Monday, April 7, 2008

India Military Budget

The Finance Division of the Ministry of Defence is headed by the Secretary (Defence Finance)/Financial Adviser (Defence Services). The SDF/FADS is tasked with the exercising of financial control over the proposals involving expenditure from the Defence Budget and the Ministry of Defence (Civil) estimates, and with the responsibility for internal audit and accounting of the Defense Expenditure and expenditure from the Civil Estimates. In the task of internal audit and accounting, the Controller General of Defence Accounts (CGDA) assists the SDF/FADS.

Defense planners face the task of reviewing programmes in the light of changes, which have taken place at the global level, as well as in the context of specific threats in the region. The endeavor of the defence planners is to balance the minimum requirements of Defence Forces and the need to modernize them, without unduly straining the national economy.

The rules provide that no expenditure which has not been provided for in the Budget or which having been provided, has not been sanctioned shall be authorized without the concurrence of the Finance Division. The strict observance of this rule is automatically ensured as the Controllers of Defence Accounts will not make any disbursement in respect of charges not covered by regulations or Government orders.

Until 1962 defense spending was deliberately limited. In the wake of the war with China, defense spending rose from 2.1 percent of the gross national product in fiscal year 1962 to 4.5 percent in FY 1964. In FY 1994, defense spending was slightly less than 5 percent of gross domestic product. In terms of dollars, FY 1994 total defense services expenditures were projected at US$7.2 billion (but are likely to have been close to US$7.8 billion). Proportionately, based on figures provided by the government, 48.4 percent of expenditures were for the army, 15.7 percent for the air force, 5.9 percent for the navy, and 30 percent for capital outlays for defense services and defense ordnance factories. The latter provide matériel to the armed forces through some thirty-nine ordnance factories and eight public-sector enterprises that build ships, aircraft, and major defense items.

The defense budget for FY 1994 was 6.5 percent higher than the revised estimate for FY 1993. The allocation increased to 14.9 percent of the total central government budget, up from 13 percent in the previous two fiscal years. Nuclear energy and space research are not fully accounted for in the defense budget, but most paramilitary forces fall within the purview of the Ministry of Defence.

After the Kargil war in 1999, the defence forces were spending less than the allocation. During 1999-2000, the defence forces spent Rs 48,504 crore - nearly Rs 3,000 crore more than the allotted sum of Rs 45, 694 crore. In 2000-01, they spent Rs 54,461 crore as against the allocation of Rs 58,587 crore – less than Rs 4,000 crore. In 2001-02, the defence forces are estimated to have spent Rs 57, 000 crore as against the revised allocation of Rs 65, 000 crore – a big gap of Rs 8,000 crore.

(Rs. In crores)


















2000-2001 (RE)



2001-2002 (BE)



The increase in defence allocation for 2002-03 over 2001-02 was modest. The Finance Minister, Mr Yashwant Sinha, proposed a defence budget of Rs 65,000 crore against Rs 62, 000 crore allocated in the fiscal which is coming to an end. A significant development in the current fiscal is that the Defence Ministry will be spending only Rs 57,000 crore out of the allotted Rs 62,000 crore, leaving a shortfall of Rs 5000 crore. Thus, compared with the actual expenditure during the current fiscal, the budget proposes an increase of Rs 8,000 crore. The allocation for the Army has been fixed at Rs 35,368.72 crore, marking an increase of 6.69 per cent. It, in fact, gets reduced to 2.59 per cent while making allowance for inflation. The increase covers a number of sectors ranging from other equipment like tanks, artillery and electronic hardware such as weapon-locating radars, welfare and housing and stores (upgradation of existing assets). The increase on account of other equipment is a huge Rs 1,400 crore, revealing the government’s plan to provide the Army with the modern tools of war. The Air Force gets Rs 15, 589 crore, an increase of 30 per cent over the revised estimates. The allocation is expected to take care of the upgrading of the fighter aircraft (MiG-21 BiS), licence payment for manufacturing of SU-30 fighter aircraft and purchase of Jaguars from Hindustan Aeronautics Limited.

(Rs. in crores)
YearBudget EstimatesRevised EstimatesActual Expenditure
*Provisional, accounts not yet closed.

In July 2004, in order to catch up with the backlog of expenditure that had not been provided for, the Government increased the allocation for Defence to Rs.77,000 crore. After a gap, defence expenditure in 2004-05 has matched the Budget Estimates. It was proposed to increase the allocation for Defence in 2005-06 to Rs.83,000 crore, which included an allocation of Rs.34,375 crore for capital expenditure.

The Defence and Defence related Expenditure is about Rs.95,922 crores (2004-05), including the Civil Estimates of around Rs.16,000 crores comprising about Rs.11,000 crores towards Defense Pensions. The outlay for defence services in the Budget 2004-05 is Rs 77000 Cr. This consists of Rs 43,517.15 Cr for revenue expenditure and Rs 33.482.85 Cr for capital expenditure. The allocation is 17.92 per cent more compared to 2003-04 Budget. The increased outlay, particularly for capital expenditure, is a reflection of the Government's keenness to ensure speedy modernisation of the Armed Forces.

Service-wise allocation for 2004-05 vis-a-vis Budget 2003-04 is as follows:

2003-04 Budget 2004-05 Budget
Air Force15419.3223270.53
Total $US$14.74 billion $17.38 billion

The budget estimates 2004-05 cater to increased allocation for each of the services and research and development activities. An attempt is made to provide funds to meet the Service commitments both for meeting their maintenance requirements and modernisation. In addition to the above, one new feature in this year's Budget is exempting from income tax the family pension received by widows, children and nominated heirs of members of the Armed Forces and the para military forces killed in the course of operational duties.

:Non-Plan Expenditure for Defence Services: (net of recoveries and revenue receipts in Rs. Crores)





% Change
over budget
of 2004-05

(A) Revenue
(B) Capital










The Union Budget for 2005-06 was presented to the parliament by the Finance Minister, Mr. P. Chidambaram on the 28th of February, 2005. In this, the allocation for Defence has been increased by about eight per cent over that of the last year from Rs.77,000 crore to Rs. 83,000 crore, or about $18.5 billion at current exchange rates.

Purchasing Power Parity [PPP] is an indicator of the real conversion factor that should be used when comparing dollar and rupee costs. Prior to the the switchover to a flexible exchange rate arrangement in India in 1993, by one estimate the PPP ratio was about three. In the period after the float, by this analysis the market rate was close to the PPP value. [SOURCE] Another observer suggested that by 2003 the PPP was around six, that is, a salary of Rs 6 lakh in India is equivalent to a salary of one lakh dollars in the US. By 2004 the PPP was estimated at about five, or perhaps somewhere between six and eight. The precise PPP would depend on the basket of good --- that is, in principle there is a PPP that is specific to military spending, which would be different from that for the economy in general. Factoring in PPP, India's military budget might thus be estimated as the equivalent of about $100 billion.

The allocation for defence for the year 2005-06 is well in tune with the policy of the government to give this core sector its due. The defence expenditure pegged at Rs 83,000 crore for the year amounts to an increase of Rs 6,000 crore or 7.79 per cent over the current year (2004-05). The revised estimate for the new fiscal has been kept at the level of Rs 77,000 crore, the same as in the budgetary estimate (BE) of the current one. The provision for revenue expenditure in the forthcoming fiscal is Rs 48,624.86 crore. The allocation for capital is Rs 34,375.14 crore which includes Rs 2,541.86 crore for research and development and Rs 1,364 crore for married accommodation project.

The proposed increase in defence expenditure should take care of the normal growth in pay and allowances, inflation and other specific requirements. The bulk of the capital outlay goes to meet the requirements for the ongoing acquisition projects. The allocation for capital will be providing over Rs 7,000 crore for new projects for modernisation of the forces.

India has to make up for what has been known as the lost decade of defence modernisation. In 2002-03 alone, it surrendered Rs 9,000 crore (Rs 90 billion). In view of this, last year the Budget had Rs 33,483 crore earmarked for capital purchases. But that was hardly sufficient for the whole purpose. The government decided to buy Mirage jets as well as Hawk trainer fighters. For the Navy, India had decided to go in for the aircraft carrier Admiral Gorshkov along with its MiG-29 fighters. Payments had to be made to honour contracts for airborne warning and control system (AWACS). The previous Government had signed these contracts but made no allocation for the same. Besides, New Delhi has had plans to purchase submarines, more multi-role fighter aircraft, multiple-rocket launchers, plane-based radar systems, light helicopters and artillery guns and many other sophisticated equipment for the three Services. The multi-role fighters and submarines alone are estimated to cost over Rs 20,000 crore. In other words, the last year’s capital outlay left little for any fresh defence acquisition. No wonder, immediately after the Budget was presented last year, Defence Minister indicated that the amount earmarked for capital purchases might not be enough for other necessary fresh contracts and he might have to seek additional funds from the Union Finance Ministry. The proposed capital expenditure has to be assessed in this context.

It is, however, expected that the new allocation would enable the Services to move forward in the direction of their fresh acquisitions. Pertinently, in the new budget the revised estimate (RE) of the defence expenditure (DE) is the same as the budgeted estimate (BE). It means that the amount allocated at the beginning of the current fiscal has been fully spent. One can hope the trend to use the capital outlay would continue. The capital outlay for research and development has been increased from Rs 1,657.78 crore in the current fiscal to Rs 2,541.86 crore in the new one. This should help the DRDO in giving a momentum to some of its ongoing programmes. India has already started deploying its short range 700 kms Agni-I and intermediate range 2,000 kms plus Agni II surface-to-surface missiles. The DRDO is all set to carry forward the process of missile research and development programme so crucial for the country’s doctrine of ‘credible nuclear deterrence’ and triad. There has ,of late, been an increasing interface between the designer engineers and user agencies so as to determine what exactly is needed by the Services.

The DRDO is developing a contemporary weapon locating radar for the Army. It is speeding up the manufacture of the main battle tank (MBT) Arjun to ensure its supply to the Army by due date. It has also been working on several naval projects. There are some analysts who argue that there is no fair increase in capital allocation this year. According to them, the provision for Defence Services Estimates in the Budget Estimates-2004-05 was Rs 77,000 crore. This had Rs 43,517.15 crore for Revenue Expenditure and Rs 33,482.85 crore for Capital Expenditure. The allocation of Rs 77,000 crore was an increase of 17.92 per cent over the provision of Rs 65,300 crore made in Budget Estimates of 2003-04. The capital outlay of the DE in 2004-05 increased by an almost 100 per cent from Rs 16,863 crore to Rs 33,483 crore. In contrast, in the fiscal year 2005-06, the capital outlay has increased marginally by 2.66 per cent from Rs 33,483 crore to Rs 34,375 crore.

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