The much awaited India’s Union Budget 2014-15 was announced in the Parliament on July 10 by the Finance Minister (also holds the charge of Defence) by Arun Jaitley. There was a lot of excitement and expectation before the budget as it was the first budget of a non-Congress Government after a decade. The Finance Minister made his intentions clear by focusing on boosting of growth, cutting inflation, reduce fiscal deficit and consolidate fiscal health. He dwelt at length on fiscal deficit by stating that, “My predecessor has set up a very difficult task of reducing fiscal deficit to 4.1 per cent of the GDP in the current year. Difficult, as it may appear, I have decided to accept this target as a challenge.” There are not many changes from the defence portion of the Interim Budget which are being highlighted.

Allocation

The Finance Minister said that “there can be no compromise with the defence of our country. I therefore propose to allocate an amount of 2,29,000 crore (about $38.16 billion) for the current financial year for defence.” Thus there is an increase of 5,000 crore (about $0.8 billion and 12.5 per cent) in the capital budget for modernisation which includes 1,000 crore (about $0.16 billion) for accelerating the development of the railway system in the border areas. He also mentioned that urgent steps would also be taken to streamline the procurement process to make it speedy and more efficient.

One Rank One Pension. Jaitley stated that “We reaffirm our commitment to our brave soldiers. A policy of “One Rank One Pension (OROP)” has been adopted by the Government to address the pension disparities. We propose to set aside a further sum of 1,000 crore (about $0.16 billion) to meet this year’s requirement.

War Memorial. This was long awaited aspirations of the defence forces and in this context Jaitley mentioned that “the country is deeply indebted to the officers and the jawans of the armed forces for having made huge sacrifices to defend its honour. In doing so a very large number of them gave up their lives. It is a privilege for the nation to erect a befitting memorial in their memory. I am happy to announce that a War Memorial will be constructed in the Princes Park. It will be supplemented by a War Museum. I am allocating a sum of 100 crore for this purpose.”

Defence Production. Jaitley stated that, “in the year 2011 a separate fund was announced to provide necessary resources to public and private sector companies, including SMEs, as well as academic and scientific institutions to support research and development of defence systems that enhance cutting-edge technology capability in the country. However, beyond the announcement, no action was taken. Therefore, I propose to set aside an initial sum of 100 crore to set up a Technology Development Fund to support this objective.”

Foreign direct investment (FDI). The majority opinion was that there is a requirement to increase the FDI in defence from the current 26 per cent (increase was to be allowed case by case basis). The suggested increase varied from 49 per cent to 100 per cent. Many private companies who are involved in defence manufacture appeared not to be in favour of the increase. Jaitley mentioned that, “the policy of the NDA Government is to promote FDI selectively in sectors where it helps the larger interest of the Indian economy. India today is the largest buyer of defence equipment in the world. Our domestic manufacturing capacities are still at a nascent stage. We are buying substantial part of our defence requirements directly from foreign players. Companies controlled by foreign governments and foreign private sector are supplying our defence requirements to us at a considerable outflow of foreign exchange. Currently we permit 26 per cent FDI in Defence manufacturing. The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route.”

Number crunching

Revenue Budget (figures in brackets pertain to the interim budget)
Army. Army’s revenue allocation also includes allotment for Rashtriya Rifles, National Cadet Corps, Military Farms, Ex-Servicemen Contributory Health Scheme and other revenue expenditure. The overall allotment is 92,669.32 crore ( 92,601.32 crore), a marginal increase.

Navy. Navy also includes repairs and refits and there is no change in the already allotted sum of 13,975.79 crore.

Air Force. Air Force also includes special projects and there is no change in the already sum of 20,506.84 crore.

Indian Coast Guard. There is no change in the already allotted sum of 1,130.26 crore.

There is normally a marginal upward trend in the revenue allotment due to dearness allowance and other factors. Navy will have a problem as additional funds will be required for repairing the ships and submarines which were damaged during accidents.

Capital Budget (figures in brackets pertain to the allocation in the interim budget).
The capital budget includes funds for land and construction, capital requirement of other organisations like ECHS, NCC, DRDO, Naval Fleet, Naval Dock Yards etc, apart from modernisation of the armed forces. Capital allotment for the Coast Guard is given separately under Ministry of Defence -Demand No. 20 (which normally covers revenue budget).The total allotment is 94,587.95 crore ( 89,587.95 crore) an increase of 5,000 crore as already mentioned.

Army. For aircraft and aero engines no change in the already allotted sum of 2,127.99 crore; for heavy and medium vehicles 2,692.16 crore (2,128.16 crore) –an increase of 564 crore and for other equipment- 15,591.93 crore ( 16,155.93 crore) – a marginal decrease of 564 crore which has been adjusted with the increase for heavy and medium vehicles.

Navy. For aircraft and aero engines no change from the already allotted sum of 3,330.69 crore; for heavy and medium vehicles no change in 34.27 crore already allotted; for other equipment- no change in the allotted sum of 4,358.10 crore; for Naval Fleet 12,576.06 crore (12,856.06 crore), a marginal decrease and for Naval Dock Yards no change in the already allotted sum of 1,612.87 crore.

Air Force. For aircraft and aero engines no change in the already allotted sum of 16,271.43 crore; for heavy and medium vehicles no change from the already allotted sum of 194.29 crore; and for other equipment no change from the allotted sum of 15,352.17 crore.

Coast Guard. No change in the already allotted sum of 1550 crore.

Prototype Development under Make Procedure. No change from 35.71 crore.

Brief Analysis

There is only cosmetic increase in the modernisation allocation as the interim budget had already allotted funds to the extent possible. The new Government had to symbolically indicate their inclination towards increasing the defence preparation. In any case five months have already been lost (from February) due to the change of government and there is hardly any scope to launch new programmes in the remaining financial year. Picture of defence cooperation with the United States will emerge after the visit of the Prime Minister to the United states in September.

Army. Major requirements of the Army are helicopters for the Army Aviation Corps, variants of the 155mm gun, anti tank missiles; and guns and missiles for Army Air Defence. There could be scope for progressing some of these requirements.

Air Force. There is a drop by about 9,000 crore in the allocation for aircraft and aero engines from last year and all indications are that no big ticket projects may go through this year.

Navy. The allocation under aircraft and aero engines has been reduced by almost 50 per cent from last year that means ruling out any new acquisitions like 16 Multi-role Helicopters (as an interim measure) and amphibian aircraft. US Sikorsky S-70B and European NH-90 were tried out earlier but final decision is still pending. The ShinMaywa US-2 amphibian was a strong contender but it is also hanging fire. The allotted funds may be used for past deals like MiG-29K carrier-based fighter jets of Russian origin. The allocation for the Naval fleet is used for acquiring new ships and payment of past liabilities. There is a marginal increase in the allocation but considering that about 45 ships and submarines are under construction in the Indian ship yards, there is a requirement for additional requirement. The capital allocation for the Naval dockyards is for modernisation of the infrastructure which is required if they have to perform more efficiently and match the international standards.

Coast Guard. Considering the Coast Guard’s key role in the coastal security structure, they have to be allotted adequate funds to enlarge their organizational infrastructure; for acquiring additional ships, fast boats, helicopters and aircrafts.

Conclusion

There are many new aspects like increase in FDI and encouraging technical development by allotting 100 crore. This is too meager a sum for Rand D by public and private sector companies, including SMEs, as well as academic and scientific institutions to support research and development of defence systems that enhance cutting-edge technology in defence thus would need enhancement. Also the danger of duplication with the Defence Reserch and Development Organisation (DRDO) is there thus should be synergized with them. The other measures which concern the respect and the well being of defence personnel like allocation of funds for the war memorial and OROP which are very encouraging but additional funds will be required specially for OROP as conservative estimates are that it may require more than the allotted amount. The limited time remaining in the financial year will only allow clearing past payments and consolidation. The trend of the Defence Budget indicates the noble intentions of the Government towards defence preparedness and the well being of the defence personnel.