Economic Situation To Weigh Heavily On Resource Allocation Decisions

When Finance Minister Nirmala Sitharaman presents her maiden Budget on July 5, the Indian strategic community will keenly watch her announcement on defence allocation. Will she be generous to them by providing a hefty hike in the defence budget or stick to a tiny or moderate growth to cater to the competing demands from other sectors? In any case, the difficult situations that the economy is presently going through will weigh heavily on her resource allocation decisions.

The defence establishment, by virtue of its large size and modernisation needs to counter a two-front security threat, has always been a big stakeholder in the Union Budget. With an allocation of Rs 4,04,365 crore in 2018-19, the Ministry of Defence's total allocation accounts for about 17 per cent of the central government expenditure, though in terms of its share in GDP, it is a little more than two per cent. A 10 per cent hike in the previous budget will result in an additional amount of about Rs 40,400 crore, which may seem reasonable to many, but in reality is grossly insufficient to meet the huge shortages that the defence establishment is presently facing. In 2018-19, three armed forces alone had projected a shortfall of more than Rs 1,12,000 crore. To add the shortfalls of other entities such as the Defence Research and Development Organisation, and Coast Guard, the amount is much larger.

Those who know the budget-making process, and the competing pulls and pressures behind it, would know for certain that the mammoth shortfall is unlikely to be eliminated in the upcoming union budget. Any effort to bridge a part of that shortfall which is reasonable and takes into account the inflationary pressure, exchange rate fluctuations and the past contractual liability will, therefore, be welcome. A particular attention would be on how much additional amount the finance minister would allocate to the last year's defence acquisition budget of Rs 74,116 crore. That will decide the pace of the ongoing procurement projects including those being planned or executed under the 'Make in India' regime. Both the foreign and domestic suppliers will keenly watch this particular segment of the defence budget.

Since a hefty hike in the Ministry of Defence's budget to eliminate all the immediate shortages is unlikely, all eyes would be on what the finance minister would announce to bridge the gap in the long run. Being the former defence minister, the finance minister is in a unique position of knowing better the urgency of certain defence reforms to enable the defence establishment to get a bigger bang for the buck.

It is no secret that the defence establishment is currently overwhelmingly manpower-heavy, with about 60 per cent of the ministry's budget being consumed in the form of salary and pensions. Hard reforms are the need of the hour to shift the focus of the budget towards equipment to better arm the forces to fight the modern war.

It is also not a secret that the defence establishment is sitting on a vast amount of assets which could be better optimised or monetised so as to lessen the pressure on budgetary resources. The finance minister could announce a set of measures to expedite the disinvestment process of all the state-owned and -controlled industrial entities, including those run by the armed forces, which will not only lead to resource generation but will pave the way for their improved functioning. The finance minister could also announce measures for better utilisation of 1.73 million acres of defence land, a significant amount of which is unused, underused or misused, as brought out by the various oversight agencies.

Last but not the least, much expectations from the finance minister would be on the 'Make in India' front. While at the helm of the Ministry of Defence, Ms Sitharaman was in the thick of the action in the launch of several schemes, including two defence industrial corridors, for promoting indigenous arms manufacturing. Her presence on the other side of Raisina Hill will now be equally important to support those schemes. The defence industry, particularly the private companies, would expect the finance minister to be sympathetic to their long-held demands for granting their investment on plants and machinery the infrastructure status, and their certain supplies the deemed export status, to make them competitive vis-a-vis foreign suppliers.

(Dr Laxman Kumar Behera is Research Fellow at Institute for Defence Studies and Analyses)

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