New Defence Purchases: Only marginal increase in the Budget

February saw two major events that are of interest to the country’s defence sector. One, the 10th edition of the biennial, five-day Aero India held in Bangalore event, easily Asia’s biggest air show, and two, the presentation of the general budget under which defence allocation is done for the three armed forces. 

Both, at first glance, both came as a disappointment.

At Rs 2,46,727 crore or approximately $40 billion, India’s overall defence budget has shown a marginal 7.5% increase over the last year’s allocation. It is, however, exclusive of another Rs. 62,852.6 crore provided to the Ministry of Defence (MoD) under the heads of Defence Pensions (Rs. 54,500 crore) and Civil Expenditure of MoD (Rs. 8,852.6 crore), both of which do not form part of India’s official defence budget. 

It is however distressing to note that the revenue expenditure takes up 61.7% of the total budget while the capital expenditure gets just 38.3% of the total allocation. Since the strengthening of the Indian military is dependent on the money that is available to acquire new hardware, it is essential to review what has been allocated to the three services for capital acquisition or in simpler terms to buy new equipment.

Table IV. Army’s Acquisition Budget

Table IV. Army’s Acquisition Budget

Table V. Navy’s Acquisition Budget

Table VI. Air Force’s Acquisition Budget

*BE is Budget Estimates; RE is Revised estimates 

The tables above suggest that there is only marginal increase in the funds for new purchases. 

Juxtapose this with the finding of the Parliamentary Standing Committee on Defence during the winter session of Parliament which said that the Army is running low on ammunition, soldiers posted to high altitude places like Siachen and Leh don’t have snow clothing and boots and that for over a decade to produce an assault rifle that meets the most basic requirements of the Army.

Elaborating further, the report said soldiers in high-altitude areas were short of nearly two lakh pairs of ankle leather boots; one lakh mosquito nets were wanted; soldiers were waiting for 65,000 Balaclavas or masks to keep their faces warm; MoD had failed to furnish plausible information about how many soldiers have bulletproof jackets with voids jeopardising the lives of thousands of soldiers; and while MoD seemed satisfied that equipment like night vision goggles are plentiful, the Army was not satisfied with the state of affairs.

The report says, “It appears that the Ministry is not taking the Army into confidence while doing its perspective planning.” The report warns that the shortage of ammunition means “it would not be possible for the country to sustain a war for a longer period.”

Some shocking highlights of the report are: IAF is down to just 25 fighter squadrons against a sanctioned strength of 42; the situation was very grim and national security was being compromised; India may have already lost its strategic edge over Pakistan in terms of fighter squadrons; IAF requires at least 45 fighter squadrons to counter a two-front collusive China-Pakistan threat; India’s fighter squadron strength will be reduced to just 11 squadrons by 2024; there are serious shortages of submarines in the Navy as well as equipment and weaponry for the Army; funding for the Mountain Strike Corps is inadequate (no funds allocated in last fiscal) and it is being raised with only ‘war wastage reserves’.

The committee was told that 37 cases of procurement were pending at 13 different pre-Contract Negotiation Committee (CNC) stages. Time taken at each stage is much more than what is accorded by the defence procurement procedure (DPP). 

The devil clears lies in the detail. All multinational and Indian companies who made a beeline at the Aero India 2015 said they want to see change on the ground, in India’s often cumbersome and sluggish defence acquisition and procurement processes if India wants to overcome the tag of being the “single largest importer of military equipment and weapons.” 
 
Narendra Modi, who became the first Prime Minister to inaugurate and attend the mega event, has promised major changes in the policy allowing greater private participation while firmly saying that “make in India” will get preference.

New Delhi’s main suppliers of military equipment like the US, Russia, France, Israel and UK have all responded cautiously. However, they now await a policy that will clarify the terms and conditions of setting up units in India. If the Defence sector needs to align itself to the overall policy of `Make in India’ then a new initiative to encourage defence manufacturing is needed.

Defence Minister Manohar Parrikar, aware of the desire among big defence manufacturers, declared: “We are planning a separate policy on ‘Make in India’. It will be outside the existing Defence Procurement Procedure (DPP).” The separate policy is likely to be notified in the next financial year. It will have clarity on providing a level-playing field — to the ordnance factory board, PSUs, import partners and domestic private industry.

Prime Minister Modi in fact laid out the broad contours: “India can also be a base for export to third countries.” On the permitted level of Foreign Direct Investment (FDI) at 49 per cent, the PM virtually read the mind of the foreign companies who want majority stake holding in plants in India.

“This (FDI) can go higher if the project brings state-of-the art technology,” Modi has promised. Modi’s pitch notwithstanding, it’s the change policy framework foreign companies want to see. The Prime Minister’s intention is clear. He wants to make India self-reliant in defence manufacturing but it is easier said than done. 

In his budget speech, finance minister Arun Jaitley too said: “We have been over-dependent on imports, with its attendant unwelcome spin offs. We are thus pursuing the ‘Make in India policy’ to achieve greater self-sufficiency in the area of defence equipment.”

Jaitley has indeed made some provisions to incentivise Indian industry, particularly the manufacturing sector. Among others, the budget has proposed to reduce the corporate tax from 30 to 25% over a period of four years in a move to: bring parity with the tax structure of other manufacturing nations; enhance the access of technology to small businesses by reducing the rate of income tax on royalty and fees for technical services from 25 to 10%; and explore the possibility of replacing the system of multiple prior permissions required for setting up a business with a pre-existing regulatory mechanism so as to further improve the ‘ease of doing business’.
These may not be sufficient though. To boost indigenous arms manufacturing, particularly by the private sector, there is a need for huge investment in plant and machinery, technology and skill development. Tax and duties structure also need to be made attractive for in-house manufacturing. The budget does not, however, shed any light on any of these aspects. 

To conclude, Indian strategists must disabuse themselves of any military competition with China in the next decade at least. Given the mess in India’s defence finance and acquisition processes, all talk about India-China rivalry is nothing but empty rhetoric. According to media estimates China’s defence budget when announced this week will likely be around $140 billion-- more than three and a half times India’s amount.  

Its time India adopted former Chinese strongman Deng Xiaoping’s famous dictum, until it can acquire requisite strength: ‘"Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership."