The interim Union Budget 2019-20, presented in Parliament on February 1, 2019, allocated Rs 4,31,011 crore (US$ 60.9 billion1) to the Ministry of Defence (MoD). Of the MoD’s total allocation, Rs 3,01,866 crore ($42.7 billion) is earmarked for what is conventionally termed as the defence budget. T
hough the interim allocation may change in the regular budget to be presented by the next government after the forthcoming parliamentary elections, it nonetheless provides a broad direction of the likely spending on national defence in the ensuing fiscal year. This Issue Brief examines India’s latest defence allocation. In so doing, it also looks at five-year trends in defence allocation, key growth drivers, share of the armed forces, impact on modernisation and progress achieved on the ‘Make in India’ initiative in defence manufacturing. The Brief begins with a broad survey of India’s macro economy and fiscal situation, which have a direct bearing on defence.
Despite higher crude oil prices, rising global trade tensions and a stressed domestic banking system, the economy is poised to grow at 7.2 per cent in real terms in 2018-19, the fastest among the world’s large economies. The growth forecast in the medium-term also looks bright, in the light of structural reforms undertaken in the recent past, revival of investment rate, stability in exchange rate and decline in global crude oil prices. The nominal gross domestic product (GDP) is forecast to grow at 11.5 per cent in 2019-20 and at over 12 per cent in the next two years.
The robust growth forecasts also come in the wake of the significant improvements in several macro-economic indicators such as the low inflation rate of 3.7 per cent in April-December 2018 and progressively narrowing fiscal and current account deficits.
Though India’s macro economy remains relatively healthy, fiscal consolidation has not progressed as planned. The fiscal deficit2 in 2019-20 is budgeted at 3.4 per cent of GDP as against 3.2 per cent envisaged in the previous budget. The expansionary fiscal policy, which is not uncommon in a pre-election budget, is largely aimed at addressing agrarian distress and meeting the aspirations of the common man. However, the provision of Rs 75,000 crore for assured income support at the rate of Rs 6,000 per year to 12 crore farmers, tax exemption for income up to Rs 5,00,000, a new pension scheme for the unorganised sector, and a host of other ‘populist’ initiatives have eaten up much of the fiscal space in the 2019-20 budget, even though the government’s total expenditure has shot up by 14 per cent.
With limited fiscal space available, the defence budget has been subject to a moderate increase of a little over eight per cent. This hike would not, however, satisfy the MoD, which is already grappling with a huge shortage of resources to meet its expenses. In 2018-19, the shortage of funds for the three services alone amounted to 30 per cent – or Rs 1,12,137 crore – against a projected requirement of Rs 3,71,023 crore. What is of greater concern for the MoD is that this shortage is unlikely to be bridged in the next few budgets. With the recurring effects of many of the promised ‘populist’ measures continuing into future budgets, and a tight fiscal path the government has articulated (by which the fiscal deficit is planned to be contained at three per cent of GDP from 2020-21 onwards), the scope for a hefty increase in defence expenditure in the medium-term looks grim.
MoD Budget: Civil and Defence
Of the Rs 4,31,011 crore allocated to the MoD, the defence budget accounts for 70 per cent. The balance 30 per cent is earmarked for MoD’s civil expenditure, which consists of MoD (Miscellaneous) and defence pension (Table 1). Owing to the implementation of the 7th Central Pay Commission recommendations and Rs 35,000 crore spent on account of the One Rank One Pension (OROP) scheme, the pension budget has seen the highest percentage increase among the three major components of the MoD’s expenditure.
To put this in perspective, between 2015-16 and 2019-20, the growth in defence pension has been 86 per cent, in comparison to the 50 per cent and 47 per cent rise in defence expenditure and MoD’s overall expenditure, respectively. Pension’s higher growth has increased its share in the MoD’s expenditure from one-fifth to over a quarter now. In the same time period, pension alone has also contributed 38 per cent to the overall growth in the MoD’s expenditure.
Click here for the full report (10 PDF pages) on the IDSA website.