India’s New Defense Budget: Rising Inputs, Shrinking Outputs
(Source: Forecast International; issued Feb 07, 2019)
India’s federal government presented its fiscal year 2019 Union Budget to Parliament on February 1, with an eye on the upcoming April-May electoral cycle.

Tucked within this latest budget was the estimate for the defense allocation for the upcoming fiscal year, which at INR3.019 trillion ($42.1 billion) represents a 7 percent hike above the 2018 revised estimate (RE) of INR2.821 trillion, though a 1 percent decline in the share of defense spending as a portion of total central government expenditure.

The budget estimate (BE) for 2019 marks the first time that India’s nominal defense allocation would exceed INR3 trillion. It also marks the fifth consecutive increase to defense spending by the government of Prime Minister Narendra Modi.

On the surface, this appears to be a sign of positive momentum for both India’s national defense capability and its long-term modernization efforts.

The budget helps to sustain the world’s second-largest standing military of nearly 1.4 million soldiers. This full-spectrum force is tasked with defending the nation against immediate threats from neighboring peer competitors, as well as safeguarding the nation’s airspace and broader maritime domain in the Indian Ocean Region.

The latest outlay should ensure that India remains one of the world’s 10 largest defense-spending nations, a crucial distinction for a nation wedged between two strategic rivals, China and Pakistan, which spent roughly $180 billion combined on their militaries last year.

However, as past indicators have borne out in many instances, the revised estimate usually ends up pushing the final total downward by year end.

The budget estimate for 2018, for instance, indicated an allocation of INR2.96 trillion – this was ultimately revised downward by nearly 5 percent. Over the past four years only once has the revised estimate produced a higher topline figure, this coming in 2017 when the final earmark came in at a mere 1.8 percent over the initial budget estimate.

Another factor to consider is that due to the fluctuation in the Indian currency on global exchange markets, India’s purchasing power in terms of foreign-sourced equipment – which accounts for the bulk of the armed forces’ inventory – is often impacted negatively. Despite an ongoing effort since the mid-1990s to equip the Indian armed forces with indigenous solutions equal to 70-75 percent of their hardware, the exact opposite ratio has remained a constant, with India continuing to serve as the world’s largest net importer of military materiel.

Furthermore, the Indian Defence Ministry often fails to spend its full capital outlay, referred to as the Capital Head. This portion of the budget is used to fund major equipment procurement projects and upkeep existing military hardware, as well as provide for the creation of infrastructure (roads, airstrips, barracks, depots, naval bases, etc.) that may require acquisition of land/property to build on or across.

In short, this element of the budget provides the tip of the spear for combat capability and wartime readiness.

Under the 2019 proposed defense budgetary allocation, the Capital Head amounts to INR1.034 trillion ($14.42 billion), a nominal increase year-on-year of about INR39 billion, or 3.9 percent over that of 2018. This increase barely exceeds the level of inflation (roughly 3.7% on average last year), meaning that at 0.2 percent overall, the extra funding over that of last year is negligible to helping improve defense capabilities.

As a portion of defense spending, capital outlays continue to decline, as reflected in the latest budget in which the Capital Head equals 34 percent of the total allocation, versus 44 percent in 2007 and 42 percent in 2014.

Worse, the Capital Head allocation is rarely fully spent, and what is invested largely involves legacy procurements (“committed liabilities”) already in the pipeline or delivered.

Considering the spate of ongoing and in-the-pipeline major equipment programs planned through 2027, the shrinking margin of the budget apportioned toward modernization is worrisome for Indian defense planners. Under the Defence Ministry’s own “Long-Term Integrated Perspective Plan” (LTIPP) launched in 2012, the requirements stretching from mid-2016 through 2027 amount to INR15.44 trillion ($232 billion) in procurement expenses, slightly more than $19 billion per year.

As the aforementioned Capital Head earmark for 2019 demonstrates, Indian modernization investment falls short of the funding needed to meet the goals of the Long-Term Integrated Perspective Plan.

Instead, the bulk of the annual defense budget is allocated toward personnel, troop transportation, storage costs, repair and refit of naval equipment, infrastructure upkeep, and additional miscellaneous costs, all of which are earmarked for what is termed the Revenue (Net) Expenditure in Indian budgetary parlance.

Despite accounting for the bulk of the total defense budget, revenue expenditures have failed to prevent complaints over poor working conditions and inadequate care from Indian soldiers in the past. Nor have they helped reverse the ammunition shortage plaguing the Indian Army’s wartime reserve stocks.

With an election looming and a slew of modernization projects facing delay due to funding pressures and bureaucratic inertia, India’s government appears to be taking a line akin to Britain’s infamous “Ten Year Rule.” That government guideline, adopted in 1919, charged the British military with drafting its budgetary estimates under the assumption that another war would not occur over 10 years.

This might have contained a modicum of sense considering the rule emerged less than a year after the armistice of World War I.

But for Indian officials confronting an ever-evolving strategic environment, the need to streamline procurement procedures, fast-track modernization programs, and provide ample funding for the nation’s security apparatus presents an immediate challenge.

While the government kicks the proverbial can down the road, China continues to rapidly modernize and upgrade its military capabilities in all phases, while working to circumnavigate India on land and at sea, as well as deepening its strategic cooperation with New Delhi’s archrival, Pakistan.

Against this strategic backdrop, the next government will need to make shrewd calculations on future force structures, the optimal high-low military technology mix, where to bolster bases and military infrastructure, and which strategic projects to push forward in the near term. The good news for India is that in the short term, it should maintain its pace as the world’s fastest-growing major economy, despite the slowdown in global growth.

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