It’s Your Everyday Defence Budget

Allocating money for defence is complex. It doesn’t just demand a near-accurate estimation of monetary requirements based on the potential national security situation in the coming year. It also calls for thorough analyses of committed liabilities, for how much is needed to meet modernisation standards for the armed forces, and for a revenue expenditure outlook that keeps defence resources happy.

India’s latest defence budget estimate for FY 2025-26, which, for a second consecutive year continues to remain under 2% of estimated GDP, attempts to check all these boxes – per usual, some more enthusiastically than others.

Capital Outlay

Capital outlay expenditure, estimated at around ₹1,80,000 cr, is the heart and soul of military modernisation. This is the money spent for acquiring new and advanced defence technologies and equipment. At a time when Chinese aggression in both continental and maritime theaters around us continues to escalate, capital expenditure on must-have platforms has the potential to determine the confidence of India’s response to the ‘China challenge’.

The estimated capital outlay for FY 2025-26 is hiked by a mere 4.6% as compared to the FY 2024-25 Budget Estimate (BE). As compared to the Revised Estimate (RE) for FY 2024-25, the hike is at 12.8%. However, trends of capital outlay over the past few years indicate that the BE is always higher than the RE, while the RE is always higher than the actuals.

Table 1: Defence Budget BE v/s RE v/s Actuals (₹ cr)

In this regard, the main concern, as also expressed in the ‘Demand for Grants’ reports prepared by the Parliamentary Standing Committee on Defence in the past few years, is the underutilisation of funds and the potential need for a non-lapsable, roll-on fund for defence modernisation. A Secretary of the Finance Ministry argued in the Committee’s 2023-24 report that there was no need for such a fund to guarantee continued progress in military modernisation. This was so because the budget allocation process had now become more consultative, involving representatives from the armed forces. 

And yet, in the Committee’s report for 2024-25, it was again specified that barring the Army and the Joint Staff, all other defence services and organisations had fully exhausted their capital budget allocation for FY 2023-24 (at RE stage). This sheds light on an interesting double whammy – neither are the exorbitant funds being allocated to the Army and the Joint Staff being utilised optimally, nor are the Air Force, Navy, and other defence services such as Land, Aircraft and Aeroengines, and the Rashtriya Rifles promised additional funds through a non-lapsable procedure.

The Committee report for FY 2021-22 also recommended creating a separate head for committed liabilities, so that the ability to buy new and additional weaponry remained unhindered. But now, that recommendation has been dropped in favour of a chunk of the capital outlay being allotted to a Capital Acquisition (Modernisation) Budget, which is also used for committed liabilities.

So far, if there is a mismatch between allocated/ projected funds and actual requirements, the Finance ministry is required to seek them at the RE stage. However, trends indicate that the mismatch continues.

Pensions and Salaries

Per usual, pensions and salaries continue to constitute the largest chunk of defence budget expenditure.

There is a noticeable imbalance between total personnel (salaries and pensions) and capital expenditure. For FY 2024-25 RE, the revenue to capital ratio is at 2.85:1, with a similar ratio at 2.63:1 for FY 2025-26 BE. The Parliament Committee has regularly expressed concern that the higher revenue expenditure may hinder the modernisation of the armed forces. However, there is also cognisance of the need to aptly maintain and operate the forces.

The hope is that with the introduction of the Agniveer scheme, and the deducted expenditure on pensions, gratuity, and other Ex-Servicemen benefits, over the next few years, total revenue expenditure will see a decline.

Priorities Moving Forward

The Defence budget intends to prioritise military reform and indigenisation of weapons and weapons components production. Of the ₹6.81 lakh crore allotted, ₹1,48,722.80 cr is intended solely for capital acquisition for the purpose of modernisation. The creation of assets in a self-reliant manner needs focus on two governmental priorities going forward.

The first is the Buy Indian (IDDM–Indigenously Designed, Developed, and Manufactured) procedure, introduced in 2016 and integral to the Defence Acquisition Procedure 2020. It requires time-boundedness and transparency. It includes five Positive Indigenisation Lists (PILs) so far comprising 5,012 items designated for domestic production, with import embargoes on these products. However, as the Parliamentary Committee has also highlighted, the progress towards self-reliance can not compromise transparency, fairness, or timely deliveries.

The IDDM plan relies on the Defence Ministry’s Technology Perspective & Capability Roadmap (TPCR) to inform domestic producers about military modernization needs. Yet, the lengthy process—from issuing a Request For Information (RFI) to contract approvals—can take years. The question remains, can foreign vendors open to trade in defence components till such a time, especially if there are fears of technological obsolescence?

Second are offset procedures, which mandate that foreign vendors procure 30% of their contract value from indigenous manufacturers. While recent changes approved by the Defence Acquisition Council (DAC) aim to make changes in offset obligations more flexible post-contract signing, a robust Indian Offset Providers (IOP) ecosystem is essential for effective partnerships. Currently, penalties totaling US$ 87.78 million have been imposed on twenty-three offset contracts for annual shortfalls. A preferable approach would involve re-phasing contracts with minimal penalties rather than imposing strict shortfall penalties that fail to address non-compliance effectively.

Conclusion

Overall, while the defence budget was expected to drive modernisation more enthusiastically in the face of varied military challenges and geopolitical uncertainties, defence spending continues to decline in relative terms. At a time when indigenisation in few critical sectors may be vital given fluctuations in trade and supply chains, the Finance Ministry’s focus on optimal utilisation of funds also seems to waver. Potentially, the government’s goal is to meet security objectives with diplomatic tools. But if not, budgeting efficiently for the national security challenges of the present and future is a must. 

Disclosure of AI/ML Use: NotebookLM used for summarising Parliamentary standing committee reports.

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