Soldiers on T-90 (Bhisma) tanks march along Rajpath, Republic Day Parade, New Delhi, January 26, 2021 (AFP)
Soldiers on T-90 (Bhisma) tanks march along Rajpath, Republic Day Parade, New Delhi, January 26, 2021 (AFP)

Does the budget meet India’s defence requirements?

The key lesson from the budget is that sudden increases in defence spending are unlikely in the post-pandemic recovery phase. Military planning for the future needs major doctrinal shifts to counter the threat posed by China and Pakistan. Hopes of a quantum jump in defence expenditure should be laid to rest.
By Pranay Kotasthane
UPDATED ON FEB 04, 2021 06:24 AM IST

Until 2019, defence spending made headlines around just two events in a year. The first was when the Union budget was tabled in Parliament, and the second was when the Swedish thinktank, SIPRI, released its formidable comparative military expenditure report.

That scenario changed in FY 2020-21. China’s incursions in Ladakh highlighted the urgent and long-term need to prioritise defence. It brought home the point that the central focus of military planning should be China, not Pakistan. This need for prioritisation came even as the pandemic caused a drop in both economic activity and government revenue. Given this backdrop, the government had a challenging task on its hands. There are four key takeaways from the Union Budget 2021-22 for defence.

One, despite the China challenge, there seems to be no proportional increase in the priority accorded to defence spending. Although defence minister Rajnath Singh was quick to thank the Prime Minister and Finance Minister for increasing the defence budget to 4.78 lakh crores, the reality is less encouraging. This number represents a mere 7,000 crore increase over the FY 2020-21 budget number. Moreover, if we account for the revised spending estimate of FY 2020-21, defence spending is set to reduce by 1.35%.

Two, the capital outlay on defence services, of which defence modernisation expenditure is a part, doesn’t seem to have factored in the urgency either. While the defence minister highlighted that capital expenditure of 1.35 lakh crore was an increase of 19% over the last budget, the situation is less reassuring when one looks at the fine print. The government ended up spending nearly 0.21 lakh crore more on capital outlay in FY 2020-21 than it had initially planned. In FY 2021-22, it merely seeks to continue spending at the same levels.

This increase would still be good news if the higher spending was on account of new schemes, but that doesn’t seem to be the case. The largest component of the increase in capital expenditure (nearly 40%) is on the line item “other equipment—Air Force”. It is unclear whether this is for new acquisitions or for meeting committed liabilities since budget documents do not make this distinction. This issue is crucial because the Standing Committee on Defence, in 2019, had observed that the budget allocation for modernisation covering both committed liabilities and new schemes did not meet committed liabilities itself. It is likely that the higher capital outlay is on account of payments for committed liabilities such as the payments for equipment purchased before recent events on the Ladakh border.

Three, the budget allocated for defence pensions is lower by nearly 0.18 lakh crore compared to the FY 2020-21 budget. Pension expenditure cannot fall by 13% without a decrease in the number of retirees or a reduction in each retiree’s amount. While reducing pension expenditure over the long-term is an important goal, going back on existing commitments made to retirees would be counterproductive. It is likely that the government is trying to spread pension commitments over multiple years in light of the fiscal situation. Some reports suggest that this reduction reflects the government’s proposal to increase the retirement age of officers. However, this alone would still not explain the fall. It could also be that previous years’ payments included arrears that have been compensated for already.

Four, the defence ministry’s plan for raising revenue on its own is unclear. There was no mention of the sale of assets of ordnance factories, defence public sector units, or surplus defence land. The Fifteenth Finance Commission has recommended the creation of a non-lapsable fund for modernisation, a long-standing demand of the ministry. Whether the government will put this recommendation into action starting FY 2021-22 remains to be seen. Until then, the government plans to meet existing defence requirements by borrowing from the market.

The key lesson from the budget is that sudden increases in defence spending are unlikely in the post-pandemic recovery phase. Military planning for the future needs major doctrinal shifts to counter the threat posed by China and Pakistan. Hopes of a quantum jump in defence expenditure should be laid to rest.

Pranay Kotasthane is a researcher on strategic public finance at The Takshashila Institution, Bengaluru

The views expressed are personal

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