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India’s Finance Minister Nirmala Sitharaman announced the budget for 2021-22 earlier this week. The announcement outlined a moderate improvement as far as India’s defense budget allocations are concerned. While the overall defense budget allocation has seen only a marginal hike of around 1.4 percent (from 4.71 trillion Indian rupees in the 2020-21 budget to 4.78 trillion rupees in 2021-22) the allocation for capital spending at nearly 18.8 percent is significant. That this allocation happened despite the huge negative economic impact of the pandemic says a lot about the shifting priorities of the Indian government. Last year’s Revised Estimates indicate that the Indian military received an additional allocation of 207.7 billion rupees under the capital expenditure heading, presumably for the emergency procurements that were undertaken because of the Galwan Valley clash.
Commenting on the hike in the defense budget allocation, Defense Minister Rajnath Singh tweeted saying, “I specially thank PM [Prime Minister] & FM [Finance Minister] for increasing the defense budget to 4.78 lakh cr for FY21-22 which includes capital expenditure worth Rs 1.35 lakh crore. It is nearly 19 percent increase in Defense capital expenditure. This is highest ever increase in capital outlay for defense in 15yrs.”
As the Indian government notes, capital expenditure “relates to modernization and infrastructure development of Armed Forces.” The capital expenditure allocation in the budget estimates for 2020-21 stood at 1.13 trillion rupees but has seen an increase of 213.2 billion rupees, bringing the figure to 1.35 trillion rupees in this year’s budget estimate.
Another notable change is the slightly increased allocation for border infrastructure development. The Border Roads Organisation (BRO) received an allocation of 60 billion rupees, a 7.5 percent hike over the previous year. The capital expenditure hike as well as the marginal improvement for border infrastructure reflects the government’s calculations on the China front.
However, the increase in India’s defense spending at 1.4 percent has to be set against the inflation rate of around 5 percent in 2020. Further, on the capital budget allocation, it is not a straightforward hike of 18.8 percent. For instance, in the budget for 2020-21, the budget estimate for capital expenditure was 1.13 trillion rupees, but it was increased to 1.345 trillion rupees in the Revised Estimates for 2020. Against this, the 2021-22 budget estimate for capital expenditure is 1.35 trillion rupees. This indicates that the actual increase from the Revised Estimates of 2020 is marginal, around 5.5 billion rupees.
An interesting proposal is the recommendation to create a dedicated, non-lapsable fund called the Modernization Fund for Defense and Internal Security (MFDIS). This recommendation, made by the 15th Finance Commission, is meant to “bridge the gap between budgetary requirements and allocation for capital outlay in defense and internal security.” Reportedly, the MFDIS for the five-year timeframe of 2021-26 will be 2.38 trillion rupees, with a maximum of 510 billion rupees per year. The funds will be generated from different sources, including measures like disinvestment of defense public sector undertakings and monetization of defense lands. Of the total amount, 1.53 trillion rupees will come from the Consolidated Fund of India. (The notable aspect of the Consolidated Fund is that no money can be withdrawn from it without the approval of the Indian Parliament.)
Strangely, the unutilized funds from the annual regular budgetary allocations to the Ministry of Defense and the Ministry of Home Affairs for capital expenditure will not be part of this multi-year fund. This has been a long-standing demand of the Ministry of Defense: to have a non-lapsable multi-year defense modernization fund. But year after year, it has been shot down by the Ministry of Finance, which gives various rationales for their decision. In the past, the Ministry of Finance argued that “adequate budget provision is made available to Ministry of Defense to finance the capital requirements of Defense Services.” This overlooks the fact that, as the military has repeatedly argued, the bureaucratic delays in clearing the capital expenditure have led to surrendering large sums of the allocated money, severely impacting upon the military’s modernization and acquisition plans.
Almost a decade ago, the late Brig. Gurmeet Kanwal wrote, “It is difficult to understand why the budgetary allocations earmarked on the capital account for the modernization of the armed forces should continue to be surrendered year after year with complete lack of accountability.” Successive governments have taken up the case with no solution in place. So, while the creation of the MFDIS is a welcome step, it needs to go further. The Ministry of Finance needs to action on Defense’s recommendation about a multi-year non-lapsable fund from its own annual allocation.
Overall, despite the nearly 19 percent hike in capital expenditure, this is not enough for the service-specific military modernization that is urgently required. If India does not address the service’s requirements, New Delhi’s ability to build up its defense capability will remain just rhetoric. But of course, India cannot spend money it does not have, which points to the larger problem with India’s relatively poor economic condition.
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