SUGOSHA ADVISORY

Budget and Revised Estimates for 2014-15 and 2015-16

Comparative Statistics of defence Budget 2014-15 and 2015-16

Impact on Capital Acquisition

One area where the 2015-16 defence budget is likely to hurt the most is in capital acquisition, which has already been under acute pressure in recent years due to the overwhelming share of the ‘committed liabilities’ arising out of contracts already signed (see Table III). Given the already downward revision of the 2014-15 capital acquisition budget, its moderate increase in the 2015-16 budget is unlikely to generate the required money to sign any major new contracts. Tables IV, V and VI summarise the capital acquisition budget of the three services. Among the three, the Air Force’s budget is projected to decline, albeit marginally. This comes at a time when it has lined up several mega deals which are one step short of contract signing. These include the tanker aircraft deal with Airbus, two helicopter contracts with Boeing and the Rafale fighter deal with Dassault Aviation. For the Rafale deal alone, the initial payment is estimated at Rs. 15,000 crore, which is almost half of what has been provided in the Air Force’s latest acquisition budget. So the writing on the wall is very clear. Unless the acquisition budget, particularly that of the Air Force, is substantially augmented during the course of 2015-16, there is a little chance of these deals being signed.

Army’s Acquisition Budget

Table V. Navy’s Acquisition Budget

Table VI. Air Force’s Acquisition Budget

14th Finance Commission’s Projection for Defence Revenue Expenditure

2016-17

. The only exception is the MoD’s overall budget which has grown by Rs. 30,842 crore (9.95 per cent). However, such growth has not resulted in any increase in the capital expenditure, which has, in fact, been reduced by a whopping Rs. 8,248 crore (8.7 per cent). On the other hand, the defence pension and the salary component of the armed forces have been increased by 52 per cent and 14 per cent, respectively. These two heads of expenditure have not only cornered the entire growth of the MoD’s overall budget but also eaten into the other heads of expenditure including the all-important capital expenditure.

Budget and Revised Estimate for 2015-16 and 2016-17 (Old Format)

Note: BE: Budget Estimate; RE: Revised Estimate. Rs. 1.0 crore = Rs. 10 million = US$ 153093 (alternatively, $1 million = Rs. 6.5 crore) as per the average exchange rate for the first 11 months of 2015-16.

Comparative Statistics of Defence Budget: 2015-16 & 2016-17 (Old Format)

  Capital Acquisition: Army (Rs. in Crore)

Capital Acquisition, Navy (Rs. in Crore)

Capital Acquisition, Air Force (Rs. in Crore)

As can be seen, the Indian army has the biggest share in defence resources, followed by the air force, the navy and the DRDO. The biggest share of the Army is primarily because of its numerical superiority over others. Accounting for over 85 per cent of the uniformed personnel, bulk of its budget goes into revenue expenditure. In 2016-17, only 21 per cent of its total allocation is earmarked for capital expenditure. In comparison, both the navy and air force have around 44 per cent of their respective allocations earmarked for capital expenditure.

Modernisation and Expansion

Tables above, show the budgetary provisions for capital acquisition for the three forces. As can be seen, all the three services have witnessed a decline not only at the 2015-16 RE stage but also in their 2016-17 allocations. The back to back decline comes at a time when all the three services have several mega procurement contracts (including the one for the long-delayed Rafale fighters) to be finalised. The cut in the latest allocation therefore means that all the pending procurement projects would not go through unless the government decides to step up the allocation during the course of the forthcoming budgetary period.

As on date there are more than 300 cases in capital procurement for an estimated cost of more than 50,000 crores.

For the FY 2014-15 capital expenditure for Indigenous procurement was around 10,000 crores and foreign exchange spend was approx. 3500 crs.

Offsets

Defence offsets we re first introduced in 2005 with a detailed guidelines published in the year 2006 as part of the DPP 2006. As on 31 March 2015, 25 Defence Offsets contracts were signed with offsets oblgations of approx. 4.87 Bn USD. Another 44 cases of offsets are under various stages of processing for contracts and the obligation is expected to increase to approx. 15 to 16 Bn USD for a discharge till 2028. Foreign vendors are reporting a less than 50% fulfilment of offsets against contracted obligations.

Make in India

DPP 2016 has provided an impetus for indigenous manufacture and sourcing with reservations announced for MSMEs. Also the government has placed emphasis on indigenous design and development.

All of these provide for a tremendous opportunity.