When the Finance Minister (FM) presents the Union Budget 2011-12 to Parliament on February 28, 2011, he will face the daunting task of deciding between fiscal prudence and the competing demands from various ministries and departments. As early indications suggest, he is likely to move on the path of fiscal consolidation, which in effect means a tight budget. The Ministry of Defence (MoD), which accounts for one-seventh of the total union budget, will face the pressure more, given pending ‘big-ticket’ arms procurement plans and the mandatory increase in pay and allowance which constitutes a substantial part of the defence budget, particularly its revenue portion. The question is whether the defence budget, which impinges upon national security, should be subject to fiscal austerity.
Proponents of fiscal austerity argue that the MoD, being one of the largest ministerial budget holders, should share some burden in the larger fiscal interests of the economy. They draw references from the UK and US, which have recently announced plans to cut their respective defence budgets to contain their burgeoning national fiscal deficits. The UK, which was the first to do so, undertook a comprehensive Strategic Defence and Security Review and then a Spending Review, which finally led to an eight per cent reduction in real terms of the defence budget over the four year period up to 2015. As per the US’s plan, the defence budget would be cut by $78 billion over a five year period; this cut is in addition to an extra $100 billion that the Department of Defence has planned to accrue through various saving measures which in turn would be reinvested within the department for augmenting force capabilities.
Opponents to the burden sharing approach, however, argue that the defence budget should only be guided by strategic considerations, which include the external security environment, military capability of potential adversaries, and the country’s broader strategic footprint. They further argue that since defence spending follows a ‘well-calibrated long-term plan’ (which itself takes into account all the relevant security considerations), it is detrimental to subject defence spending to periodic fluctuations of an otherwise strong Indian economy. They further point to China, which has sustained the pace of annual defence spending at double-digit level for the last two decades, and in the process has succeeded in narrowing its military capability gap with advanced countries.
Notwithstanding these contrasting views, the fact of the matter is that the Indian economy is now in a much better position than it was when the growth rate plummeted to 6.8 per cent in 2008-09. Compared to the sluggish economic environment in the US and Europe, the Indian economy is projected to grow by 8.6 per cent in 2010-11 (highest among the emerging economies after China’s) and by nine per cent in the coming fiscal year. The fast pace of economic growth means additional resources available to the government, with which it can make a trade-off between meeting the competing demands and placing a tab on the fiscal deficit.
Although the precise trade-off would be known only after the FM’s budget presentation, from the MoD point of view, the early signs are not so encouraging. As per the recommendations of the Thirteenth Finance Commission (TFC), defence spending is projected to grow by 8.3 per cent per year till 2014-15, with the revenue and capital expenditures growing by seven per cent and 10 per cent respectively. Assuming that the defence budget will grow by 8.3 per cent in 2011-12, the MoD would have around Rs. 1,60,000 crore – or 16,000 more than the current year’s total allocation. Further assuming that Revenue and Capital expenditures will grow as recommended by the TFC, Rs. 94,000 crore would be available under the former head and Rs. 66,000 crore under the latter.
Although the TFC’s overall projected defence outlays look voluminous, in reality it is not so. On the revenue side, Pay and Allowances are bound to grow by more than 10 per cent in 2011-12 to nearly Rs. 60,000 crore because of the high inflationary trend and the mandatory three per cent annual hike in basic pay of the armed forces personnel. This means, only around Rs. 34,000 crore will be available for meeting other heads of revenue expenditures, such as Stores and Equipment, Transportation, Miscellaneous Charges, Revenue Works, Maintenance, etc. However, the non-Pay and Allowance amount is hardly any increase to meet the intended purpose. In fact, some of these heads of expenditure have stagnated or declined because of the budgetary pressure in recent years. Of particular concern is the declining share of Stores and Equipment, which is meant to sustain the man and machine of the armed forces. If the FM does not go beyond the TFC’s recommendations, it will only further aggravate the situation in this regard.
On the capital side, of the total TFC-projected Rs. 66,000 crore, nearly 70-80 per cent or Rs. 46,200 to 52,800 crore, would be available for capital acquisition. Given that around 60 per cent of the capital acquisition budget goes for committed liabilities (on account of contracts that have already been signed), only Rs. 18,000 to 21,000 will be available for new schemes. And this amount does not look adequate enough, considering that in the coming year some big-ticket items, including the Medium Multi-Role Combat Aircraft MMRCA (estimated to cost $ 11 billion) and the C-17 Globemaster (estimated cost of $5.8 billion), will come up for contract signing. Hence, there is a need to increase the acquisition budget on the capital side as well. This means that the FM needs to go beyond what the TFC has recommended and look at the defence budget 2011-12 through the prism of ground reality rather than merely practising fiscal prudence.