India's 2021-22 Defence Budget Needs Honest Financial Reckoning, Not Empty Rhetoric

Indian army officers stand on vehicles displaying missiles during the Republic Day parade in New Delhi, India, January 26,

India’s military faces a massive financial predicament in the fiscal year 2021-22, as it remains locked in a costly faceoff with China’s People’s Liberation Army (PLA) along the Line of Actual Control (LAC) in eastern Ladakh.

To meet this forbidding challenge, that shows no sign of abating, all three services are believed to have already executed emergency purchases of over $2 billion since June 2020 to plug enduring equipment and ammunition shortages, adversely upsetting budgetary calculations. It is undeniable that the services will require vast sums of money in the upcoming budget on February 1 to operationally sustain them in the faceoff with China that could conceivably continue for years.

The military’s financial demands come at a time when India is deep in recession, following the serious financial downturn due to the COVID-19 pandemic. Though some green shoots are visible in the economy, these are unlikely to shore up government revenues in the coming fiscal in any substantial measure. Besides, to revive the economy, funds will need to be invested across several sectors from manufacturing to infrastructure, placing the government in a quandary over where it can possibly source funds to adequately finance the military.

Pompous Pronouncements

Over decades, successive finance ministers have routinely promised that there will be no shortage of funds for the armed forces, and all additional monies which they may require will be provided. Totally disregarding reality, then defense minister Nirmala Sitharaman had unbelievingly declared in July 2018 that there was neither a shortage of funds nor of ammunition when there was a paucity of both. The minister’s optimism, in fact, was in direct contrast to the Defence Parliamentary Standing Committee on Defence (SCoD) that had publicly affirmed a shortage of funds for the military.

Sitharaman’s declaration was as ironic as it was surprising, as in the financial year 2018-19 there was a yawning gap of Rs 1,12, 137 crores between the requirement projected by the services and the funds allotted to them. Of this, Rs 76,766 crore was the shortfall in allocation for capital expenditure that largely caters to force modernization. What the then Indian Army’s vice-chief Lieutenant General Sarath Chand had told the SCoD that year is more telling.

“It (the budget) is barely enough to cater to the rise in expenses on account of inflation and does not even cater for taxes,” Lieutenant General Chand had told the Committee. He had stated that Rs 21,338 crore capital allocation for the army’s modernization was “insufficient to cater for the committed payment” of Rs 29,033 crore for 125 ongoing schemes and for ammunition and equipment procurement”. The vice chief had further revealed that 68% of the army’s equipment was in the ‘vintage category’, 24% in the current and 8% in the state of art grouping, and consequently, insufficient funds were certainly not going to remedy this worrying state of affairs.

The Committee’s prescient warning that the shortage of funds could lead to a default in payment for equipment to vendors, proved true in January 2019. This was when the ministry of defence (MoD) withheld payment of about Rs 20,000 crore to the state-owned Hindustan Aeronautics Limited (HAL) in order to pay overseas vendors and obviate punitive contractual provisions. Nobody asked, and no explanations were given, as to how the situation was managed the following year when the allocation to the services again fell short of their requirement by Rs 92,412 crore.

The recurring financial crisis to sustain the country’s military is as much on account of the government’s inability to meet the services’ financial requirement, as on account of the failure to acknowledge that finances will always be finite. Therefore, financially unviable, and disjointed expenditure plans continue to be made, with each service independently pursuing its own vision of the future.

The Chief of Defence Staff (CDS) General Bipin Rawat appointed exactly a year ago as head of the all-powerful department of military affairs (DMA) was expected to ensure service jointness and prioritization in defense planning, especially with regard to financing, but the situation remains unaltered.

In fact, the DMA has floated ideas like a short tour of duty for military service and a graded pension structure to save on salaries and pensions which collectively account for almost half the annual defence outlay. But these are contentious proposals, which even if implemented, can in no way provide any immediate financial relief. Therefore, as things stand, the endless tussle by each individual service to secure a larger share of the defence budget is likely to continue unabated.

The resultant emasculation of the department of defence (DoD) too will have repercussions and add to the overall financial disarray. The DoD, for its part, continues to labour under the misconception that delegating more financial powers to the services, tweaking procurement procedures and enforcing indigenisation by banning defence imports will somehow magically solve the problem.

Reality Check

The reality, however, is that procedures and policies can only produce results provided there are sufficient funds available to secure the desired military capabilities which too remain somewhat undefined and amorphous. This is also true of Atmanirbharta or indigenisation, which in theory is desirable, but not always a cost-effective alternative to imported materiel.

Over decades, watchdog bodies like the Comptroller and Auditor General (CAG) have detailed how costly it is to indigenously license-build platforms like fighters, light utility helicopters, main battle tanks and even assault rifles compared to directly importing them. Indian defence planners somehow fail to realise that creating industrial facilities domestically to manufacture these platforms and equipment needs massive and sustained investment by the manufacturers and large budget outlays to buy the indigenously manufactured material. Both of these are problematic.

This continuing financial crisis has been further exacerbated by the lack of an efficacious financial management system in the MoD to ensure that funds needed for material acquisitions, alongside recurring expenditure on salaries, rations, ammunition and maintenance of infrastructure and equipment are indeed available.

This drawback is responsible for the growing mismatch between the financial requirement projected by the armed forces and the outlays allocated to them. This gap has widened from Rs 23,014 crore in 2010-11 to Rs 1,03,535 crore in 2020-21 after reaching its peak in 2018-19.

However, unfazed by this shortfall, the services formulated a five-year plan in July 2017 that envisaged an outlay of a whopping Rs 26.84 lakh crore. This projected astronomical amount would have necessitated doubling the annual defence budget that was – and remains – a virtual impossibility, considering that the decadal average increase in the country’s military outlay is merely eight to 10%. It is incomprehensible to imagine what goals are served by such outlandish planning that will, for decades, remain in the realm of fantasy.

Defence analysts argue that it is not for the government to meet the services’ requirement as security is critical and of paramount importance. That is true; but only partially, as the government is also responsible for other equally vital sectors like health, education, internal security, and infrastructure. This, in turn, will continue to compel all governments to walk a tightrope between the needs of all these other sectors and defence in the foreseeable future.

In conclusion, this can only mean that while there may be an above average hike in the defence budget for the financial year 2020-21, it is bound to fall short of the services’ desired requirement.

For this to be reversed or somewhat mitigated, financial realities need to be acknowledged and furthermore implemented practically in defense planning. The title of the 1968 Jerry Lewis Hollywood hit could provide a clue to its resolution: Don’t Raise the Bridge, Lower the River.

Written by: Amit Cowshish is a former financial advisor (acquisitions), Ministry of Defence.