Defence Budget 2019-20: Does Budget Support ‘Make-in-India’ in Defence?

The interim Union Budget for the financial year 2019-20, was presented by the interim Finance Minister, Shri Piyush Goyal in the Lok Sabha on 01 Feb 2019. The budget envisaged a total outlay of Rs 2784200 crore. Out of this, a sum of Rs 301866 crore has been earmarked for Defence (less pensions and miscellaneous expenditure), which accounts for 10.8 percent of the total Central Government expenditure (CGE) for the financial year 2019-20.The defence budget allocation of Rs 301866 crore represents a growth of 8.1 percent over Budget Estimates (BE) of Rs 279305 crore and 7 percent over Revised Estimates (RE) of Rs 282100.23 crore, respectively for the financial year 2018-19. The allocation of capital budget for the Armed Forces is Rs 103380.34 crore while a sum of Rs 198485.76 crore is earmarked for the Revenue expenditure. The overall MoD budget, which also includes ‘pensions’ and ‘miscellaneous expenditures’, for the financial year 2019-20 is placed at Rs 431011 crores; displaying an increase of 6.6 percent over the BE of previous financial year.

The expenditure on defence evokes much interest among the learned fraternity in general and the Armed Forces in particular. Even the common man feels highly emotive on the issue as the defence budget has direct bearing on the indigenisation, modernisation of the Armed Forces and ultimately the national security.

The past few years, commencing from the financial year 2013-14 to 2018-19, have witnessed two distinct features of the defence budget, the first is declining share of defence budget in the GDP, due to its minimal growth; and the second feature is proportional reduction of capital outlay which, in turn, had affected the fresh procurement of modern equipment and indigenisation efforts. However, the capital budget for the financial year 2019-20 has seen substantial enhancement (10 percent) in allocation, meeting expectations of the Armed Forces to a large extent.

Analysis

The prevailing uncertainties and challenges in the international security scenario, India’s national security imperatives as well as its growing regional and global role necessitate capability building of our Armed Forces and further enhanced operational preparedness to ably protect our national interests. India faces well defined internal and external threats. Given theunresolved territorial and boundary disputes in the Indian sub continent and the legacy of Partition; the probability of limited conflicts with potential to spill over into a major conflict, with hybrid contents, remains fairly high.[i] On one hand, China is actively pursuing infrastructure up-gradation along the Line of Actual Control (LAC); on the other hand, Pakistan continues with its agenda to keep the Line of Control (LC) active and simultaneously continuing with proxy war in the state of J&K.

The nature of war is continuously evolving. It is visualised that India will face an ultra-high technology adversary, with hybrid warfare as the key feature in the North; or a low to high technology adversary with greater focus on the sub conventional threats including proxy war, cross border terrorism and information warfare in  the West; or a combination of both against a nuclear backdrop. The future conflicts will be fought in a hi-tech environment, with predominant employment of information, cyber and space assets; and on three or more domains like land, sea, air, cyber, outer space and information etc.[ii] Therefore, capability wise we should be prepared for operations against both our adversaries, while also maintaining readiness to combat the intra-state conflicts involving insurgents, terrorists and violent non-state actors. In light of the numerous security challenges that our country faces, the current defence budget needs a critical and in-depth analysis.

A comparison with the defence budgets of previous four fiscal years is tabulated as under:-

The statistics indicate a downward trend in proportional allocation of defence budget from 2013-14 to 2018-19. In fact, the share of defence budget, as a proportion of both the GDP and CGE consistently declined in these past six financial years. The Central Govt Expenditure (CGE) was enhanced by 14 percent in 2018-19 over the previous financial year, while the defence budget was increased by only 7.8 percent. Thus, a corresponding growth in the defence budget was not witnessed. Similarly in BE for the financial year 2019-20, the CGE has been increased by 13.3 percent, while the defence budget has been enhanced by 8.1percent and MoD budget by 6.6 percent.

Proportional Allocation among Stake Holders

The allocation of defence budget among the stake holders – Army, Navy, Air Force, Defence Research and Development Organisation (DRDO) and Ordnance Factory (OF) Board, is as depicted in the pie chart as under:

Imbalance between Capital and Revenue Budget

The proportion of capital and revenue budget among the three wings of the Armed Forces indicates that the capital head accounts for much smaller share than the revenue head. The main reason for allotment of greater proportion to the revenue head being pay and allowances of the large manpower, ammunition requirements, replacement of unserviceable equipment, repair / maintenance of the current in-service equipment and routine expenditure on running of the organisation. The proportional allocation is illustrated as under:

The trend indicating allocation of funds under the capital head from 2016-17 onwards is illustrated as under:

The ideal ratio of capital and revenue budget should be 60:40 to cater for adequate funds for modernisation and optimal operational preparedness. However, the trend, for previous six years was regressive. For instance, in financial year 2011-12, the proportion of funds under capital head in the defence budget was 40 percent, which by 2017-18 got reduced to 33 percent; then marginally increased to 33.7 percent in 2018-19. However, there has been a 10 percent increase in capital head for the year 2019-20 and its share in the defence budget has got enhanced to 34.2 percent. The increase in capital budget is a welcome step taken by the Govt towards fulfilment of Armed Forces’ requirements, yet the imbalance which still exists between the capital and revenue budget needs to be addressed on priority.

Impact on Modernisation of the Armed Forces

In the financial year 2018-19, some major acquisitions have been approved by the Defence Acquisition Council (DAC). Decision to procure Advanced Towed Artillery Gun System (ATAGS), air defence equipment (S-400), small arms (assault rifles and carbines), attack helicopters, building of numerous naval warships, transfer of technology for manufacture of K-9 Vajra (Self Propelled Gun System), induction of M777 Ultra Light Howitzers; are some of the notable positive developments towards modernisation of the Armed Forces. There is, however, a wide gap between the projected requirements / proposals (for procurement of weapons / equipment/ munitions) and the range / quantum of items which get ultimately procured. Besides, the acquisition process takes many years, even after the acceptance of necessity (AoN) has been accorded by the DAC. The final acquisition, in fact, constitutes a small slice of the consolidated requirement (acquisition proposals) projected by the Armed Forces.

A proportionately stunted growth of defence budget allocation vis-a-vis Central Govt expenditure results in inadequate defence capital outlay and may lead to deceleration of India’s military modernisation efforts. An increase of 10 percent in the capital budget is highly commendable, yet, the funds in the capital head, in absolute numbers, would not be sufficient to earmark adequate money for fresh acquisition, after the committed liabilities are catered for. Small capital budget translates into fewer big ticket acquisitions, scrapping of some essential projects (for example Battle-field Management System), delay in ongoing projects and continued retention of vintage equipment (more than 60% of the equipment held by the Armed Forces is vintage equipment).[iii] This state is, obviously, unenviable and poses a big hurdle on the road to modernisation of the Armed Forces, preventing the country from achieving optimal military potential.

‘Make in India’ in Defence

“Defence manufacturing remains at the heart of Make in India”

Prime Minister Narendra Modi

‘Make in India’ is the flagship initiative of the Govt and defence manufacturing remains at the core of this initiative. ‘Make in India in defence’ is essentially centred on providing a reasonably conducive environment for doing business, rapid infrastructure development to encourage private industry investment in defence design, development & production; providing a level playing field to the domestic private defence industry and consistent procurement of indigenous equipment.

Positive Measures

Numerous positive measures viz. streamlining procedure for grant of industrial licenses for manufacture of defence products, revising FDI regulations, promulgating strategy for defence exports, common rules for formation of JVs, withdrawal of excise duty exemption to defence public sector enterprises, encouragement to MSMEs, facilitating public-private partnerships (PPP) in defence, revision of defence offset policy, refining of the Defence Procurement Procedure (DPP) and promoting ease of doing business etc, have been executed by the Govt in a record time frame. India has jumped 23 places in last one year and a whopping 65 places in last four years. India is currently at 77^th place in the global ranking among 190 countries.[iv]

Besides, the Army has taken a lead by establishing Army Design Bureau (ADB) to facilitate institutional interaction and guidance to both, the public and private defence industry, about numerous ongoing and futuristic acquisition projects.

Indigenisation directorates of the Army, Navy and Air Force have already facilitated indigenisation of thousands of assemblies and components of weapons / equipment that were being imported hither-to-fore; with active participation of the domestic private defence industry.

The Armed Forces have been extremely enthusiastic and supportive of the ‘Make in India’ initiative. All proposals relating to grant of Industrial Licenses, NOC for export of defence products, FDI in defence sector etc, received by the Army, Navy and Air Force have been and continue to be processed expeditiously.

Current Status

Industrial Licenses. Industrial licenses for manufacturing of wide range of defence products (ranging from radars, tanks, artillery guns, small arms and munitions to fighter planes and warships), have already been granted to 353 domestic private companies till July 2018.[v] Of these 15 – 20 major companies have already commenced defence equipment manufacturing while many others are in the process of infrastructure creation.

Joint Ventures (JVs).  More than 50 companies have formed joint ventures (JVs) with foreign original equipment manufacturers (OEMs) for production of modern military equipment. Production of recently inducted K-9 Vajra SP Howitzer is an example of a successful JV. However, most of the JVs are currently engaged in manufacture of assemblies and components only.

Make Projects.  Under the ‘Make’ head of the defence budget an amount of Rs 94.55 crores (Rs 50 crore for the Army and Rs 44.55 crore for Air Force) has been set aside which would also be utilised to provide financial assistance to the private defence industry for design, development and production of indigenous equipment. The Armed Forces have announced a substantial number of ‘Make’ projects. For instance, the Indian Army has announced 16 new ‘Make’ projects during the ARTECH (Army Technology) Seminar-2019, held in the Manekshaw Centre on 12 Jan 2019. Several projects have also been declared for development by the Army Technology Board. These Army projects and others announced by the Navy and Air Force would require substantial allocation of funds under the ‘Make’ category.

Strategic Partnership (SP) Policy.  The policy aimed at revitalising defence industrial eco-system through strategic partnerships is a major step taken by the Govt. The Policy intends to encourage broader participation of the private sector, in addition to Defence PSUs / OF Board, in the manufacture of defence platforms and equipment in four core segments (Fighter Aircraft, Helicopters, Submarines, Armoured Fighting Vehicles (AFVs) / Main Battle Tanks (MBTs)) under the Strategic Partnership route. Procurement of Utility Helicopters at cost of Rs 21000 crores for the Indian Navy, as the 1^st project under SP Model has been approved by the Govt. The ibid project will kick start the SP Model and give a boost to the ‘Make-in-India’ Programme in Defence Sector.[vi]

Does the Budget Support ‘Make in India in Defence’?

All companies, whether Public or Private, primarily aim to seek orders to supply equipment / munitions to own Armed Forces, while the secondary objective is to commence exports to friendly foreign countries and become a part of the global supply chain. However, fresh procurement by the Armed Forces requires sufficient allocation of funds under the capital head. Less capital budget results in fructification of few procurement proposals and consequently inadequate incentive for the domestic private industry to invest in the Defence Sector. The uncertainty related to defence procurement, long gestation periods and lack of assured orders, in spite of huge capital investment, seriously skews the risk-return profile.

The capital budget, major part of which will be utilized for the modernisation of Armed forces, is just sufficient for few fresh acquisition schemes, post fulfilment of the committed liabilities. Funds currently allocated under capital head (10 percent more than the previous year) will certainly provide a boost to the ‘Make in India’ initiative in defence. However, this increase should not become an aberration in the negative cycle, exhibited by stunted growth of funds under the capital head in the previous six financial years. The downward trend has been interrupted and resolved tactfully; while simultaneously affording appropriate stimulation to initiate an upwardly progressive spiral.

When our own Armed Forces procure indigenously manufactured weapons / equipment that meet stringent qualitative standards, the export of defence products will automatically pick-up. However, the acquisition of indigenously manufactured equipment can get a boost, only if sufficient funds for fresh procurement are made available. With enhanced availability of funds in the capital head, the fresh procurement in the next fiscal year should be expedited. We need to note that in the absence of adequate procurement contracts, the private defence industry would find it difficult to sustain; and the momentum that has been gained so far may peter out. Inadequacy of funds, in the capital head in the past, has been a major block on the road to speedy modernisation of the Armed Forces and success of the ‘Make in India’ in defence sector.

The Way Ahead

Early resolution of some of the issues of significance as discussed above and a host of other constraints need to be addressed on priority to gather and sustain the momentum already gained. Some of the measures that may contribute to boost the ‘Make in India’ initiative in defence are discussed as under:

Incremental Enhancement of Capital Budget.  While there has been substantive enhancement of the capital budget for the financial year 2019-20, it is required to be padded up further. The enhancement may be carried out in an incremental manner over subsequent fiscal years. Initially the proportion of capital head is strongly recommended to be increased to 40 percent of the defence budget and then gradually enhanced to reach 60 percent over the next decade.

Award Big Ticket ‘Make’ Projects.  Big ticket ‘ Make’ projects that have been pending for long should be awarded in the fiscal year 2019-20, along with various other major Naval and Air Force projects to give a boost to indigenous design and development by both, the public and private defence industry.

Build on SP Model.  In addition to the project for manufacture of ‘Utility Helicopters’, that stands already approved by the Defence Acquisition Council (DAC), other projects in the identified core areas under the SP model should be finalised and awarded expeditiously. The SP model should be fully exploited to meet futuristic requirements of military hardware without further loss of time.

Establish ‘Defence Fundamental Research Fund’.  Separate sufficient funds, other than the DRDO budget, should be earmarked to encourage fundamental research in the futuristic defence technology by various universities, Indian Institutes of Technology (IITs) and other research centres. The funds may be allotted under a head that could be named as ‘Defence Fundamental Research Fund’ and further sub-allocated for utilisation by the Army, Navy and Air Force; enabling them to focus on futuristic technologies.

Expedite establishment of Defence Corridors. The establishment of two defence corridors, one each in Uttar Pradesh and Tamil Nadu, already announced by the Govt, should be carried out in mission mode with targeted timeline. The Govt needs to work out an implementable plan to promote these defence corridors, offer reasonable tax concessions, create enough demand for defence products, incentivise export of defence equipment and make further progress in improving business environment.

Formulate New Defence Procurement Procedure (DPP).  With consistent efforts of all stakeholders certain noteworthy amendments to DPP have recently been made to further streamline the procedure and reduce timelines by obviating procedural delays.[vii]  However, the DPP is required to be further refined and simplified for easy execution. Incremental approach will not suffice. An overly cautious approach, along with too much bureaucratic emphasis on procedural correctness, has made the entire procurement process complex, cumbersome and prone to prolonged delays. While transparency and probity need due consideration, yet the speed and flexibility of execution must be realised. A new and simple procedure that facilitates speedy and collective decision making by a collegiate, rather than shunting of files up and down the decision chain, is the need of the hour.

Promulgate New Production Policy.  A revised, improved production policy is likely to catalyse indigenous defence manufacturing and facilitate creation of a military industrial complex. The new defence production policy should be expeditiously promulgated.

Link Defence Budget to the Long Term Integrated Perspective Plan (LTIPP). The defence budget should be discussed in absolute figures rather than discussing as a percentage of the GDP. As an immediate measure, the three wings of the Armed Forces should formulate, in a true sense, LTIPP for 15 years, which flows out from the National Security Strategy. In principle, the LTIPP should be approved by the Cabinet Committee on Security (CCS), the highest security body of the country. Linking of defence budget to the LTIPP would ensure that adequate funds are provisioned by the Govt to enable planned modernisation of the Armed Forces. In addition, there should be a provision to permit the unexpended portion of the budget to be carried forward, in the next financial year, to complete the capital acquisition process, which is a time consuming exercise.

Conclusion

The success of ‘Make in India’ initiative in defence, is inextricably connected to the availability of capital budget. In house demand by own Armed Forces will drive the research on futuristic defence technology and indigenous manufacturing of modern military equipment. Adequate availability of funds would logically lead to consistent procurement which, in turn, can serve to stimulate greater domestic private industry participation in defence sector, enhance competition, increase efficiencies, create a  tiered industrial ecosystem, ensure development of a wider skill base, trigger research and innovation, leading to reduction in dependence on imports and greater self-reliance in defence. It is therefore, strongly recommended that the current allocation of defence capital budget be enhanced incrementally in subsequent years too, to boost ‘Make in India’ in defence, expedite modernisation of the Armed Forces and enable the country to realise its optimal military potential.

References

[1]Lt Gen (Dr) VK Ahluwalia, Director Centre for Land Warfare Studies, Fd Marshall Manekshaw Memorial Lecture-2018, ‘India’s National Security Challenges and Priorities: Short And Long Term Perspectives’, dt Dec 16 2018.
[2]Ibid
[3] Forty First Report, Standing Committee on Defence 2017-18, pp 14, para 1.18; Available at http://164.100.47.193/lsscommittee/Defence/16_Defence_41.pdf
[4]Press Information Bureau, Government of India, Ministry of Commerce & Industry, ‘India Improves Rank by 23 Positions in Ease of Doing Business, India at 77 Rank in World Bank’s Doing Business Report, October 31, 2018; available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=184513
[5]Department of Industrial Policy and Promotion (DIPP) / Ministry of Commerce and Industry, Govt of India, ‘List of industrial licences issued for manufacture of items under defence industries from January 2001 to 3 July 2018’; available at
https://dipp.gov.in/sites/default/files/dil_13July2018.pdf
[6]The Times of India, ‘Govt approves procurement of 111 helicopters for Navy worth 21000 crore’, Aug 25, 2018; available at
https://timesofindia.indiatimes.com/india/govt-approves-procurement-of-111-helicopters-for-navy-worth-rs-21000-crore/articleshow/65542051.cms
[7] Acquisition Wing Secretariat, MoD, ‘Amendments to DPP-2016 to Streamline Defence Capital Acquisition Procedure’, Dec 06, 2018; available at https://mod.gov.in/dod/sites/default/files/dppamen61218.pdf
All Figures in Rs Crores