Have money, won’t spend

Written by Sushant Singh

March 3, 2015 

Budgetary space for big-ticket acquisitions will be limited. Capital allocation of Rs 31,481 crore for air force means signing amount needed for Rafale deal isn’t budgeted for.

In a clear indication of where our national security priorities lie, the only post-budget question put to the finance minister was about the one rank one pension (OROP) scheme for the veterans. The OROP is an emotive issue, and with the prime minister himself having promised to implement it, expectations of an announcement in this budget were understandably high. The finance minister reiterated his commitment to implementing the OROP, stating, “The methodology of calculating one rank, one pension is an issue pending between the services and the defence ministry”.

Veterans are worried because they have been promised the OROP a few times now, only to be let down. They realise that whatever the methodology, keeping the OROP promise would need money, which would have to be allocated in the budget. The budget for defence pensions has been increased by Rs 4,500 crore to Rs 54,500 crore for the coming year. This increase, much less than the estimate of Rs 8,400 crore required to implement the OROP, is sufficient only to maintain the status quo.

But the non-provision of funds for the OROP is not the biggest concern about the defence budget. That would be the government’s failure to spend last budget’s allocation of Rs 2,29,000 crore in the current year. The revised estimate of Rs 2,22,370 crore means that the defence budget was underspent by Rs 6,630 crore. And the spending shortfall under the capital head — meant for buying weapons and military platforms — was even greater, at Rs 12,623 crore. It means that the defence ministry transferred another Rs 6,000 crore from the capital head, that is, from money meant for buying weapons and military equipment, to the revenue head for routine running expenses.

In recent years, the defence ministry has regularly returned funds from the capital budget. Under UPA 2, in 2012-13, Rs 11,600 crore was the amount returned to the government. From 2005-06 to 2007-08, under UPA 1, Rs 2,400 crore, Rs 3,500 crore and Rs 4,300 crore, respectively, were returned by the defence ministry. It was in keeping with trends witnessed during NDA rule, where Rs 8,900 crore, Rs 7,700 crore, Rs 9,300 crore and Rs 5, 200 crore were returned from 2000-01 to 2003-04. This was supposed to change under the new defence minister, but such hopes have been betrayed.

The defence ministry’s inability to spend allocated funds is even more striking when you realise that a large portion of this capital budget is already booked for “committed liabilities”. These are the items for which the contracts have already been signed and money paid over the next seven to 10 years. In the current year, there were committed liabilities of nearly Rs 70,000 crore, which left only Rs 5,000 crore for new acquisitions.

Going by past data, the figures for committed liabilities and new acquisitions for the coming year will be in the same range. This means budgetary space for big-ticket acquisitions will be limited. A capital allocation of Rs 31,481 crore for the Indian air force means that the signing amount needed for the Rafale MMRCA deal — estimated to be Rs 15,000 crore — has not been budgeted for. With Rs 21,574 crore in its capital budget, the army has not been allocated additional money for raising a new strike corps on the China border, which has already been approved. At less than 20 per cent, the army’s capital to revenue expenditure ratio is unsustainable for any meaningful modernisation.

At 1.74 per cent, the defence expenditure to GDP ratio is now at pre-1962 levels. While this will send alarm bells ringing among the public, we must recognise that India’s GDP has been growing at a very high rate over the last 15 years. This means that the actual amount available for defence expenditure, in absolute terms, has not gone down. Moreover, items of expenditure such as defence pensions, which were part of the defence budget till the mid-1980s, are no longer part of the official defence expenditure. Going by the methodology the Stockholm International Peace Research Institute uses for estimating defence expenditure, India’s defence spending will still be in the range of 2.25 per cent of its GDP.

However, India’s defence spending can’t be dictated by these figures. It must be driven solely by national security requirements. In any case, higher budgetary allocations for defence, while important, are just part of the picture. Additional allocations mean little when the defence ministry is unable to spend the money. A clear directive from the prime minister, that no budgetary allocation under the capital procurement head will be returned or transferred towards running expenses, would help the defence ministry augment its capacity. Refining the ministry’s systems, processes and procedures to ensure that it spends all of the budgetary allocation must be top priority for the defence minister. The status quo must change. India’s defence cannot afford to suffer any longer.

sushant.singh@expressindia.com