has not kept pace with the allocation made by the Ministry of Finance.

An overview of different components of the MoD budget 2021-22 is given below.

Table 1: Component of MoD’s Budget 2021-22










2020-21 (BE) (Rs in Crore)








2020-21 (RE) (Rs in Crore)








2021-22 (BE) (Rs in Crore)









% Increase in 2021-22 (BE) over 2020-21 (BE) 5.2 -13.4 7.4 1.4
% Increase in 2021-22 (BE) over 2020-21 (RE) -4.1 -7.3 0.9 -1.3

Note. *: Include Army, navy, air force, ordnance factories and Defence Research and Development Organisation (DRDO). Figures in parentheses represent percentage share in total MoD.

The distribution of Defence Services budget amongst all stakeholder is as under.

Figure 1: Distribution of Defence Services Budget 2021-22

It would thus be seen that Army is the biggest spender 954%), followed by IAF and Navy. DRDO spends around 6% of defence expenditure for building prototypes and improving India’s capability for producing major weapon systems and platforms.

Capital Expenditure

Capital expenditure accounts for nearly 35% of total defence budget unlike the general budget where it is of the order of only 15%.

The modernisation expenditure of the arm forces is as under-

Table 2: Modernisation Expenditure of Armed Forces


(Rs in Crore)

2020-21 (RE)

(Rs in Crore)


(Rs in Crore)

% Increase in 2021-22

(BE) over 2020-21 (BE)

Army 25,999 25,999 30,587 18
Navy 25,620 36,478 32,235 26
Air Force 39,031 51,804 48,870 25
Total 90,649 1,14,280 1,11,691 23

It would be seen that IAF is most capital intensive with a share of 44%, followed by Navy and Army. It is a matter of satisfaction that there is a significant increase in capital expenditure by IAF and Navy at the RE stage. However, a comparison of the funds asked for by MoD and approved by MoF reveal that nearly Rs.53601/- crore was the shortfall as the following table would reveal.

Table 3:Shortages on Modernisation, 2020-21

  Projection (Rs

in Crore)

Allocation (Rs

in Crore)

Shortages (Rs

in Crore)



Army 41,531 25999 15,462 37
Navy 40,928 24,598 16,330 40
Air Force 60,840 39,031 21,809 36
Total 1,43,299 89,698 53,601 37

Note. Navy excludes Joint Staff

Mismatch between Projection and Allocation

The mismatch between resource projection by MoD and allocation by the MoF since 2015-16 is as under.

Figure 2: MoD’s Resource Projection and Allocation

It would be seen that shortage % in allocation varies between 8% to 23% over the years.

India’s Share in Global Military Expenditure

India is the second highest importer of conventional arms. The SIPRI report (2020) brings out how the global share of five major countries playout in terms of global share of export and import.

Table 4: Major exporter and importer of major arms

Exporter Global Share Importer Global Share
USA 36% South Africa 12
Russia 21% India 9.2
France 7.9% Egypt 5.8
Germany 5.8% Australia 4.9
China 5.5% China 4.3

Source: SIPRI Report 2020

Of the total Word military expenditure of $1917 billion, USA has the largest share (43%) while China accounts for 261 billion and India around 70 billion. It works out to 2.2% of world GDP. As against this India’s defence expenditure is around 2.3%. however, import of military hardware results in the country losing out on the multiplier effects on the economy and spin offs in terms of technology and innovation.

Major Reforms in the Defence Sector

In this backdrop it would be useful to look into the major reforms ushered into defence sector in to empower the services and improve their combat capability and allocation and in particular the structural change approved in budget 2021-22 for a non-lapsable capital outlay fund. There have been four major initiatives in the defence ministry. The Arun Singh Committee (1986) recommended increased delegation of financial power to the services. The Kargil Committee (1999) wanted the defence services to be integrated with the Ministry of Defence, with jointness and better coordinated intelligence as the inescapable imperatives. The Kelker Committee (2005) called upon the ministry to plump for more Public Private Partnership and take advantage of defence offset provisions, practiced by many countries. The Dhirendra Singh Committee (2016)wanted Strategic Partnership Model to be embraced by the private sector and Defence PSUs. The latest reform put in place has been placement of a Chief of Defence Staff,recommended by GOM in 1999 to provide single point military advise to the RM and PM. CDS has been formally made a part of MoD in 2019, to streamline military doctrines and bolster jointness amongst the services.

Latest Structural Reform (2020)

In July 2019 the government had tasked the 15th Finance Commission to address the severe resource constraints being faced by the Defence and Home Affairs ministries in their modernization efforts. It had also asked the Commission to examine if a “separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalized”. In view of the charter, the Commission has made several vital recommendations that has the potential to mitigate the shortages of resources required for security sector modernization.

The Commission in its report has asked the government to create in the Public Account of India Rs 2,38,354 crore non-lapsable Modernization Fund for Defence (MFDIS) to bridge the gap between projected requirement and budget allocations for the MoD for 2020-21 to 2025-26. The Commission has suggested the following three broad sources to generate resources for the non-lapsable MFDIS:

  • Transfer from the Consolidation Fund of India at the rate of one per cent of the central government’s annual gross revenue receipts(Rs 1,53,354 crore or 64 percent in five years)
  • Disinvestment proceeds of Defence Public Sector Undertakings (DPSUs)(Rs 40,000 crore or 17 percent)
  • Monetization of defence land (Rs 45,000 crore or 19 percent)

It is worth noting that while suggesting the creation of a dedicated non-lapsable fund, the Commission has been categorical in recommending that any under-utilized capital budget from the annual budgets of MoD would not be part of the proposed fund. The Commission has suggested any under-utilized amount would be returned to the Consolidated Fund of India. This will ensure that the services do not show complacency in utilizing their allocated budget.

The Commission has also recommended that of the total amount, the MoD would be entitled to Rs 1,88,354 crore or 79 per cent of the MFDIS. The remaining amount will be under the MHA’s disposal to fund capital expenditure related to internal security.

While suggesting the creation of the non-lapsable fund, the Commission has also urged the MoD, the bigger beneficiary of the proposed MFDIS, to”take immediate measures to innovatively bring down the salaries and pension liabilities”. In this connection it would be pertinent to observe that the manpower cost, the major elements of which are salaries and pension, has increased significantly from less than 50 per cent of the MoD’s budget to over 60 per cent in a time span of 10 years ending 2020-21. During the same period, the share of modernization expenditure has declined from 27 percent to 19 percent.

Improving Self Reliance Quotient

The 15th Finance Commission has also urged the MoD to reduced ependence on defence import. In this respect, the Commission has recommended to the Ministry of Finance (MoF) to in centivize the MoD to work on a time-bound action plan for progressive increase in the share of indigenous arms in India’s defence procurement. The Commission hopes that a calibrated roadmap should enable the MoD to source not more than 30 per cent of its arms requirement from the foreign vendors by the end of 2025-26. This brings to memory the Kalam Committee report of 1993, which enjoined upon the India’s Defence manufacturing complex to improve Self Reliance Index (SRI) from 30% to 70%, in a decade’s time by focusing on critical technology.

Be it, AESA rader, Focal Plane Array, Passive night vision devices, Single crystal blades for engines of aircrafts, carbon fibres required for ALH, air to air missiles, Ring Laser Gyro, stealth or seeker technology, India’s import dependence for these subsystems is in around 90%. The Atama Nirbhar initiative of the present government does not address these problems. Instead, it tries to shortcut the process by protective indigenous suppliers with import denial upto Rs.500 crore and diluting QR by 30%. This is clearly fraught with risk of diluting strategic capability via-a-vis our adversaries. Defence DPSUs have become predominantly assembling and integrators of aircrafts, frigates and submarines, with very low quotient of Gross Value Addition (GVA). A case in point is SU-30, aircraft where the indigenization component is far less (7%) than what was envisaged (70%) when we took technology transfer from the Russians. In contrast China, who had taken ToT for SU-27 for the Russians, have substantially added to its indigenous value addition and even exporting the upgrades to countries like Malysia.

The Myth of Capital Outlay Shortage

As against the popular misconception that the MoF has been consistent niggardly in providing adequate modernization funds as asked for by the services, the experience in the past (1990s-2005) has been that there have been recurrent surrender of funds in capital outlays. Often the Ministry used to park funds in DPSUs like HAL to preempt criticism on surrender of funds. When the Parliamentary Standing Committee in 1997 suggested that DRDO’s share of defence budget be increased to 10% from the historical 6%, Dr. Kalam as the SA to RM did not bite the bullet. He was aware that the DRDO would not be able to absorb such massive fund allocation, due to its inherent gaps in design capability to bring up credible prototypes for by OFs and DPSUs. One of the ways to mitigate such problems, is successful Jt. D&D initiative for MR-SAM undertaken by the DRDO in tandem with design houses of Israel. HAL had also embarked on a design and development project for building a FGFA in collaboration with the Russians. Sadly, this ambitions programs has now been shelved, making India permanently dependent on import for stealth technology.

The Way Forward

Victor Hugo, the celebrated French poet wrote “No force on earth can stop a moment whose time has come”. Despite stubborn opposition by MoD mandarins, CDS is now a critical component of MoD’s decision making. Similarly providing a non-lapsable fund for modernization of the defence services is a major iconic structural reform whose time has come to ensure that the services are not starved for funding modernization plans. However, it needs to mesh up with Long Term Defence Capability Plan and our indigenous capability duly factoring the capability of our bellicose neighbours. Besides, the services need to tighten and shorten their cycle time for acquisition, cut down on interminable delay in time taken for trials and drawn up realistic QR. The private sector and the research institutions must be actively partner for critical designing subsystems with the reputed design houses abroad instead of leaving it to DRDO, as the only agency. MoD needs proper synergy between design agency, production agency and the services. The DRDO must follow the DARPA model of USA on this.

The Department of Defence Production is presently perceived as the protector of DPSUs & OFs, instead of providing level playing field to the private sector players. The SP model of Dhirendra Singh Committee is still born. The move to monetize surplus defence land is fraught with risks. It may be recalled during (1991-93), Mr. Sharad Pawer as the RM tried to monetize defence land. It had to be abandoned as it was fraught with complaints of corruption and complicit with corporates. The government needs to tread carefully on this. Timely modernization of defence services is not predicated only on availability of funds alone but putting in place complex mechanism of acquisition (Buy), Buy & Make by DPSUs and energizing slow moving (Make) option. Only a strong political will bring all stakeholders together in our quest for higher indigenization instead of mouthing rhetoric of Atma Nirbhar Bharat.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Prof (Dr) SN Misra

was previously Joint Secretary (Aerospace), Ministry of Defence, Government of India.

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