‘Butter Vs Guns’ Takes Front Seat In Union Budget 2021

Jan 27, 2021

Thanks to China, GoI must look at the defence budget as a wider security budget Defence allocation and China threat: In this budget, FM will have to bite the bullet For a nation which has been virtually at war, both overt and covert, the importance of military capability generation still is a discussion point in every Union Budget because of various other commitments and very cogent reasons.

On February 28, 1963, Morarji Desai as the Finance Minister, presented the Union Budget which had a Rs 708.5 crore allocation for defence; a whopping 38% share out of a total budget of Rs 1852 crore. This was after the Indo-China war in 1962.

The realisation of the importance of defence, in economic progress of the country dawned a bit late in this case. For a nation which has been virtually at war, both overt and covert, the importance of military capability generation still is a discussion point in every Union Budget because of various other commitments and very cogent reasons, given the competing priorities, including meeting basic needs.

We argue that most large counties that have driven long term economic growth and want to play at the global stage have invested significantly in military capabilities. India needs to look at a five-year plan, that takes our defence allocation to beyond the 1.5% of GDP (ex-pensions) to 3%.

NATO guidelines are for a minimum of 2% of GDP on defence, so +1% to begin with would be ideal given our geographic reality. Other measures would have to be coupled with it to generate finances and focus shifted to acquisitions enhancing deterrence.

While we hope that the current scenario with China will get resolved sooner than later, it is pragmatic to presume that some of our neighbours will continue to present tactical and strategic challenges. Long term budget allocation to defence has to be strategic and to be analysed in different scenarios.

Scenario 1

A reconciliat ion with China, fuelled by the realisation that military aggression would mean immense loss in human lives, impact on economy and unachieved objectives leading to loss of international standing. In this case, punitive military capability provides deterrence. The key factor in a successful war avoidance philosophy is military capabilities.

Scenario 2

A hot summer with escalation of armed clashes which could result in localised or widespread aggression. That Chinese will suffer unacceptable losses may not be presumed by China, leading to adoption of aggression by them. The key point here being that the Indian military engages with what it presently has; all planned/pipeline projects do not come into play.

Scenario 3

We may well see a long drawn-out stand-off lasting a number of years,like the one in Sumdorong Chu. At the end, either Scenario 1 or 2 could emerge. What matters is that time is on the Indian side to ramp up capability. Greater the Indian punitive capability generated, more the swing of the pendulum towards a likely favourable Scenario 1.

It is Scenario 3 that the Defence Budget should address and thereby lead to Scenario 1 for any future. The adversary must believe that the damage caused by retaliation to his aggression will take unacceptable toll and objectives will not be met.

The Defence Budget already needs to carry a committed liability for the emergency procurement of almost Rs 40,000 crore. It is expected that the revenue expenditure, due to an enhanced deployment in Ladakh and infrastructure development, would also increase.

It is also relevant to look at how and where the allocations are being spent. As a country which has needs of fund for infrastructure, basic health services, affordable housing, water supply, etc, it is also not possible to keep enhancing the defence budget. Hence, as we develop a plan for an uptick in the defence budget, especially on capital side, we need to plan on how we reduce our revenue budget. This would leverage technology and bring in efficiency by partnerships with the private sector. Alternate means of resource generation will have to be factored in. Creating a Defence Modernisation Corpus (DMC) could be considered.

A 49% disinvestment in DPSUs could generate ~Rs 42,000 crore. This could be increased multi fold with privatisation of OFBs. Secondly, an offer to discharge the balance of defence offsets of about Rs 50,000-60,000 crore into the DMC, with an investor benefit multiplier factor of 2x, could generate a total of up to Rs 25,000-30,000 crore. This is apart from further offsets that could possibly come from contracts signed in the last year and any future contracts with offset obligations. The DMC could thereby add around Rs 60,000-70,000 crore in the kitty for capital acquisitions.

A Deferred Financing Model (DFM), as applicable only to long term high value procurements under Strategic Partnership, may be required to ride over the current cash crunch. For the first year, no payment on delivery model can be adopted, thereby providing time for fund accumulation in DMC. The Industry could be facilitated to ride over the period of ‘no payment’ with adoption of long-term procurement contracts. In this Strategic Partnership Policy (SPP) must come into play in almost all major equipment purchases.

With a contract for about 10-15 years, the company can focus on facilitating production lines of greater capacity. Eco-system of Tier 2 and 3 vendors is facilitated who, with long term benefits, could transfer that to component quality and faster delivery time. Reportedly, HAL NSE 1.12 % share price went up on the award of contract for 83 Tejas aircraft. A long-term contract facilitates the contracted company to sustain the one-year deferred payment cycle by generation of finances from the market.

he DMC could, having reached sustainable levels, cater to Scheme Based Financing.

Ramping up production capacities would take time. To meet the immediate requirement, of bolstering punitive deterrence, an initial immediate lease of the equipment from foreign technology provider may be carried out, followed by a replacement procurement from the Indian production line set up in collaboration. A strategic G-to-G understanding that long term contract would be given to a JV with manufacture in India.

Initial provision of equipment ex-stock could be factored in. Immediate training of core personnel may be carried out on the equipment.

As difficult as it may be, given how the pandemic is impacting us, enhanced defence budget is required for punitive deterrence capability to ensure war avoidance and negotiate from a position of strength.

Maj Gen Rohit Gupta, SM (Retd) heads the Aerospace and Defence practice and Amit Dugar is the Vice President, at Primus Partners.

Courtesy: ET