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Opinion: Why Defence Sector has no high expectation from Union Budget

Representative photo. Photograph:( Zee News Network )

New Delhi, Delhi, India Jan 18, 2018, 07.51 AM (IST) Written By: Amit Cowshish

Last August, the finance minister laid before the Parliament the Medium Term Expenditure Framework Statement, envisaging an increase of approximately 10 per cent in the defence budget for the FY 2018-19. This makes it pointless to second-guess whether this time around the government would push the envelope to boost defence manufacturing by making a substantially higher allocation for capital expenditure. The burgeoning revenue expenditure makes it virtually impossible to do so anyway.


Every year, a lot of energy is spent by defence analysts before the presentation of the Union Budget in underscoring the need for a substantial increase in the outlay for defence. The rationale put forth is that it will beef up the combat capability of the armed forces. There has been a persistent demand to increase the defence budget to 3 per cent of the gross domestic product. 


While the security concerns are legitimate, unrealistic expectations concerning substantially higher allocations invariably result in disappointment after the presentation of the budget. The heartbreak spawns narratives of politico-bureaucratic apathy towards the imperatives of defence preparedness. This familiar scenario seems to be playing out this time also.


While we can rarely argue that there is no need for a higher allocation, it has to be realised that it is possible only if the government’s revenue goes up steeply. The finance minister’s options for raising the government’s revenue in any substantial measure are limited, especially after the onset of the GST regime. He can now tinker only with the direct taxes or raise revenue through other means, such as disinvestment. 


With a very limited tax base in India, there is nothing much that the finance minister could do to boost the revenue receipts through changes in the direct taxes. The coming budget being the last regular budget to be presented by this government before the 2019 general elections, there is no way he can raise the taxes or levy a defence surcharge.


This electoral compulsion, however, does not apply to disinvestment. Going by the experience of the sale of 5 per cent stake sale in the Bharat Electronics Limited (BEL) last year, which was oversubscribed 3.6 times by the retail investors, there is a wide scope for tapping this source for revenue generation.


But BEL remains a solitary shining example. More than five years ago, a similar attempt was made in respect of the Hindustan Aeronautics Limited (HAL) - another flagship defence public sector undertaking. But it has not produced any result. It will not be unreasonable to expect that the finance minister will lay down a more definitive roadmap for disinvestment in HAL and other undertakings and announce other policy changes necessary to ensure that the targets are achieved.


The defence sector must benefit from the disinvestment in the undertakings that are under the administrative control of the ministry of defence. For that to happen, at least a portion of the revenue raised through disinvestment, and credited to the Consolidated Fund of India will have to be transferred to a sector-specific fund for the modernisation of the manufacturing infrastructure, technology development and innovation in the defence sector. 


This fund could subsume the Defence Technology Fund which is presently struggling to take off. Appropriation from this fund should be related to specific outcomes and, it goes without saying, that the fund will have to be professionally managed. An announcement by the finance minister, looking at the modality of creating such a fund could go a long way in energising the largely dormant ‘Make in India’ initiative. The private sector companies could borrow from this fund for technology development under ‘Make II’ category wherein the cost of prototype development is to be funded by the industry itself. 


This could well turn out to be wishful thinking at this juncture but a more realistic expectation from the budget would be announcement of policy initiatives that make the cost of capital more affordable for the private sector in India, especially for the micro, small and medium enterprises. There is apparently an issue regarding eligibility of the defence industry under the priority sector lending scheme of the Reserve Bank of India. It remains to be seen if this problem gets addressed in the budget.


The budget speech is not meant to expatiate on the defence policy but over the past four years, the finance minister has been mentioning several issues, ranging from the one-rank-one-pension to development of a centralised defence travel system to facilitate the online booking of travel tickets by the armed forces personnel in his speech. These issues are important in their own right but do not holistically address the most critical issue of acquisition of defence capabilities.


One of the fundamental causes of this unsatisfactory state of affairs is tardy decision making in the ministry of defence which either stymies the procurement and infrastructure development projects or results in time and cost overruns. 


Last year, a committee set up by the ministry had recommended setting up of a dedicated defence acquisition organisation, free from the bureaucratic stranglehold of the ministry. It will steer the entire process from formulating qualitative requirements, identified by the armed forces and based on the operational needs, till the delivery of the requisite capability. The scheme, however, requires the approval of the government.


It would make the upcoming budget stand out if the finance minister announces the government’s resolve to go ahead with the setting up of this organisation.  Moreover, the government needs to make it responsible for the optimum utilisation of the capital outlay, a portion of which remains underutilised, every year, under the present scheme of things.


(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)       

Amit Cowshish

Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and presently a Distinguished Fellow with the Indian Institute for Defence Studies and Analyses