The annual budget for the financial year (FY) 2017-18 was presented on February 1, 2017 and the government has introduced a revised methodology of allocation for the Defence Ministry that is disaggregated into major expenditure heads viz: capital, revenue, pensions et al. This new format offers an instructive pattern of the structural characteristics that shape and to an extent limit, the efficacy of India’s annual defence allocation, when this is translated from fiscal outlay and actual spending, to the creation of tangible military capacity.
The financial allocation figures for each service are illustrative of the basic character of the Indian military wherein the army is the lead service and dwarfs the other two by way of personnel strength. In FY 2017-18 the total allocation for defence was budgeted at Rs. 3,59,854 crore. Devoid of pensions and allocations for the DRDO, BRO, Coast Guard et al., the actual allocation for the three armed forces—Army, Navy and Air Force is Rs. 2,42,403 crore.
The individual service allocation is Army Rs.1,46,202 crore; Air Force Rs. 58,359 crore and Navy Rs. 37,842 crore which translates to 60.3 percent, 24.1 percent and 15.6 percent for the respective Services. Given the manpower intensive nature of the Indian Army, this allocation ratio is unlikely to change in any significant manner over the next decade plus.
The revenue component of the defence budget caters to the pay and allowances and related HR cost for maintaining and training a 1.3 million plus military. The capital component is meant for the acquisition of new equipment and platforms and for undertaking upgrades where warranted. Given that the government has set up a pay commission for revising government salaries periodically—the wage and pension bill has been increasing steadily. Hence, the ratio of revenue to capital in the composite defence budget in 2015-16 was 64.6 to 35.4 percent. In the budgeted estimate for 2017-18, it has skewed to 68.4 to 31.6 percent—and if the NFFU and one-rank-one-pension is awarded in its entirety, the revenue share will increase further.
The Army is a revenue intense service while the Navy and Air force are traditionally capital intensive services. The revenue to capital ratios for 2017-18, based on actual service wise allocations are Army 82:18; Air Force 42:58; and Navy 48:52. However, when the pension component is also included, the ratios get further attenuated.
A thumb-rule for any navy that seeks to maintain a certain level of operational readiness is the ability to allocate up to 60 percent of its budget towards the capital head. Given that the lead-times for building major warships goes up to five years at the bare minimum, shipyards and major vendors need an assured financial commitment that allows for planning from one decade to another. While the Indian Navy has done relatively better than the other two services by way of being able to design and build its warships within India (the ordnance and fire control systems are still imported), the shrinking capital component is cause for concern.
Though the Navy is the smallest service by way of uniformed personnel strength — just five percent of the army — it has a large civilian work-force in the dockyards and related ancillary departments. With every pay commission revision, the salary and pensions allocation has to go upwards. Consequently, from FY 2014-15 to the current fiscal, the capital component of the Navy has moved downwards from 58 percent, to 53, 48 and now 47 percent. This is an unsatisfactory trend in the long run and some very radical policy measures will have to be considered, if the Navy is to retain its ability to have a steady rate of induction of modern platforms and also undertake the necessary technological upgrades. Productivity in defence public sector units is well below the market norm and this needs urgent redress — but this issue has defied any satisfactory resolution for decades.
Yet another feature of the defence budget that is cause for concern is the underutilisation of amounts allocated for capital expenditure. In FY 2016-17, The Army, Air Force and Navy returned Rs. 3,082 crore, Rs. 1,585 crore and Rs. 2,404 crore respectively from their budgeted estimates of the capital allocation—a total of Rs. 7,071 crore! This defies logic, for the Indian military as a composite entity is slipping into obsolescence and each service has major inventory gaps. Yet the higher defence decision-making apex either delays the release of funds or by some adroit macro-adjustments, compels the defence ministry to return large sums of money as unspent. Unless these structural characteristics of the Indian defence budget and its utilisation are addressed, it is unlikely that there will be any meaningful modernisation of the Indian military.
Commodore C Uday Bhaskar, is currently Director, Society for Policy Studies (SPS), New Delhi. He was previously Director, National Maritime Foundation (NMF) and prior to that he headed the Institute for Defence Studies and Analyses (IDSA).