In Pragati: Understanding India’s Defence Spending

I restarted the infographics column in Pragati last week by creating one on defence spending:

India Defence Spending preview

[Pragati, September 2013]

You can read the full text of the infographic below:

India has the 3rd largest armed forces in the world in terms of active personnel, and is the 8th largest spender on defence. India has been spending more on defence in the last 20 years, but so has the rest of the world.

In the last 10 years, China, Russia and Saudi Arabia have all increased their defence spending faster than India. In the mean time, India’s defence expenditure is steadily falling: as a percentage of both GDP and total government expenditure (union + states). But then, why is so much written about India’s high defence expenses? The answer lies in India’s arms imports. India’s defence imports have been steadily rising and it was big news when in 2011 India became the largest arms importer in the world. This is reflective of India’s weak defence manufacturing ability at home rather than any aggressive military expansion by the India. Both private and public sector defence manufacturing houses in India lack capacity and technological ability. While India needs to become more self-reliant in defence equipment, this can be achieved by greater foreign direct investment entering India’s defence sector, rather than closing it off to foreign competition.

What does India spend its defence budget on?

About half of India’s defence expenses go to the army, a quarter to the air force and the remaining for the navy, R&D, ordinance factories and more.

Broadly, one can classify expenses into capital and revenue: Capital expenditures are investments, for future benefits and improvement. In defence, they can be on new aircraft, battleships, tanks, rifles and more. Revenue expenses are those that are recurring and for salaries, pensions and consumables.

Generally, higher the Capital-to-Revenue ratio is, the more competitive and modern the armed forces are. Before 2004-05, India’s armed forces had a C:R ratio of 27:73 but since then it has increased by about 12 percentage points to 39:61.

The Capital-to-Revenue ratio is very different in the three armed forces. While the Indian Navy and the Air Force spend more than half their budgets on capital assets, the Indian Army spends less than 20% on average on capital. Worse still, in 2011-12, the Capital-to-Revenue ratio in army expenses reduced from a 17:83 in the budget estimate to 11:89 in the actual expenditure, implying that higher than expected revenue expenses were eating away at the already sparse capital funding.

The Indian Army’s revenue expenses are increasing rapidly over the past few years. Since the sixth pay commission came into force around 2008-09, both salaries and pensions for army soldiers have become ballooning numbers for the exchequer. As a result, while budget estimates for capital expenses have flattened out, the actual expenditure on capital is actually declining rapidly in the army. What is particularly alarming is that the army’s capital expenditure is decreasing even in nominal terms – and is far worse once inflation is factored in.

Even in the navy and the air force, there is an increasing divergence between budget estimates and final expenditures by the end of the financial year.While the fiscal deficit is often used as a reason for this in parliament standing committee reviews, the real reasons could be more alarming.

What is evident here is the decreasing ability to plan and follow through with defence procurement and manage the finances of India’s armed forces.

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