Money Falls Short

Modernisation of armed forces stalled because of fiscal pressure, global economic uncertainties

Gp Capt A.K. Sachdev (retd)Gp Capt. A.K. Sachdev (retd)

As it always is, the 2023 annual budget preparation exercise was one of walking the tightrope between fiscal forces, political pressures and geopolitical goading. This was the last full budget by this government before the general elections next year and it was expected that the budget would have a populist slant. It did provide relief to a large section of the middle class by raising the income tax exemption limit to Rs 7 lakh in the new regime, but its ingenuity lay in introducing several social welfare schemes that could garner votes in the 2024 general elections.

The defence budget, always a tug of war between geopolitics and fiscal compulsions, was expected to factor in several compulsions: minor skirmishes with China in the recent past and the need to build infrastructure along the borders and the Line of Actual Control (LAC), an impending international recession, the Supreme Court diktat to the central government to pay one rank one pension arrears in full to veterans who have been waiting for four years, the internal upheaval in Pakistan, the Russian-Ukraine war with its implications for Indian defence equipment replenishment, and the critical need to modernise the defence forces for multi-domain warfare with either or both our inimical neighbours. What does this year’s budget portend for aerospace and the defence sector, both of which are connected?

Finance minister Nirmala Sitharaman on the Budget Day
Finance minister Nirmala Sitharaman on the Budget Day


Pre-Budget Expectations

The first advance estimates of growth released by the government on 6 January 2023 projected that the economy would grow at 7 per cent in FY 2022-23, a rate marginally higher than the 6.8 per cent projected by the Reserve Bank of India. It was less than the 8.7 per cent growth in 2021-22. The final economic survey projected a GDP growth of 6 to 6.8 per cent ‘depending on the trajectory of economic and political developments globally.’ It retained the expected growth rate in real terms at 7 per cent, as contained in the advance estimates. The budgeting exercise was thus based on a modestly healthy outlook. So were expectations from it.

According to unattributed reports, all three services had demanded substantially more funds (than the previous budget) in their pre-budget presentations to the ministry of defence and these were duly forwarded to the ministry of finance. There was also a demand for a non-lapsable fund for modernisation programmes of the services. This has been a longstanding demand, perhaps further reinforced by the fact that Rs 2,369 crore of last year’s capital outlay remained unspent at the end of 2021-22. Private players were also wishful of a large increase in defence capital expenditure allocation so that some of the largesse could flow their way.

Given the rumblings with China in 2022 and the constant refrain of the defence services as well as the government about modernisation, some analysts had expected a hike in the defence budget to 3.5 per cent of the Gross Domestic Product (GDP). Their argument was that China’s defence expenditure is more than three times of India. However, these were lone voices and more of wishful thinking as previous defence budgets did not encourage such thoughts.

Another expectation from the budget was that with all the noises being made about aerospace and defence production indigenously, the budget would reflect the government’s vision of moving India’s aerospace and defence sector into prominence on the global scene. While framing of policies and exhortations for achieving this vision are important, budgetary allocations are even more so. This is especially so in view of the increasing stress on transfer of technology, which entail high acquisition costs.

Similarly, if Aatmanirbhar is to be pursued realistically, the need to develop leading edge technologies would require Indian research and development (R&D) competencies to be expanded to support a robust manufacturing ecosystem in aerospace and defence. There was also an expectation that the government would extend the lower corporate tax of 15 per cent to Maintenance, Repair and Overhaul (MRO) services as well. It was also hoped that the import of parts, tools and components for MRO activities of defence aircraft would be exempted from Goods and Service Tax (GST), as is done for civil aviation aircraft.

Another big expectation from the budget was that GST, which is a huge add on cost to defence acquisitions, would be exempted for the import of strategic and critical ingredients of defence equipment being produced indigenously. GST exemption was also hoped for import of material not available in India but required for aerospace and defence components.


Budget and Beyond

The finance minister’s budget speech sadly did not mention the word defence even once and the total defence allocation was Rs 5.94 lakh crore, around 1.98 per cent of the projected GDP. This figure was 13.18 per cent of the total budget and 13 per cent more than the 2022-23 allocation of Rs 5.25 lakh crore. However, considering that the official Wholesale Price Index based inflation rate was 11.5 per cent, according to the financial survey 2023, the 13 per cent increase is not impressive and does not reflect any urgency on the threat from China, modernisation etc. Moreover, if the last fiscal year’s revised estimates are considered (around Rs 5.85 crore) then the increase is a bare 1.36 per cent.

The defence revenue expenditure is dictated by undeniable costs and the allocation in this budget is around Rs 2.7 lakh crore. Some media reports highlighted the high allocation for defence pensions but failed to mention that a higher figure had been necessitated because of the government’s failure to pay pension dues since 1 July 2019, leading to arrears of four years.

The capital outlay is Rs 1.62 lakh crore. This is a 6.7 per cent increase over the previous year’s allocation of Rs 1.5 lakh crore but is lower than the inflation rate and that is bad news for the defence forces. This is so because the needs (not wants) of the defence forces are quite evident. The Indian Air Force is down to a combat squadron strength of 30 against a sanctioned strength of 42 and the Chief of Air Staff (CAS) is on record as saying that five to six squadrons of 4.5 generation combat aircraft are required urgently. The quest for 114 aircraft to raise six squadrons is lumbering at a snail’s pace and one of the factors behind this is budgetary allocation. Money is also required for the planned Su-30MKI upgrades and induction of the remaining four squadrons of the S-400 air defence missile systems (ADMS).

The Indian Navy’s requirements to counter the growing presence of an adventurist and belligerent maritime China also demand urgent and higher volumes of budgetary allocation. The navy needs fighters for its new aircraft carrier and is lagging behind in the induction of submarines. It hopes to sign a contract for six submarines under Project-75I and another for the acquisition of 27 Rafale-M (the marine version of the Rafale). The army, facing China in its new transgressive mood, needs light tanks and artillery guns in addition to its normal deployment. The modest increase in capital allocation does not match with the figures required to meet these needs.

R&D for technological innovation for defence forces has been given some (but not adequate) attention and an allocation of Rs 23,264 crore has been made to the Defence Research and Development Organisation (DRDO). In addition, the Innovations for Defence Excellence scheme has been allotted Rs 116 crore (a hike of 93 per cent over last year) and Rs 45 crore for Defence Testing Infrastructure Scheme, these figures are almost double of the previous year’s allocation and will contribute to technology development and support the domestic defence industrial ecosystem. However, given the fact that India is lagging behind the leading edge of many defence and aerospace technologies (aero engines, metallurgy, radars, avionics, stealth et al), the R&D allocation could have been more generous, and its beneficiaries could have included private entities under special arrangements. The fact that the increase is just around 9 per cent from the previous year is a cause for concern and is certainly not in sync with the constant harping on Make in India and Aatmanirbhar which, if they are to be consummated in aerospace and defence sectors, would need a huge increase in R&D endeavours and investment.

Infrastructure had been given importance in the defence budget with the Border Roads Organisation getting Rs 5,000 crore, up from Rs 3,500 crore the previous year. This is a recognition of the reality that China is investing hugely in building roads and villages along the Indian border areas and LAC. The Sela Tunnel, Nechipu Tunnel and Sela-Chhabrela Tunnel projects were specially mentioned in the defence budget press release and border connectivity is expected to get a boost from the additional allocation.

India is the third largest military spender globally after the US and China, according to Stockholm International Peace Research Institute. A target of Rs 5 lakh crore has been set for defence equipment exports by the government as also a turnover target of Rs 25 lakh crore in the defence sector by 2024. If these targets are to be pursued, investment would be required under infrastructure and capital heads. The 2023 budget is disappointing in this respect.

A view of Adani Defence & Aerospace stand at Aero India 2023
A view of Adani Defence & Aerospace stand at Aero India 2023

Modernisation Needs

Nearly five years ago, the Defence Planning Committee (DPC) was notified by ministry of defence and the National Security Adviser (NSA) was appointed as its chairperson. The NSA’s mandate included preparing drafts on national security strategy, strategic defence review and doctrines, improving defence manufacturing ecosystem and a concomitant defence plan.

A coherent, well contemplated national security strategy would have served to highlight the need for modernising defence forces and a defence plan would have made a strident claim for funds to do so. None of these documents have been produced. Possibly, a well contemplated national security strategy and a defence plan, reduced to writing in concise documents, may help to focus better on defence budgetary deliberations.

A proposal for earmarking 25 per cent of the R&D budget for the private sector has not fructified (no doubt due to the public sector lobby), while an initiative to establish a non-lapsable pool of funds to modernise the defence forces has remained stillborn.

Meanwhile, the residual effects of Covid-19, repercussions of the Ukraine war and future uncertainties of global economies have determined that, while defence priorities have probably been recognised, not enough has been given to the armed forces for meeting them. The fiscal pressure on the government is understandable but the disappointment with the defence budget cannot be wished away.

The modernisation of the defence services has been dragging on for years. For more than a decade, the services’ demands have not been met fully. All three services contextualise their stated needs against the new and emerging technologies available and the need to modernise to keep up with the neighbourhood. The phrase fourth industrial revolution dates back to 2015 and is commonly termed as ‘Industry 4.0’; it is the current concept of swift changes in technology and industrial patterns and processes due to the increasing interconnectivity and Artificial Intelligence (AI). Inherent to the concept is a host of breakthroughs in emerging technologies like AI, robotics, quantum computing, nanotechnology, biotechnology, the internet of things (and its sub-set, the industrial internet of things), fifth-generation wireless technologies, 3D printing, and fully autonomous vehicles, to name a few. These fruits of Industry 4.0 are available for the picking but there is a cost to enjoying their benefits. Nations that invest in these technologies will remain ahead of others who do not; the current budgetary allocation suggests India is destined to be in the latter group.

INS Vikrant
INS Vikrant

That brings us to another issue, that of Make in India and Aatmanirbhar, the two slogans that have become daily mantras for the government. One wishes that the establishment would give more attention to the technology needs and equipment of the defence forces and to imbibe them into indigenous industry than to regularly remind the public of the slogans. At the moment, the Aatmanirbhar tail is wagging the defence indigenisation dog. The danger is that in many areas of defence equipment and weaponry, the push for indigenisation is forcing the military to induct mediocre arms and equipment from inefficient, largely public sector, indigenous sources and pushing the nation into a military disadvantage vis a vis our two inimical neighbours.

Indian aerospace and defence exports are expected to be Rs 19,000 crore in 2023 and projected to reach Rs 25,000 crore by 2025. But all the exports are modest level equipment. The Light Combat Aircraft Tejas, which is going to be a good aircraft, is being marketed abroad but there is a question mark over when the Tejas will be available for sale to another country as our own requirements will lap up every Tejas the Hindustan Aeronautical Limited will produce for the next decade. India’s aspiration to become an international aerospace and defence hub should be predicated to leading edge technologies like a totally indigenous fifth generation fighter, for example. We have a long distance to go in that direction. Instead of setting aside a sizeable percentage of defence capital procurement for the domestic industry (the defence minister announced a 75 per cent figure during Aero India show 2023), what needs to be done is to leverage our defence imports (and the 114 fighters deal comes to mind again) to imbibe significant transfer of technology from nations and OEMs we enter into the final contract with. That would mean methodical infusion of hard money into the defence infrastructure, especially R&D at the leading edge. Clearly, some hard decisions are needed to be taken urgently.

Meanwhile, our defence forces, modestly modern in a majority of their equipment but regrettably bereft of leading edge technologies and weaponry in many significant areas, valiantly toil on using Plan B to attain and sustain an edge over our neighbours. One hopes that a war is not thrust upon India before we find the fiscal wherewithal and the national will to increase our defence budget.


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