Defence Industry

Metamorphosis of the Defence Budget 2016-17
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Issue Courtesy: IDSA | Date : 09 Mar , 2016

Pic Courtesy: Sumit Walia

There was no mention of the allocation being made for defence for the coming fiscal in the finance minister’s budget speech on February 29. It would be pointless to second guess the reason for what many would consider an omission but two factors appear to have something to do with it.

First, the defence budget for the next fiscal has been completely restructured, making it difficult to make like-to-like comparisons. And second, the growth in the defence budget is bound to disappoint the strategic community, notwithstanding the economic factors that may be responsible for it.

Ever since the revenue budget of the ordnance factories and the defence pensions were carved out into separate Demands for Grant, the Ministry of Defence (MoD) has been presenting eight Demands to the parliament. These have been restructured as follows:

Defence Services Estimates (Defence Budget)

Existing Demands What Goes Out? Where Does it Go? Consequence
Army (Revenue) Military Farms (MF), Ex-servicemen Contributory Health Scheme (ECHS), Inspection Organisation (IO), Rashtriya Rifles (RR), and the National Cadet Corps (NCC) To Demand for Grant for MoD (Civil) now rechristened as MoD (Miscellaneous) The revenue budget of the Indian Army, now clubbed with other two services in a new Demand called Defence Services (Revenue)
Navy (Revenue) Nothing Not Applicable Clubbed with other two services in the new Demand for Grant called Defence Services (Revenue)
Air Force (Revenue) Nothing Not Applicable Same as in the case of Navy
Director General of Ordnance Factories (Revenue) The entire Demand To the new Demand for Grant – MoD (Miscellaneous) Nothing
Defence Research & Development (Revenue) The entire Demand To the new Demand for Grant –  MoD (Miscellaneous) Nothing
Capital Outlay on Defence Services Everything, except the budget of the three services and Joint Staff Demand for Grant – Capital Outlay on Defence Services Only the three services, including the Joint Staff

The MoD used to present another two Demands: MoD (Civil) and Defence Pensions. The allocation made in these Demands was not included in what was commonly referred to as the defence budget. The Demand for Defence Pensions remains undisturbed but the MoD (Civil) will now cover the revenue and capital budget of all organisations other than the three services and the Joint Staff, as explained in the Table above. This Demand will also henceforth be called Demand for Grant for MoD (Miscellaneous).

Consequently, MoD will present only four Demands for Grant to the parliament instead of eight for the FY 2016-17: MoD (Miscellaneous), Defence Pensions, Defence Services (Revenue) and Capital Outlay on Defence Services.

How does one compare the budget for the FY 2016-17 with the current year’s budget? There are two ways of doing it. One method would be to work backwards and rearrange the coming year’s budgetary allocation the way these are currently structured. If done this way, the following picture emerges:

Defence Budget BE 2015-16 RE 2015-16 BE 2016-17 Underutilisation Increase w.r.t BE Increase w.r.t RE
Revenue 152139 143236 162759 8903 6.98 13.63
Capital 94588 81400 86340 13188 -8.72 6.07
Total 246727 224636 249099 22091 0.96 10.89

Indian Rupee (INR) in crore (BE: Budget Estimates; RE: Revised Estimates)

If, however, the current year’s budgetary allocations are rearranged as per the new scheme adopted for the FY 2016-17, and comparisons are made accordingly, the picture that would emerge is as follows:

INR in crore. Increase is in percentage terms

It is apparent that the impending implementation of the seventh pay commission recommendations and the one-rank-one-pension scheme has necessitated a substantial increase in the Demands for MoD (Miscellaneous), Defence Services (Revenue) and Defence Pensions.

But the increase of just 00.96 per cent or 01.84 per cent with reference to the current year’s BE (in what would probably henceforth qualify as defence budget), depending which of the two methods you adopt, is likely to rankle for a long time.

The RE is a more realistic measure of the ministry’s capacity to spend. With reference to the RE figures of the current year the overall increase works out to 10.89 per cent as per the first method and 11.17 as per the second one. These figures may look more presentable but an increase of just 05.77 per cent in the capital outlay for the defence services will probably be one of the lowest, albeit not unprecedented, in the recent years. This may possibly have implications for everything that gets clubbed under the category of ‘Make in India’ these days.

To add to the woes, the allocation for revenue and capital expenditure exclusively of the services works out to just 01.47 per cent of the GDP and 11.24 per cent of the total central government expenditure (CGE), although if one considers all the four new demands as a part of the expenditure on defence, which is perhaps how it should be, the total allocation of INR 3,40,922 crore would work out to 02.05 per cent of the GDP and 15.67 per of the total CGE.

Beyond these numbers and figures, which will surely be discussed and debated for a long time, there is a need to set right the systems and procedures that stymie decision-making to prevent underutilisation on the one hand, and channelise the available resources to fill up the existing voids as well as to acquire new capabilities according to a financially viable roadmap on the other.


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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

Amit Cowshish

is a former Financial Advisor (Acquisition), Ministry of Defence and presently a Distinguished Fellow with the Indian Institute for Defence Studies and Analyses.

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