Finan ce Minister Arun Jaitley started the budget speech by reiterating the Government’s past achievements and announcing new proposals for agriculture and rural economy; health, education and social protection; MSMEs and employment; infrastructure and financial sector development; building institutions and improving public service delivery, etc. All this under the Centre Heading of ‘Governance, Economy and Development’. This was on anticipated lines due to the elections coming up in many states during this year. India’s annual budget becomes more of the Government’s arithmetical exercise on its revenue and expenditure with political overtones.

Defence Budget

Union Budget for the financial year 2018-19, presented by the Finance Minister Arun Jaitley in the Parliament envisaged a total outlay of 24,42,213 crore. Out of this, 2,95,511.41 crore has been earmarked for Defence which accounts for 12.10 per cent of the total Central Government expenditure for the year 2018-19. This allocation represents a growth of 7.81 per cent over Budget Estimates (2,74,114.12 crore) and 5.91 per cent over Revised Estimates (2,79,003.85 crore), respectively for the financial year 2017-18. However it is 1.58 per cent of GDP and lowest since 1962.

Revenue and Capital Allocations. Out of 2,95,511.41 crore allocated for the financial year 2018-19, 1,95,947.55 crore has been allocated for Revenue (Net) expenditure and 99,563.86 crore for Capital expenditure for the Defence Services and the Organisations/Departments under Ministry of Defence.

Capital Allocation. The amount of 99,563.86 crore, allocated for Capital expenditure, includes modernisation related expenditure. The Capital allocation for Ministry of Defence under Budget Estimates (BE) 2018-19 is 33.1 per cent of the total Central Government Expenditure on Capital Account, which is 3,00,441 crore.

RM’s Advisory Committee on Ministry of Defence Capital Projects

The Raksha Mantri Nirmala Sitharaman has constituted a 13 member Raksha Mantri’s Advisory Committee on Ministry of Defence (MoD) Capital Projects (RMCOMP). The decision has been taken to expedite capital acquisitions to bolster armed forces preparedness. The Committee is chaired by Shri Vinay Sheel Oberoi, Former Secretary, Government of India. The other members are retired senior officers from Defence PSUs, OFB, DRDO and the three services. There are two members from outside the Government that is one from Ernst & Young and the other Aerospace & Defence-KPMG. There are also serving members from HQIDS and representative of DDP (JS Rank or Above). The Committee is required to submit their report by August this year. It is not clear as what this Committee will accomplish which was not possible from the serving officers of the Government.

Defence Pensions. For Defence Pension, which is over and above the outlay mentioned above, an amount of 1,08,853.30 crore has been provided in BE 2018-19. This is 26.60 per cent above the BE 2017-18 of 85,740 crore and 14.26 per cent over RE 2017-18 of 95,000 crore.

Border Infrastructure

Arun Jaitley declared the government was focusing on developing connectivity infrastructure in border areas to secure the country’s defences. “Rohtang tunnel has been completed to provide all weather connectivity to the Ladakh region. Contract for construction of Zozila Pass tunnel of more than 14 kilometer is progressing well. I now propose to take up construction of tunnel under Sela Pass (in Arunachal Pradesh),” he said. The approval for the construction of Sela pass will give further impetus to the Defence preparedness. Under Capital Outlay on Infrastructure: Works executed by Border Roads Development Board during Revised Estimates( RE) 2,708 crore was allocated and in the BE of the current Budget 2,785 crore has been allocated.

Promotion of Defence Production

Arun Jaitley stated that, “ever since the NDA Government has assumed office in 2014, lot of emphasis has been given to modernising and enhancing the operational capability of the Defence Forces. A number of initiatives have been taken to develop and nurture intrinsic defence production capability to make the Nation self-reliant for meeting our defence needs. Ensuring adequate budgetary support will be our priority. We have opened up private investment in defence production including liberalizing foreign direct investment. We will take measures to develop two defence industrial production corridors in the country. The Government will also bring out an industry friendly Defence Production Policy 2018 to promote domestic production by public sector, private sector and MSMEs. He announced the following steps for promotion of Defence Production:

• Measures to develop two Defence Industrial Corridors in the country.
• Bringing out an industry friendly Defence Production Policy 2018 to promote domestic production by public sector, private sector and MSMEs.

Thanking the Finance Minister on these path-breaking announcements, Defence Minister Nirmala Sitharaman, said, “These are the first ever Defence Production Corridors being formed in the country. These Defence Industry Corridors will give a big boost to defence production in the country.” She added that “the announcement by Shri Jaitley has paved the way for setting up the first Defence Production Corridor in Tamil Nadu. This shall provide impetus to the defence production industry in the country and in the region, in particular.”

The RM has constituted a 13 member Raksha Mantri’s Advisory Committee on Ministry of Defence Capital Projects (RMCOMP). The decision has been taken to expedite capital acquisitions to bolster armed forces preparedness.

The Department of Defence Production had recently conducted a major Defence Industries Development Meet in Chennai in January 2018 with huge participation from defence industries, including MSME from Chennai, Mysore, Coimbatore, Salem, Tiruchirappalli and from other states as well. The meet highlighted the prevailing ecosystem, albeit scattered, conducive for Defence Production in Tamil Nadu.

Number Crunching

MoD. Total allotment is 16,206.09 crore which is marginally up from 16,000.0 crore from the RE of last year which includes revenue/capital expenditure of various departments which come directly under the MoD like Secretariat General Services, Border Road Development Secretariat, India Coast Guard (ICG), Defence Estates Organisation, Jammu and Kashmir Light Infantry, etc. The Hindustan Shipyard Limited has also been given interest subsidy of 4.84 crore.

Revenue Budget

The total BE allocation is 2,05,018.34 crore which is more than the RE of 1,95,989.66 crore of 2017-18. Details are:

• Army. A total allocation of 1,30,785.84 crore is shown as BE which includes other revenue expenditure like pay and allowances and miscellaneous expenses of auxiliary forces, civilians, transportation, stores, works, etc. This is up 1,25,127.14 crore from the RE of last year.
• Navy. A total of 20,208.40 crore is shown which includes other revenue expenditure and is up from the RE of 19,515.44 crore of last year.
• Air Force. A total of 30116.87 crore has been allocated which includes other revenue expenditure and is up from the RE of 28505.40 in 2017-18.
• Indian Coast Guard (ICG). 2091.42 crore for revenue and 2700 crore for capital expenses have been allocated as compared to 2148.97 crore for revenue and 2200 crore for capital expenditure was shown in the revised estimates of 2017-18.

Capital Budget

Capital allocation under this head is meant for all modernisation schemes and 93,982.13 crore (about $14.7 billion) has been allocated as compared to 86,488.01 crore (about $13.5 billion) allocated in the RE of 2017-18. Raksha Rajya Mantri Dr Subhash Bhamre in a written reply to Bhubaneswar Kalitain in Rajya Sabha on February 5 stated that, “an amount of 69,405.75 crore was allocated for Modernisation (Capital Acquisition) under DSE in Budget Estimate 2017-18. Till December 31, 2017, the expenditure under modernisation is 61,002.97 crore. This implies that the capital budget for 2017-18 was pruned down by about 17,000 crore which is bound to effect modernisation. He also mentioned that an amount of 61,002.97 crore has been spent till December 31, 2017, for Modernisation (Capital Acquisition) under DSE, 2017-18. It is contradictory as in Demand Number 21 (Notes on Demands for Grants, 2018-2019) the figure given for RE for 2017-2018 is 86,488.01 crore.

The current alocation is 33.1 per cent of the total Central Government Expenditure on Capital Account. Capital head covers committed liabilities and the remaining is for the new schemes. Out of this, 83,292.62 crore is specifically for the three services. This allocation includes weapons, warlike platforms, land, construction works, Rashtriya Rifles, NCC, Naval Fleet, Naval Dock Yards, Joint Staff, Special projects and procurement of Rolling Stock. It is not known as to how much will be pruned down from this allocation.

Army. A total of 2,66,288 crore has been allotted in BE for aircrafts and aero engines, heavy and medium vehicles, other equipment, Rashtriya Rifles, NCC, land works, etc. This is marginally up from 25,205.71 crore allotted last year in the RE.

Air Force. A total of 35,755.62 crore have been allocated which includes land, construction works, aircraft and aero engines, heavy and medium vehicles, other equipment and special projects. This is marginally up from 33,555.62 crore allotted last year in the RE.

Navy. The overall allocation for the capital budget is 20,848.62 crore which is marginally up from last year’s RE of 19,348.16 crore (which actually was pruned down to 18,327.64 last year) and the Navy has been able to spend 13,970.44 till December 31, 2017. Thus the amount of about 4,400 crore will possibly be surrendered. This current allocation includes sub allocation for land (70.71 crore), for construction works (850 crore), for aircrafts and aero engines (1900 crore which is much less when compared to revised estimates of 3,046.56 crores for 2016-17), Heavy and Medium Vehicles (30.95 crore), other equipment (2,298.80 crore), for Naval Fleet (10,300.00 crore which is up from revised estimates of last year of 9,222.70 crore) and Naval Dockyard/projects – 2,000.00 crore which is marginally down from last year’s revised estimates of 2,002.49 crore.

Analysis of Navy’s Capital Budget

The total capital budget for modernisation (aircraft and aero-engines; heavy and medium vehicles; other equipment and naval fleet) comes to 17,083.00 crore. Naval Dockyards which repair the naval ships have a separate budget of 2,000 crore. The modernisation allocation is required for the following projects:

Indigenous Aircraft Carrier Programme. Construction of prestigious 37,500 tons Indigenous Aircraft Carrier (IAC-1) is on track and is likely to be commissioned by 2020. IAC-2 is also in the pipeline and named INS Vishal.

Project 17A. This project is a follow up of Project 17 and comprises of seven stealth frigates with advanced features and technology upgrades. The construction load will be shared between the Mazagon Dock Shipbuilders Limited (MDL) for four ships and the Garden Reach Shipbuilders & Engineers (GRSE) Limited for three ships.

Project 15B. The Government has also approved an additional four stealth ships of the Guided Missile Destroyer class, designated as Project 15B and to be constructed at MDL. The total cost is about 30000 crore (about $4.7billion).

Mine Countermeasures Vessel. The Defence Acquisition Committee had cleared nomination of GSL for construction of 12 MCMV vessels in February 2015 in collaboration with South Korea’s Kangnam Corporation at a cost of about $5billion. During January 8, 2018, the Indian Government cancelled the tender due to differences in pricing and mode of transfer of technology. It is understood that the acquisition process will start again. Indian Navy needs 24 of these vessels.

Amphibious Capability. With the induction of the Landing Platform Dock (LPD) Jalashwa, IN has considerably augmented its amphibious capability. Together with the five Landing Ship Tanks (Large), a sealift capability for over 3500 troops and a squadron of armour now exists. To augment its amphibious lift capability, Navy plans to acquire larger amphibious ships of the LPD type. The case for four Multi-Role Landing Platform Docks is being progressed with two private shipyards - M/s L&T and M/s Reliance Naval and Engineering Ltd.

Fleet Tanker. During 2008 a fleet tanker was ordered from Italian Shipbuilder Fincanterri which had a follow-on option of up to three tankers. IN has now exercised this option for one follow on ship.

Scorpene Project 75. The first project under the perspective plan was Project 75, Scorpene for indigenous construction of six conventional stealth submarines under transfer of technology arrangements with DCNS (now Naval Group), France. The first submarine INS Kalvari has been commissioned during December 2017 by Narendra Modi on December 14, 2017. As per available reports the delivery of the remaining five boats are expected by 2021.

Project 75 (India). Project 75 (India) is a sequel to Scorpene Project 75 to boost the ethos of self-reliance through indigenisation practiced by Indian Navy which was lying dormant for some time. The Government has recently promulgated Global RFI to six leading shipbuilder. The submarines are to be built at an estimated 70,000 crore ($10.9 billion) in collaboration with an Indian shipyard.

Nuclear Submarines. India needs at least six nuclear powered attack submarines (SSN) and at least four nuclear powered submarines with nuclear-tipped missiles (SSBN) for strategic deterrence. In February 2015, Government of India approved the construction of six nuclear-powered SSNs.

Naval Aircrafts and Helicopters

Multi-Role Carrier Borne Fighters (MRCBF). Considering the doubtful suitability of Tejas for MRCBF, the Navy has begun a search for a MRCBF for IAC-1 and its follow up carrier.

Amphibious aircraft. The Navy had identified Japanese amphibious aircraft ShinMaywa US-2 and wanted to procure 12 multi-role aircraft under a government to government deal between 2017 and 2022 however there has not been any progress.

Helicopters. Acceptance of Necessity for the procurement of 111 NUH worth 21,738 crore ($3.2 billion) has been recently accorded by the Defence Acquisition Council under the Strategic Partnership model to give a major boost to indigenous defence manufacturing capabilities in the country.

With about 80 per cent of the capital allocation going for past commitments, it is clear that in spite of the Government having the will, there is a dearth of funds for modernisation

Naval Multi-Role Helicopters. Indian Navy plans to acquire 123 Naval Multi-Role Helicopters (NMRH) to be used as ship borne flights of two helicopters each for its frontline destroyers and frigates to form integral air for critical operations out at sea. India had signed an agreement with Russia to build Kamov 226 light utility helicopters under the government’s ‘Make in India’ mission. HAL has already started the construction of a separate helicopter manufacturing plant near Tumakuru, around 70 km from Bengaluru. Prime Minister Narendra Modi had unveiled a plaque for the foundation stone on January 3, 2016. This facility will be utilized for the manufacture of all defence utility helicopters.

Naval UAVs. Indian Navy is keen to buy tactical UAVs, high-altitude long-endurance (HALE) UAVs, vertical take-off and landing (VTOL) UAVs, and medium-altitude, longendurance (MALE) UAVs to augment the surveillance of the long coast line of India and in the Indian Ocean region.

Current status of construction in Indian Ship yards. There are about 34 ships under construction in the Indian shipyards and all need funds for construction. Some may have been mentioned above.

ICG. The ICG currently operates about 130 surface vessels, including 60 ships which are offshore patrol vessels, fast patrol vessels and pollution-control vessels. It has another 18 hovercrafts and 52 small interceptor boats/crafts. It possesses 39 Dornier maritime surveillance aircraft, 19 Chetak helicopters and four Dhruv choppers.

It has been allocated 2,700 crore which is more than 2,200 crore allotted in the revised estimates of 2017-18. The amount is allocated for the acquisition of ships like advanced offshore patrol vessels, inshore patrol vessels, fast patrol vessels, helicopters, aircraft, etc. to bolster their coastal security capability. It was reported last year that the Government had approved a 31,748 crore “definitive five-year action programme” to modernise the ICG on August 17, 2017. Sources said the newly approved action plan is aimed at bolstering the CG into a 175-ship and 110-aircraft force by 2022. With this allotment it will remain only a wish list.

Conclusion

With about 80 per cent of the capital allocation going for past commitments, it is clear that in spite of the Government having the will, there is a dearth of funds for modernisation. After the implementation of the Seventh Pay Commission, a major chunks of the funds go into the revenue budget. This and the next year can be called the ‘election years’ and thus there are all chances of a further indirect squeeze in the capital allocation by slowing down the acquisition process. These funds will then go to those schemes which will fetch votes. We can now only look forward to the Budget of 2020.