IDSA COMMENT
G. Balachandran
July 11, 2014
Interim Budget
The interim budget presented in Parliament was a status quo budget. The 10 per cent hike in the interim defence budget with respect to both budget estimate and revised estimate of 2013-14 allocation was no upward or downward revision of the defence allocations provided in the previous budget & represented the erstwhile popular term of the 80s ‘the Hindu rate of growth’ to cater for inflation. While the overall 2013-14 allocations remained the same, the capital allocation was, however, revised downward by 9.07 per cent or Rs.7868.48 crore, which has been added to the revenue allocation.
What Has Been Ailing the Defence Budget in The Recent Past?
All watchers of the defence budget hoped that the much needed inescapable & overdue corrections will come when the new government that is formed after the elections presents the budget. The anxiety was because of the loss of direction seen in the defence budget allocations over the years was beginning to adversely affect the capability needed to take on the current & emerging challenges to national security. Although when absolute figures of defence are seen they create a perception of substantial increase over the years but when put in context the picture is different. A comparison of the Defence expenditure of 1997-98 and 2013-14 and that of the central government expenditure and the GDP is tabulated below.
Table no 1 (All Rupees in crores)
1997-98
|
2013-14 (RE)
|
Increase over 1997-98
| |
Defence Expenditure
|
35278
|
203672
|
4.773
|
Central Government Expenditure
|
224866
|
1590434
|
6.073
|
GDP at Market prices
|
1572394
|
11355073
|
6.222
|
Defence expenditure which was 2.24% of GDP in 1997-98 has come down to 1.79% of GDP in 2013-14 and this gradual decline is depicted in the chart No 1 below. The two spikes on increase in 2008-09 and 2009-10 are on account of pay commission arrears:
Chart No 1
The relationship with the Central government expenditure has similarly been of a steady fall as may be seen in chart No 2
Chart No 2
Three major heads of expenditure account for around 75% of the Non Plan Revenue expenditure. These are Interest, Defence expenditure & Subsidies. At the turn of the century these accounted for 70% of the Non plan expenditure with Interest accounting for 40%, Defence 20% and Subsidies 10%. Today they account for 75% of the Non plan Expenditure with Interest accounting for 34%, Subsidies 23% and Defence 18% (Details given in chart no 3 below.
Chart No 3
The ratio with in the defence budget between capital & revenue budget has been changing over the years. The changes have been primarily driven by the FRBM Act becoming effective from 2004-05. The FRBM Act was enacted by the Parliament in 2003 to be effective from 2004-05 to ensure fiscal discipline. The Govt introduced the concept of effective revenue deficit, which excludes from the conventional revenue deficit, grants for the creation of capital assets (Defence capital expenditure comes under this category). Chart no 1 above in addition to the Defence expenditure to GDP ratio also gives the ratio of the Defence capital & revenue budget respectively to the GDP over the years. Revenue expenditure which used to be in the range of 1.6 to 1.7% of the GDP has come down to 1.1% while the Capital expenditure has increased from 0.5 to 0.7 %.
The two major components of Revenue expenditure are Pay & Allowances (P&A) and Operation & Maintenance (O&M) expenditure. P&A being obligatory & entitlement based has to have first charge on the revenue budget. The combined effect of the Pay commission and the inflation has been that the share of Pay & Allowances of the revenue expenditure has been steadily rising and has increased from around 40% to 53 % and is depicted in Chart No 4 below.
Chart No 4
The combined effect of the defence budget not keeping the pace as seen in Table no 1 above, Chart No 1, Chart No 2 and chart No3 above, the reducing share of revenue expenditure as a portion of the defence expenditure as seen in chart no 1 and increasing demand of P &A on the revenue budget has put severe strain on the revenue O&M expenditure. Defence capabilities are maintained & sustained on O&M. The adverse affect of the sustained pressure of limited resources for O&M had been candidly brought out in the 20th report of the parliament standing committee on defence in its 20th report.
Budget presented on 10th July 2014
The interim budget presented in February maintained the same trend & hence all eyes were on the budget presented on 10th July 2014. The reality check of the budget presented reveals no change and defence capabilities would continue to be impacted by the lower O&M allocations. While the Finance Minister’s budget speech struck the right chords, a closer examination of the 2014-15 budget, and its comparison with the 2014-15 interim budget, shows certain anomalies which are difficult to reconcile with some of the earlier statements made by the minister in his capacity as the defence minister.
Speaking at the Naval Commanders Conference earlier he had stated that “Our forces want their requirements should be fulfilled. The government's effort would be to work in that direction...This is an issue of national priority…Whatever is needed for national security will be provided by the national exchequer.”
The interim budget had allocated Rs.224000 crores for the defence services consisting of Rs. 134412 crores as revenue Expenditure and Rs 89588 crores as capital expenditure for a total of Rs 224000 crores. The current regular 2014-15 budget has allocated Rs. 229000 crores for defence, an increase of Rs 5000 crores. The increase has been on account of the increase in capital outlay. As the minister explained “Modernization of the armed forces is critical to enable them to play their role effectively in the Defence of India’s strategic interests. I, therefore, propose to increase the capital outlay for Defence by Rs.5000 crores over the amount provided for in the interim Budget. This includes a sum of Rs. 1000 crores for accelerating the development of the Railway system in the border areas. Urgent steps would also be taken to streamline the procurement process to make it speedy and more efficient.”
This reference to the increase in capital expenditure while talking about modernisation of the armed forces is a bit spurious since the amount allocated for the modernisation of defence forces, taking into account the definition of modernisation expenditure adopted by the Indian defence ministry, has really been reduced by an amount of Rs 280 crores. Ironically this reduction in modernisation allocation has been at the expense of the Navy which has seen its modernisation allocation reduced from Rs. 22191.99 crores in the 2014-15 interim budget to Rs 21911.99 crores in the final budget. A major portion of this additional allocation has been made to DRDO & Ordnance factories.
While the interim budget had given the revised estimate (RE) for expenditures for 2013 -14, since it is customary to give the RE of the preceding financial year along with the Budget, exactly the same figures have been reproduced, when now that the CGA (Controller General of Accounts) has published the provisional expenditure figures for the year 2013-14, it may have been prudent to give those expenditure data. Thus while the RE for defence capital expenditure in February was Rs 78872 crores, the May end estimates for the provisional expenditure for 2013-14 is Rs 79222 crores.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India
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