Trends in India’s defence spending

Defence sector has been a major expenditure head for India almost since it’s inception. Within months of attaining indepence, India was involved in a border skirmish with newly separated Pakistan. Between 1962 and 1971, the nation had to fight three battles – two with Pakistan and one with China. Although there hasn’t been a full fledged war since ’71, tensions on both the Pakistan and Chinese borders have largely remained on the higher side and especially since the 1980s, proxy war waged by Pakistan through armed militancy in Kashmir has been a constant feature.

On the Chinese front, despite significant progress made in trade and diplomatic relations in recent years, the border situation has not been stable. In 2017, the two forces came close to blows in the Doklam tri-junction area. Last week, India and China relations hit a long time low after the two armies got involved in a violent encounter in the Galwan valley of Ladakh. Indian armed forces suffered 20 deaths and 70+ injuries while on the Chinese side also significant causalties happened although numbers have not been officially announced. Since then, the situation on ground has been tense with high level military delegations from both countries discussing ways to de-escalate the tension.

India in recent years has been among the heaviest spenders on defense heads. In 2019, India had the 3rd highest share of world defense expenditure – after USA and China (source: Stockholm International Peace Research Institute-SIPRI). India’s defense expenditure in the ten year period 2009-18 has gone up steadily:

(Spending in US$ Billions)

However, in the same time period, spending as a % of GDP and % of total government expenditure has witnessed a steady decline.

Data source: World Bank/SIPRI

As can be observed, in the ten year period, military expenditure as a % of general government expenditure has declined from 10.3% to 8.7%. Similarly, seen as a % of GDP – military expenditure has dropped from 2.89% to 2.42%. In the last 4-5 years, it has largely hovered around the 2.4-2.5% mark. This however, is not unique to India. Even in China, a similar trend observed. China’s military expenditure as % of GDP was 2.06% in 2009 and has declined to 1.87% in 2018, although China’s absolute spending is estimated to have gone up from US$ 105.64 billion to US$ 250.0 billion in the same time.

For a rapidly growing / developing economy like India, managing allocation on defence vs other developmental heads is an act of delicate balance. Unstable borders like India has with Pakistan and China add to the problem. In an ideal situation, any government would want to focus maximum possible funds on development avenues. However, reality of geopolitics is that we live in a far from ideal world and therefore defense allocation/spending becomes a critical aspect of national safety.

The Union Budget 2020 (for the fiscal 2020-21) allocated INR 4.71 lakh crores for the Defense ministry. This however includes a INR 1.34 lakh crore component of defense pensions – close to 30% of the total outlay. Excluding the pension component, the allocation on revenue and capital expenditure witnessed an increase of 5.7% than 2019-20 estimate and only 1.8% more than the revised estimate for the same time period. Although the overall allocation stood at 2.1% of the GDP, it comes down to approx 1.5% of GDP excluding the pension component. This is estimated to be the lowest since 1962 – the year of the China war.

Out of the INR 3.37 lakh crores allocation on revenue and capital, the share of the latter stood at INR 1.13 lakh crores. This poses a serious challenge for the forces which have undertaken a major modernization drive which includes: M777 ultra light howitzers, K-9 Vajra self-propelled guns and Dhanush 155 mm artillery guns (Army), Rafale fighter jets, Apache and Chinook helicopters and S-400 air defence system (Air Force) among others. The IAF’s allocation out of the INR 1.13 lakh crores was 38% or INR 43, 281 crores. This is actually lower than the allocation in the revised estimate for FY20 which was INR 44, 869 crores. The IAF already had committed liabilities of over INR 47,000 crores last year – more than the revised allocation. The same further reduced will definitely pose problems for the force.

The Navy on the other hand has witnessed it’s alloted share in the capital expenditure go down from 18% in 2012-13 to 13% in FY20. It has led to the Navy having to re-work its plan of acquiring 200 new warships by 2027 and also reduce volume of orders in Mine Counter Measure Vessels and P8i maritime recon aircraft. There is a genuine concern among defence observers that capital acquirement process of all the three forces could witness a delay in light of the funding gap.

India’s fiscal deficit (gap between revenue and expenditure) for FY20 was 4.59% of GDP, overshooting the government’s revised target of 3.8%. With the covid-19 induced lockdown bringing all economic activity to a near halt for close to two months, the fiscal deficit is likely to widen further in the current FY. Rating agency Fitch has already stated that the deficit could widen to as much as 6.1% for FY21. Against that backdrop, it is unlikely that the representation made by the Services and the Defence ministry to the Finance Commission for additional funding especially on capital heads will bear major fruit. The Defence ministry has proposed certain measures to cover the funding shortfall. These include: divestment of defence PSUs, levying of a cess, monetisation of surplus lands and other defence assets, and issuing of tax-free defence bonds. The Finance Commission is expected to set up an expert group to examine these proposals and recommend further action.

The country is presently facing challenges on multiple fronts. The covid19 pandemic, the resultant lockdown leading to adverse impact on the economy and the situation on the border – all simultaneously have made the situation very difficult. IPD remains hopeful that the country will emerge stronger out of all the adversity and most importantly, the interest of the Indian armed forces will not be compromised in terms of modernization and capability strengthening agenda.

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