Indian Interests

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[url="http://pragmatic.nationalinterest.in/2010/01/04/understanding-unutilised-defence-expenditure/"]Understanding unutilised defence expenditure[/url]

38 percent of the amount earmarked for new acquisitions was surrendered in 2008-09.

Most of us have noted — with great concern — that certain portion of the defence budget is returned to the government coffers unused every year. Those who go into slightly more detail are aware that this unexpended money is usually from the capital expenditure portion of the defence budget (for example, it was Rs 3500 crore in 2007-08).



Now let us look at it even far more closely. The capital expenditure is also divided into two broad categories: capital acquisition and other capital expenditure. Other capital expenditure consists of expenses incurred on items such as land, works, accommodation projects, ordnance factories, DRDO and other defence departments. This amounts to 20 to 25 percent of the total capital expenditure. The balance 75 to 80 percent of capital expenditure goes towards capital acquisition — the actual amount spent to procure military hardware and weapon platforms. The capital acquisition portion can be again subdivided into the one used to fund committed liabilities for items already procured in previous years and the other for new schemes.



Let us understand this better with a concrete example. In the last financial year 2008-09, the total defence budget (at the Budgetary Estimates stage in March 2008) was 105600 crore. Out of this, the revenue or running expenditure was supposed to be 57593 crore and the capital expenditure was to be 48007 crore. Now this was an unusual year where the total defence budget was actually increased by 9000 crore before the end of the financial year (called the Revised Estimates). This should have been a welcome move but it wasn’t so. For even this additional amount was not sufficient to meet the increased revenue expenditure due to implementation of sixth pay commission recommendations. The government actually reduced the capital expenditure by another 7007 crore and transferred it to the revenue head.



At the BE stage, the capital acquisition budget was supposed to be 37482.77 crore, which included committed liabilities of 17846.57 crore. When the actual capital acquisition budget finally spent in 2008-09 was 30000.42 crore, the expenditure on account of new schemes came down to 12153.85 crore from 19636.2 crore. Thus, the unutilised portion of 7482.35 crore that was returned was only from the amount earmarked from new schemes — over 38 percent. 38 percent!



This is a story which has been replayed year after year for last many years and is likely to be repeated in the current year, 2009-10 as well. The total defence budget for 2009-10 at the BE stage is 141703 crore, out of which revenue allocation is 86879 crore and the capital allocation is 54824 crore. The capital allocation portion for this year is 40367.72 crore which includes committed liabilities of 21248.98 crore and new schemes worth 19118.74 crore. Very interestingly, the allocation for new schemes planned this year, though more than actually spent last year, is actually lesser than what was planned for last year. So much for accelerated plans for military modernisation this year.



A detailed breakdown for defence budget of 2009-10 will be made available only after the release of a parliamentary defence committee report that reviews the grant of demands for defence ministry for 2010-11. But when the finance minister presents his next union budget to the parliament in March this year, watch out for the RE figure for capital expenditure on defence for 2009-10 [Demand number 27 of the Finance bill]. If that figure be X crore, then (54824 — X) crore will be the amount returned from the allocation of 19118.74 crore for new schemes in 2009-10. Let us see whether the figure will be less than 38 percent this year or more.

If you have followed the post so far, then you would have come to the conclusion that the genesis of the problem lies with the politico-bureaucratic lethargy and the tortuous acquisition procedures of the Indian government. But that is only a part of the problem. The bigger problem perhaps is with the way the budgetary allocation for defence is made every year by the government of India. That is where there is an urgent need in this country — to begin with — to study defence economics. And implement the lessons during the formulation of defence budget of this nation.