A gradual approach on defence spending
Clues from the defence budget suggest India is gradually improving the operational efficiency of its armed forces, opting to tackle China without a rapid rise in expenditure
Another defence budget zoomed past us this month. Since then, analyses have focused on how defence spending for the coming year departs from the previous one. Some have waved a red flag as defence spending has fallen below 2% of the Gross Domestic Product (GDP) for the first time in many years. On the other hand, the defence ministry’s post-budget statement emphasised a 44% increase in operational spending, which it said will close critical gaps in combat capabilities and equip the forces in terms of ammunition, sustenance of weapons and assets, and military reserves. The ministry also highlighted that the capital outlay for modernisation and infrastructure development rose by a handsome 57% over the last five years.
How do we make sense of these seemingly conflicting narratives?
Comparing allocations year-by-year gives us a confusing picture. Any interest group can pull up a number from the budget to suit their pre-formed narrative. Taking a step back and going beyond the numbers will reveal that this budget didn’t indicate any significant change in the defence posture, and unlike Japan, which has announced a doubling of its military spending in the next five years, India’s approach focuses on gradually improving the operational efficiency of its armed forces.
To put numbers into context, let’s use an earlier year (FY16). FY16 is a useful reference point as it predates two major developments: China’s visibly aggressive posture on the border and the budgetary commitments arising from the One Rank One Pension (OROP) scheme. Three observations follow from such an analysis.
One, not only has defence spending fallen as a proportion of GDP, but it has also fallen as a percentage of government expenditure. In other words, defence has slipped in priority relative to non-defence functions (Figure 1).
Two, the China challenge hasn’t led to any spectacular change in the composition of defence expenditure. Defence spending can be divided into four major components: Salaries, pensions, capital outlay, and others. As Figure 2 shows, capital outlay was being squeezed by rising pension expenditure over the last few years. For two consecutive years (FY19 and FY20), more money was spent on pensions than on capital acquisition and modernisation. The balance has now been marginally restored since FY21, after the Galwan crisis flared up. Crucially, the rises in pension and capital expenditures have come at the cost of operational and maintenance expenditure, including ammunition stores (under the others category). It is hence not surprising that the latest budget is trying to arrest this decline in combat capabilities.
Three, this period has been relatively better for the Indian Navy in terms of capital expenditure. Since the procurement of new platforms happens over multiple years, a temporal view is useful in analysing how capital outlay is split between the three armed forces. Our analysis suggests that the big change in the last four years is in the capital outlay for the Indian Navy, with the FY24 figure having doubled in absolute terms since FY20.
By connecting these dots over the last five years, a clearer picture emerges. The government seems to firmly believe that China can be handled without a rapid rise in defence expenditure. The latest budget serves as a bellwether indicator for this claim. It was the first budget of the post-pandemic period, at a time when the economic prospects for India have improved considerably. The government achieved better than expected buoyancy in both income taxes and Goods and Services Tax in the current financial year, and the cooling of global fertiliser prices led to a decline in the projected subsidy bill. Consequently, the government, for the first time in many years, had some fiscal room to play with. It used that space to increase the overall capital outlay to ₹10 lakh crore, almost three times the outlay in 2019-20. Despite this increase, the defence budget resembles the middle overs of a one-day cricket match.
From a financial savings perspective, there have been just two important changes over this period in the defence domain. The first was the announcement of the Agnipath scheme. It might reduce the pension burden, but these savings will reflect only after a decade-and-a-half. Other proposals, such as theatre commands, haven’t come to fruition yet. The proposal to create a non-lapsable fund for modernisation — a proposal the Union government gave an in-principle nod to way back in February 2021, still hasn’t found a mention in the latest budget.
Probably, the defence budget is a wrong place to infer India’s strategic posture against China. Perhaps, the government considers other tools of statecraft — diplomatic, economic, or non-conventional — more suitable for the purpose. This point needs deeper reflection. Many parliamentary standing committees and defence organisations have argued that defence expenditure should be raised to 3% of GDP. If anything, the change is in the opposite direction. We hope that the government is investing heavily in sharpening other tools at its disposal to counter the China threat.
Pranay Kotasthane is chairperson, high tech geopolitics programme, Takshashila Institution The views expressed are personal.
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