In India’s ‘Make Or Break’ Budget, Defense to Take Back Seat
Only bare minimum devoted to increase Modi’s military spending
(Bloomberg) -- India’s disruptive cash ban may prevent Finance Minister Arun Jaitley from using this week’s budget to quicken the pace of the country’s much-needed military modernization.
With economists slashing India’s 2016 growth estimates because of Prime Minister Narendra Modi’s move to eradicate 86 percent of India’s currency in circulation, analysts doubt India’s armed forces will get an increase beyond the bare minimum. Even as India’s soldiers leak videos of grim conditions on the front line of the country’s decades-long conflict with Pakistan, extra budget stimulus for defense is not likely.
"It is unlikely to happen because the economy is not doing very well, there is an overall resource crunch," said Laxman Behera, who has advised the government on military expenditure and is a fellow at the government-funded Institute for Defence Studies and Analyses in New Delhi. "If growth is down, and there is spillover effect, then it is definitely not a good sign for defense."
The defense ministry needs an increase of roughly 10 percent to deal with inflation and the vast sums required to modernize India’s aging military hardware -- from Soviet era aircraft to outdated guns and body armor. But many expect the government instead to focus the budget on soothing the impact of demonetization.
Critical Gaps
India faces a host of threats, from insurgencies and terrorist attacks to disputed borders with both Pakistan and China.
India’s defense spending was around $33.8 billion for the 2016-2017 fiscal year -- a figure which does not account for substantial pension obligations or India’s large paramilitary forces, which draw their budget from the home ministry. That’s an increase of 11 percent from the previous fiscal year, compared to an increase of 10.5 percent the year prior, government documents show.
The majority of funds are funneled into ongoing expenses, including salaries for India’s vast 1.3 million-strong army, at the expense of capital expenditures for modernization, which dropped in 2016-17 by 8.7 percent, according to the Institute for Defence Studies and Analyses.
"It’s not enough," said Anit Mukherjee, a former Indian Army major who is now an assistant professor at at the S. Rajaratnam School of International Studies in Singapore. "It’s not just about increasing budget numbers, it’s also about using the cash wisely."
Mukherjee said one of the main problems is that budget increases are eaten up each year by the army’s increased manpower costs, which comes at the expense of capital expenditures that could be used for modernization.
Since 2009, India’s total defense spending has only increased by about $3 billion, in constant 2014 dollars, while China increased its defense spending by about $77 billion over the same period, according to the Stockholm International Peace Research Institute.
In recent years, China has also undergone a rapid military modernization designed to help the People’s Liberation Army’s ability to fight "high-intensity regional conflicts at greater distances from the Chinese mainland," including improving amphibious and airborne assault unit capabilities, according to a U.S. Department of Defense report.
At the same time, India’s defense spending is still heavily weighted toward traditional, large-scale conflicts, a recent report from the New Delhi-based Observer Research Foundation think-tank said.
Modi has promised to shell out $250 billion in the coming years to help modernize India’s armed forces. His government has signed deals to buy new submarines, howitzers, fighter jets and helmets.
However, defense acquisitions are often delayed by India’s bureaucratic process -- currently undergoing a review -- and lengthy development time lines from state-owned contractors. There is also the need to balance immediate combat requirements with Modi’s "Make in India" plan to reduce India’s costly reliance on imports.
"From submarines to aircraft and from ammunition to guns, there are critical gaps in practically every field," said Amit Cowshish, a retired financial adviser for acquisitions at the Ministry of Defence.
However, he added, "I do not expect any unusual growth in the defense budget for the next fiscal, not least because there is likely to be no marked increase in government’s revenue and the pressure from competing sectors, such as infrastructure, is not going to ease."
Last Chance
With Modi up for re-election in 2019, this may be the last budget with room to increase defense spending before the administration becomes focused on handouts to ensure re-election, said Manmohan Bahadur, a retired air vice marshal in the Indian Air Force.
"This is a make or break budget in my mind, because this is a time when the government can give an additional advantage to defense," Bahadur said. "Government priorities change in the last year, in any country."
The forces could certainly use the money. In recent weeks, disgruntled troops from the army and border security forces released videos that went viral. One complained soldiers only got a burnt roti and tea for breakfast, and sometimes went to bed hungry.
Some Optimism
Others are more optimistic. Kotak Securities analysts said in Jan. 24 research note that Modi is likely to increase defense spending along with other stimulus measures.
Jayant Patil, senior vice-president and head of defense and aerospace at Larsen & Toubro Ltd., a major Indian defense contractor, said demonetization will actually lead to increased, rather than reduced, government revenues that could be spent on defense. He said it is crucial to spend more after India’s military were caught off guard by terrorist attacks last year.
"I think very clearly that there’s no choice for the government but to increase the budget," Patil said.
To contact the reporters on this story: Iain Marlow in New Delhi at imarlow1@bloomberg.net, N. C. Bipindra in New Delhi at nbipindra@bloomberg.net. To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Unni Krishnan