This brief is a part of the Budget 2022: Numbers and Beyond series

In the run-up to the Finance Minister’s Budget speech earlier this week, a report in the media revealed that the defence services had recorded an unusually slow pace of expenditure of their capital allocations. The Indian Army, the report highlighted, had spent just about 40 percent of its capital budget in the ongoing financial year, with the Indian Air Force managing a figure of around 70 percent. Only the Indian Navy has achieved 90 percent spending of its capital outlay.

The army’s slippage in spending came as a surprise, as it has, for some time, been projecting a requirement for capital budgets much higher than its normal allocation. Last year’s defence budget even allocated additional capital funds for the purchase of new arms and equipment. That, however, appears not to have helped. In the shadow of the pandemic, the army’s procurement plans seem to have suffered, with delays in the execution of contracts and interruptions in payments and delivery.

At INR 47,590 crores, the navy’s overall budget stands considerably higher than the INR 33,253 crores allotted in the previous financial year—evidence that the government is alive to the China-challenge in the Indian Ocean, and the need for assertive presence operations in the littorals.

Not unexpectedly, the defence budget (2022-23) has reduced the capital allocation for the army. While the overall defence budget has registered a healthy, though less-than-impressive rise, of 9.48 percent (from INR 4.78 lakh crore last year to INR 5.25 lakh crore in the next fiscal), the army’s share of capital allocation is down by a significant 12 percent (more than INR 4,000 crores). The navy’s share of capital, on the other hand, has been raised by over INR 3,000 crores, including a 43 percent rise in its modernisation funds. At INR 47,590 crores, the navy’s overall budget stands considerably higher than the INR 33,253 crores allotted in the previous financial year—evidence that the government is alive to the China-challenge in the Indian Ocean, and the need for assertive presence operations in the littorals. Even the Indian Coast Guard earned a hike of 39 percent over its allocation last year.

The main talking point of the budget, however, was the Finance Minister’s announcement that 68 percent of the modernisation budget would be reserved for domestic industry. The latest in a series of government decisions meant to promote indigenisation, the move seems intended also at reducing the military’s dependence on foreign procurements. Starting with a ban on the import of 101 products in August 2020, to the release of a “positive indigenisation list” of 108 items of defence equipment in May 2021, the Ministry of Defence has progressively narrowed the avenues for acquiring foreign manufactured equipment. The Finance Minister’s Budget speech reiterated the need for the services to meet their warfighting needs from domestic sources. The Defence Minister, who has in the past backed moves to indigenise—including a new DRDO procurement manual to facilitate indigenisation—has been strongly “vocal for local”, as have many defence veterans and commentators.

The Defence Minister, who has in the past backed moves to indigenise—including a new DRDO procurement manual to facilitate indigenisation—has been strongly “vocal for local”, as have many defence veterans and commentators.

Yet something about the government’s moves suggests an attempt at ‘forcible indigenisation’. At a time when warfare is becoming increasingly sophisticated, the military is being pressed to work with indigenously designed and manufactured equipment that may be less than fit-for-purpose. Indeed, on more than a few instances in the past, the military has had multiple occasions to reject sub-par indigenous equipment; which is not to say that all domestic defence industry in India is incompetent. Larson and Toubro (L&T), that has played a key role in India’s submarine building programme, is an example of a private enterprise that has done yeoman service to the military. L&T, however, is more the exception than the norm. On the whole, private industry in India has struggled to deliver, not least because it is yet to properly invest in research and development. While the lack of contracts from the military has certainly been an aggravating factor, process inefficiencies in India’s domestic private sector is a reality that cannot be overlooked. Forced spending on domestic industry—though laudable in intent—is unlikely to create the industrial ecosystem within which a defence sub-system can flourish.

The defence budget’s reservation of almost three-fourths of the defence capital budget for Atmanirbharta may be justifiable from an indigenisation standpoint, but it leaves the military grappling with a paradox. India’s armed forces must find ways to preserve their operational edge using equipment that may not be best-in-class, or even necessarily reliable. With some foreign projects still in the pipeline, the navy, in particular, will need to look for ways to acquire proven equipment, made sparse through government diktat.

India’s armed forces must find ways to preserve their operational edge using equipment that may not be best-in-class, or even necessarily reliable.

In recognition of the modernisation deficit, the new defence budget sets aside 25 percent of the total R&D budget for private industry, start-ups, academia. That may seem significant in percentage terms, but isn’t really so in actual numbers. In reality, the allocation to private industry for defence R&D in FY 2022-2023 is a mere 3,000 crores, with the overall R&D budget at a conservative 11,981 crores (an increase of about INR 500 crores over last year’s allocation of INR 11,375 crores). Yet, it is telling that the revised R&D budget for 2020-21 was reduced by over INR 1,500 crores, as the money was perhaps not spent. Thereby, hangs a tale about the true state of defence R&D in India.

One had expected the Finance Minister to announce a dedicated and non-lapsable Modernisation Fund for Defence and Internal Security (MFDIS), as per the recommendations of the 15th Finance Commission. It would have been a step in the direction of addressing the issue of unpredictable spending of capital allocation. But the government isn’t still quite ready to allow unspent funds to be reallocated to the defence budget. This means the military will continue to surrender its funds under the current rules. And remain in the budgetary ‘Chakravyuh’ that all armed forces are fated to live in.