Defence Budget 2013-14: An upcoming tight spot

Speaking at the Aero-India 2013 in Bengaluru, the Defence Minister is reported to have said on February 6, 2013 that the defence budget for the coming financial year will see a cut, both under the revenue and capital segments. He is also reported to have said that the expenditure in priority areas will not be reduced and that it would be left to the armed forces to choose the priority areas without any interference from the ministry. The general budget for the FY 2013-14 is less than a month away. The Ministry of Finance would have already made up its mind about sector-specific budgetary allocations. It would, therefore, be futile to speculate about the size of the defence budget for the next fiscal but it is not difficult to foresee the kind of dilemma that the Services would face in trying to make the most of what the budget has in store for them.

It is somewhat difficult to understand what the Defence Minister meant when he said that the budget for the coming financial year will see a cut, assuming that this is precisely what he said. A cut can be imposed on something that already exists. The defence budget for the next fiscal does not exist as of now and, therefore, there cannot be any cut in that budget. It is also unlikely that there will be a cut in the budget for the next fiscal vis-à-vis the current year’s budgetary allocation, implying thereby that next year’s defence budget would be less than the current year’s budget. That is an unlikely scenario because of the following reasons.

The defence budget is divided into revenue and capital segments. The revenue segment caters for expenditure on pay and allowances, stores and equipment, transportation, maintenance-related civil works and miscellaneous charges. In the Budget Estimates (BE) for the current year, pay & allowances accounted for 65.93 per cent of the total revenue budget. Stores, transportation, works and miscellaneous charges accounted for 19.17 per cent, 3.14 per cent, 7.41 per cent and 4.34 per cent, respectively. This has been the pattern in the past as well. (These percentages, mentioned in the Defence Services Estimates 2012-13, relate to the total revenue allocation for the three services, defence research & development and the ordnance factories.) The biggest dilemma would be to decide for which of these areas the allocation could be reduced vis-à-vis the current year’s allocation.

Even if there is no accretion in the manpower, the expenditure on pay & allowances keeps increasing every year because of the annual increments and the increase in the dearness allowance. Therefore, there is absolutely no possibility of reducing the expenditure on pay & allowances in the short term. This is equally true of the other budget heads mentioned above, though for different reasons. Take stores and equipment, for example. The expenditure covered under this head is incurred on food; clothing; ordnance, medical and aviation stores; airframes and engines; information technology; research & development projects of the services; fuel for operating vehicles, ships, submarines and aircraft; and, most importantly, on ammunition. Generally all these stores are procured and stocked as per laid down scales. Even if the consumption and stocking are contained at the current year’s level, the increase in the price of food items and fuel alone would warrant higher allocation under this budget head.

The cost incurred on movement of stores and troops would also inevitably go up during the next fiscal because of the fluctuation in the cost of transportation, even if all activities are contained at the current year’s level. For the past several years, the allocation for maintenance of buildings, roads and other civil infrastructure has been less than what it should have been as per the prescribed scales. No further reduction is apparently viable. The miscellaneous charges broadly cater for expenditure on conservancy services; unit allowances; training grants; amenities to troops; printing; postal and telephone charges; procurement of maps; sports and adventure activities; purchases by army commanders for counter-insurgency and internal security related activities and to meet other urgent operational requirements; management of sainik boards and departmental canteens; legal expenses; and, other miscellaneous expenditure, which includes maintenance of equipment. At 4.34 per cent, budgetary allocation under this budget head in the current year’s budget for the Army was only INR 4,943.38 crore. This allocation is so thinly spread that any further reduction might result in drying up of allocation to some of the smaller units and formations. It might also result in insignificant allocation for important activities, such as research and development projects, for which the allocation in the Army’s budget for the current year is a meagre INR 4.72 crore.

So what could happen if the budgetary allocation under the revenue segment is reduced this year? Since the expenditure on pay & allowances, rations, clothing and other such inescapable items of expenditure cannot be reduced at all in the short term, the balance amount left after making full provision for these items of expenditure will have to be thinly spread over the remaining budget heads. The worst affected by this would be the allocations for ordnance stores, ammunition, fuel and maintenance of equipment. This has implications for operational preparedness of the armed forces. The hollowness in the ammunition holding is already a matter of serious concern. Inadequate allocation could aggravate the problem, apart from adversely affecting operation of assets held by the services.

That is not all. The civil infrastructure requires better maintenance. The Ex-servicemen Health Scheme is already struggling because of inadequate allocations. It is inconceivable how the scheme would be able to deliver with lesser allocation.

The capital budget could also face a similar situation. The capital budget is notionally divided into capital acquisition and other-than-capital acquisition budgets. (The former is also referred to as the modernization budget and generally accounts for more than one-fourth of the total capital budget.) An overwhelming percentage of the capital budget is spent on discharging the committed liabilities and the balance amount is used for paying advances in respect of newly concluded contracts. The committed liabilities have been rising because of the spurt in capital acquisitions. The Ministry of Defence cannot default on contractual payments. Therefore, this would inevitably have implications for new schemes for which contracts are to be concluded in the coming year, especially where the initial payment would be substantial, as in the case of the MMRCA acquisition programme.

The other-than-capital acquisition budget caters for acquisition of land, capital works, naval projects and all capital expenditure incurred by the Ordnance Factories and the Defence Research and Development Organization (primarily on machinery and equipment). The trickle-down effect of resource allocation could hit all these activities hard.

The prospects of allocation for the next year being less than the allocation for the current year are thus remote because of the immense implications it would entail. However, it is likely that the growth in the budgetary allocation for the next fiscal may be less than what has been the case in the past. In the last ten years since 2002-03, the year-on-year growth has ranged from 2.57 per cent in 2002-03 to 26.29 per cent in 2004-05. This implies that there could be a modest increase in allocation for the next fiscal. However, even in this scenario, there would be tremendous difficulty in factorising the budget under various budget heads. One cannot envy those who would be called upon to do this. The Defence Minister has said that it would be left to the armed forces to choose the priority areas without any interference from the ministry. This has been the practice in the past as well. However, since the allocations are almost always less than the projection, it would be a good idea to evolve a strategy to make do with whatever is allocated for defence. Asking for more money at this stage would not really help. As Finance Minister P. Chidambaram said while delivering the K. Subrahmanyam lecture organized by the Subbu Forum and IDSA on February 6, 2013, we must give more money to defence, but for that to happen we must have more money. He is right when he says growth is necessary for security.

Amit Cowshish is Former Financial Advisor (Acquisition) & Additional Secretary and Member, Defence Procurement Board, Ministry of Defence.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.