Defence Budget 2006–07 –– An Overview

An IDC Analysis


New Delhi, 04 March 2005

The national budget for the year 2006–07 has a total federal outlay of Rs 563,991 crores ($126.8 billion), of which $20 billion or Rs 89,000 crores are earmarked for defence, a 7.2% increase over the previous year’s budgeted military expenditure. The projected defence spending is 2.4% of GDP –– a virtual Lakshman Rekha hovering around 2.5% for so many years –– much below the expectations of military-planners who have been campaigning for a sustained spending of more than 3% of GDP to speed up the ongoing modernizing process. Pakistan and China’s figures are around 4 to 4.5%.


Some analysts have branded the budget as innocuous, quite an apt phrase for the defence part of it. The allocation/estimate in the last fiscal 2005–06 was Rs 81,700 crores (Rs 83000 crores was the original estimate) which was about 8% over the grants for the preceding year 2004–2005 when there was an unprecedented hike of 28% with $6 billion worth of defence deals that took India ahead of China for the first and only time.

Of the Rs 89,000 crores defence budget, Rs 37458 crores –– or 42% of the total outlay which is more by Rs 4383 crores than last year –– is earmarked for capital expenditure or the purchase of arms and equipment. A point to note is that in the last year, the defence ministry failed to spend Rs1300 crores, thus marking a turnaround from earlier years, when it surrendered much more money earmarked for purchasing modern arms. The revenue expenditure of 58% though it is a lot more for the Army, signifies a need for streamlining the manpower and older weaponry. South Block sources said, the Army is likely to get just over Rs 40,000 crores, the IAF about Rs 25,000 crores and the Navy possibly a little over Rs 15,000 crores. Of this the revenue expenditure is likely to be –– Army Rs 32,300 crores, Airforce –– Rs 9860 crores and Navy –– Rs 6715 crores. The outlay for the 39 state-run ordnance factories is Rs 976 crores while for the Defence Research and Development Organisation is Rs 3008 crores.

Capital Expenditure

Much of the capital outlay is expected to be cornered by big ticket deals concluded in the last two years viz. the refurbished Russian aircraft carrier Admiral Gorshkov, the 66 Hawk jet trainers bought from Britain and six Scorpene submarines from France –– payments for which are spread over several years. With these big acquisitions already contracted, Defence Minister Pranab Mukherjee is now free to initiate or renew negotiations on projects that had willy-nilly been pushed onto the backburner. Among these are the modernisation of the artillery, a crying need for the army and, of course, the multi-billion dollar order for 126 multi-role combat aircraft for the Indian Air Force that is so tantalising for global arms majors.

Initial action is also in the process for purchasing a complement of surveillance planes and ASW helicopters for the Navy and a large number of tanks from Russia to replace the ageing armoured corps assets, besides air defence equipment. The Navy is also planning to repeat an order for three warships (updated Krivak class) from Russia. However, after the payments for deals already closed, there may not be much to spare for newer acquisitions unless the MoD goes in for supplementary demands for defence funds later.

Expenditure Management

While a generous defence budget is always sought by the Services, more efforts need to be made towards prudent expenditure management. A major portion of the budget goes into revenue expenditure, thus adversely affecting capital outlay for modernization. This should be a concern in the Army where manpower costs are on the rise. If the global trend in manpower reduction and revolution in military affairs (RMA) is given due consideration, the money saved could be utilized to make the Indian Army technology savvy. Although there has been a comprehensive delegation of financial powers for revenue expenditure in all the three wings of the Services, there are still cases of project delays, cost escalation and even surrender of funds. While the procurement manual for revenue stores has come as a handy guideline, the integrated financial advisor (IFA) system has not boiled down to all levels. The IFAs are 'necessary evils' for expenditure management and hence should be institutionalized and strengthened.

Defence Production

With regard to capital expenditure, most of it goes for foreign procurements. While China is pumping at least $60 billion in 'selective' modernization, Pakistan by investing mostly in nuclear and missile fields has achieved strategic parity with India. Against such trends, India's emphasis on 'incremental' and 'across the board' modernization serves little purpose. Instead, the spotlight needs to be on 'selective' modernization’. While Indian money has substantially revitalized military industrial complex (MIC) in Russia and Israel and created jobs there, very little is left to invest in the domestic market. The ordnance factories and defence PSUs have not been able to reduce the country's dependence on foreign markets despite their long existence and full support from the government. Until recently, 'defence' was treated as a 'holy cow' and private sector had only a peripheral role to play in making supplies to the services. If the new procurement manual for capital stores is implemented in spirit, this will mean at least 30 percent of out flowing funds remaining within the country through an ‘offset’ policy and requests for proposals (RFP). However, the government as well as the Services should consider some kind of preferential treatment for domestic suppliers including the private vendors. Only with a mature and successful MIC in the country, can India assert itself as a major power in the world arena.

(Figures are indicative only)

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