Wednesday, February 25, 2015

Defence Budget 2015-16: Urgent Action is needed to Boost Modernisation

Brig Gurmeet Kanwal, 
Visiting Fellow, VIF

While inaugurating the biennial air show Aero-India 2015 at Bengaluru on February 18th, 2015, Prime Minister Narendra Modi said India did not like being labelled the world’s largest importer of weapons systems. With less than ten days left for the presentation of the NDA government’s second budget, the Prime Minister said in the era of shrinking defence budgets, India could become a global manufacturing and export hub for arms and defence equipment. Is that statement indicative of the shape of the defence budget to be presented to Parliament shortly?

The Prime Minister invited defence MNCs to join hands with Indian public and private sector companies to “Make in India” and reiterated the government’s willingness to allow FDI in defence beyond the stipulated 49 per cent for projects involving the transfer of cutting-edge technologies. He pointed out that reduction in dependence on defence imports from 70 to 40 per cent in five years would create 100,000 to 120,000 highly skilled jobs, boost investment, reduce costs and lead to the upgradation of India’s manufacturing and system integration skills. In short, a gradual shift in the defence acquisition policy to manufacturing in India will provide huge economic benefits,

In the budget for Financial Year (FY) 2014-15 presented in July 2014, Finance Minister Arun Jaitley had increased the allocation for defence by 12.5 per cent over the amount allotted for FY 2013-14. The Minister had hiked the outlay on defence expenditure from Rs 2,03,672 crore (Revised Estimates – RE) in (FY) 2013-14 to Rs 2,29,000 crore (Budgetary Estimates – BE) for FY 2014-15. The defence budget now stands at a low 1.74 per cent of India’s projected GDP for FY 2014-15 and accounts for 12.75 per cent of the country’s total government expenditure.

While presenting the budget, the Finance Minister had said, “Modernisation of the armed forces is critical to enable them to play their role effectively in the defence of India's strategic interests.” However, the increase of Rs 25,328 crore in the allocation – partially neutralised by the high annual inflation rate that still hovers between six and seven per cent, the steep fall in the value of the Rupee against the US Dollar vis-à-vis the traditional rise in the global prices of arms – was insufficient to give a major boost to the military modernisation that is necessary to meet the emerging threats and challenges.

The total revenue expenditure planned for the year 2014-15 was Rs 1,34,412 crore (approximately 60.00 per cent of the budget). This goes towards paying salaries and allowances and expenditure on rations, ammunition and transportation. The remaining amount of Rs 94,588 crore (40.00 per cent of the budget) was allotted on the capital account for the acquisition of modern weapon systems and equipment. Various consultancy firms have estimated that India will spend approximately US$ 100 billion over the 12th (2012-17) and 13th (2017-22) five-year defence plans on military modernisation.

The army has begun the raising of 17 Corps, designated as a mountain strike corps, which is expected to cost Rs 64,000 crore over seven years. Major acquisitions of weapons platforms that have been pending for long include initial payments for 126 multi-mission, medium-range combat aircraft (MMRCA), 197 light helicopters, 145 Ultra-light Howitzers, 15 Apache attack helicopters and 22 CH-47F Chinook medium lift helicopters, C-17 heavy-lift aircraft and frigates and submarines. The armed forces must also upgrade their command and control systems and substantially improve their intelligence, surveillance and target acquisition capabilities if they are to become proficient in launching effects-based operations in a network-centric environment riddled with threats to cyber security.

In a letter that he wrote as the COAS to Prime Minister Manmohan Singh in March 2012, General V K Singh, now MoS, External Affairs, had pointed out the ‘critical hollowness’ in defence preparedness. Ever since the Kargil conflict in 1999, when 50,000 rounds of Bofors medium artillery ammunition had to be imported in a hurry from South Africa, the ammunition holdings of the army have been reported to be too low to fight and win a sustained war. Many other deficiencies in the holdings of important items of weapons and equipment need to be made up.

While China has been engaged in rapidly implementing new rail, road and airfield projects in Tibet so as to reduce the deployment timings of the People’s Liberation Army (PLA) and enhance operational logistics, India’s development of infrastructure along the border with China has made relatively little progress. As many as 14 strategic rail projects have been pending due to resource constraints. These shortcomings need to be made up quickly to avoid military embarrassment in a future conflict.

The announcement made in the budget speech to raise the ceiling for FDI in joint ventures (JVs) for the manufacture of weapons and defence equipment from 26 to 49 per cent had fallen far short of the expectations of the defence MNCs. They would have preferred to have majority stake of at least 51 per cent. That would have made investment in defence manufacture in India worthwhile for them.
The Department of Industrial Policy and Promotion (DIPP) had proposed an increase in the FDI limit in the defence sector from 26 per cent to 49 per cent without transfer of technology (ToT), up to 74 per cent with ToT, both with FIPB approval, and up to 100 per cent in the case of the transfer of state-of-the-art technologies with prior approval of the Union Cabinet. However, the Ministry of Defence (MoD), the defence PSUs (DPSUs) and CII and FICCI, the two powerful of chambers of commerce, had expressed their reservations against giving controlling interest to the MNCs.

The Finance Minister had earmarked Rs 1,000 crore for OROP (one rank, one pension). The veterans’ associations were not convinced that the allocation of a token amount like Rs 1,000 crore over the full financial year was indicative of good intentions when the actual expenditure was likely to be almost Rs 10,000 crore. As for the government’s intention to build a national war memorial at Prince’s Park near India Gate at New Delhi, the three Services have for long sought a war memorial at India Gate and not near it and are disappointed with the decision.


Published Date: 25th February 2015, Image source: http://i.ytimg.com
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

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