A separate budget for India's defence

Till a few years ago, funds allocated for India’s defence budget were part of the Finance Minister’s budget speech. This tradition ceased to be from the financial year, i.e. 2024-25. It does not reflect diminished focus from the government on defence. Rather, the separation allows the government to concentrate on economic issues in the budget speech and focus separately on the defence budget.

There is always a feeling that the defence budget is not adequate. Or that the defence ministry spends more on pay, allowances and pensions, leaving very little for modernisation and acquisition of weapons and equipment. Some analysts say that the defence budget should be 3%-4% of India’s GDP. The latter is not feasible in a developing country like India which has large social needs and commitments to be met. New Delhi has consistently maintained that should there be a need, there will be no constraint of funds for ensuring national security, territorial integrity and sovereignty. This promise has been kept. The latest example is the acquisition of extreme cold clothing and other equipment needed by the additional troops inducted into Eastern Ladakh in 2020. Therefore, it is impractical to expect large annual increases in the defence budget.

With this background, a detailed analysis of the defence budget is of consequence.

This year’s defence budget is pegged at Rs 6,81,210 crores or $79.5 billion, which is 1.9% of GDP, a decrease from 2.4% from the previous year. However, this year has seen an increase of 9.3% over the Budget Estimates[1] (BE) of 2024-25 and 6% over the Revised Estimates[2] (RE). If adjusted to 2023-24 inflation of 5.4%, then this year’s allocation is barely 0.9% higher than last year. Inflation in this financial year is approximately 4.86% till January 2025. Therefore, there is no major variation in the defence allocation.

There are four major heads under which the defence budget is divided. They are Ministry of Defence (MoD) Civil, Revenue, Capital and Defence Pensions. When compared to last year’s revised estimates, the allocation for MoD Civil has been retained at 4% (Rs 28,683 Crores), revenue expenditure maintained at 46% (Rs 311,732 Crores), capital expenditure up slightly from 25% to 26% (Rs 180,000 Crores) and the pension is down marginally from 25% to 24% (Rs 160,795 Crores).

Last year, the MoD returned Rs 12,500 crores from the capital budget as the same could not be spent – a phenomenon seen year after year. The reasons continue to be the same: longer trial periods of the equipment being procured, and laborious and long procurement process and other delays. These urgently need to be streamlined to ensure better utilisation of funds allocated for capital expenditure. The Defence Procurement Procedure 2024 is 720 pages long and must be simplified. There is an effort to procure more indigenously so funds can be utilised more efficiently. Towards this goal, the MoD has brought out Five Positive Indigenisation Lists (PIL) comprising of approximately 5,000 items to be procured only indigenously. Of these, 2,972 items have been indigenised. The Department of Military Affairs, a department under the MoD, has additionally brought out a PIL of 509 items – a small step in the large annual imports of military equipment.

There is some attempt to rationalise the budgeting, but there are complications here too. While the capital allocation for aircraft and aero engines has been increased, those for the Ex Servicemen Contributory Health scheme and Rashtriya Rifles have been reduced. The government may have to relook at these when revising the estimates, as these are necessary expenditures. Additional expenses have been added on, like National Cadet Corps and Agniveer project which has received 85% higher funding from the previous year, to pay for the Agniveers who will retire from the system this year. Despite the criticism, the Agniveer Scheme seems to have stabilised, and will contribute to the national effort of motivating young Indians. The pension bill has increased due to the implementation of the third phase of One Rank One Pension. The insinuation by some analysts that the Agniveer scheme has been introduced to decrease the pension burden, is misplaced as the effect of this scheme on the pension load will be apparent after about 12 years when the present personnel on the present terms of service start to retire, and the payouts for those Agniveer recruits not being retained, stabilises.

The National Cadet Corps has received a 150% increase (from Rs 20 Crores to Rs 46 Crores) in allocation this year, possibly for specific planned projects. Rolling stock has also seen a substantially higher allocation at 250% more (to Rs 500 crores or $58 million), to ensure quick mobilisation of troops and equipment to their operational areas and vice versa.

The all-important Research and Development (R&D) is seeing an uptick of 12.4% increase from the budget estimate to Rs 26,817 Crore or $ 3.1 billion, but the majority is for strategic systems mostly long-range applications. Encouraging is the increased allocation of Rs. 450 crores or $52 million for startups and MSMEs for the Innovations for Defence Excellence (iDEX) system, as also Rs. 750 cores ($87 million) to Acing Development of Innovative Technologies with iDEX (ADITI), another programme for technological advancement that was launched in March 2024. Other countries like China spend much more on defence R&D. While India does not have to imitate others, important areas like R&D must receive monetary and administrative attention, with accountability attached to it.

The disappointment has been the Defence Research and Development Organisation or DRDO, against which complaints of non-delivery have been mounting. Thankfully, the process of reforming the DRDO is ongoing, and the underutilisation of allocated funds may be due to this.

The defence ministry declared 2025 as the year for reforms in the Indian military. The theaterisation of the armed forces, streamlining of processes, increased indigenisation and establishment of manufacturing facilities by international OEMs are all underway. All this will involve investment. Given the sub-optimal relationship between India and its western and northern neighbours and the threats posed by them, high utilisation of budget funds is an urgent requirement.

Lt Gen S L Narasimhan is the Adjunct Distinguished Fellow for China and National Security Studies at Gateway House.

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References

[1] Budget estimate means funds allocated on estimate of expenditure on that head in the budget.

[2] Updated allotment normally in December/January each year based on the expenditure incurred in the first six months of the financial year.