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Indian defence impervious to GFC July 14, 2009

Posted by sandygordon in : Gordon, Sandy, India , trackback

Sandy Gordon

Despite a rising budget deficit due in part to the global financial crisis (for details see Monday’s post on the Indian budget), Indian defence spending continues to rise substantially in real terms.

The interim defence budget, brought down in February, has been surpassed by 2 per cent  in the actual budget, brought down on 6 July. Defence (not including pensions, military nuclear costs, the Coast Guard and the running costs of the Ministry of Defence) rose 23 per cent over the revised estimate (RE) to a total just shy of US$30 billion. The rise over the budget estimate (BE) was 34 per cent, but India’s chronic under-spend was corrected last fiscal year, meaning that the actual rise (assuming this year’s budget estimates are met) over last year will be 23 per cent. With Indian inflation running at about 4 per cent to the end of the fiscal year, the 23 per cent hike represents a significant rise in real terms. The  hitherto persistent under-spend on the defence allocation is due to serious problems with procurement. With 38 cases of alleged corruption in procurement still pending, procurement officials have been wary of leaving their signature on defence contracts.

Until now, India’s rising defence expenditure has basically been a manifestation of its rapidly rising GDP. This year, however, that link has been broken. In bringing down the budget, Finance Minister Pranab Mukherjee cited the 26-29 November 2008 Mumbai attacks as highlighting India’s vulnerability. However, the rise in defence spending has much more to do with the report of the Sixth Pay Commission – which substantially raised remuneration of service men and women – and with military modernisation, than it has to do with counter-terrorism. But in an indirect sense, there may be a connection. Some say the poor state of the military, and especially the Army, restrained India in exercising a ‘surgical strike’ option in the aftermath of the 26/11 attacks in Mumbai.

Whether lack of progress with military modernisation restrained India from striking Pakistan last year or not, modernisation is now perceived to be pressing. The Indian Air Force is facing block obsolescence of its 600 strong MiG fleet and is in the market for 126 state-of-the-art fighters, in what has been touted as a US$10 billion ‘mother of all defence contracts’.

F/A-18F Super Hornet.  In line for Indian procurement?

The F/A 18 Super Hornet, which Boeing is hoping to sell to India. India will have to do a lot better than Australia's recent deal to afford 126 of these.

India also needs to update its maritime patrol capacity, buy new howitzers, helicopters and tanks for the Army, and give credibility to its 2005 claim to seek ‘sea control’ in parts of the Indian Ocean.

As usual, the Navy is the ‘poor cousin’ in this budget. Navy’s share is 14.5 per cent – not up significantly from the 12 per cent it regularly received in the 1990s. Although India is an ambitious naval power, in reality it is restrained by continental demands and by burgeoning pay allocations for the 1.1 million strong Army arising from the findings of the Sixth Pay Commission.

report by the Delhi-based think tank, the Institute for Defence Studies and Analysis (IDSA), notes that  the rate of spending as a percentage of GDP has risen from 1.95 percent last year to 2.35 per cent this year. Even more significantly in view of the looming budget deficit, the share of Defence of government spending has also risen, from 14.6 per cent to 14.87 per cent.

An expenditure of US$30 billion represents a 300 per cent nominal rise from 1992. But defence as a percentage of GDP, while rising, is still relatively low compared with China’s estimated spend of 7 per cent and Pakistan’s of 5 per cent.

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