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Tuesday, 1 March 2016

From Today's Papers - 01 Mar 2016
OROP effect: Major chunk of defence budget goes to salaries, pensions
Ajay Banerjee

Tribune News Service

New Delhi, February 29
Despite a hike in the budget, the Ministry of Defence has literally been weighed down by increased salaries and pensions — the expected effect of the Seventh Pay Commission and enhanced pensions.

The allocation for new weapons, equipment and systems has been increased, but not the quantum jump that is needed to rapidly bridge the gap. Union Finance Minister Arun Jaitley, surprisingly, did not mention the allocation of defence in his Budget speech in Lok Sabha today.

The budget for MoD is Rs 2,58,589 crore. The ongoing fiscal had a defence budget pegged at Rs 2,33,341 crore and the hike works out to be 9.76 per cent. Another Rs 82,332 crore is allocated for pensions, making it a total of Rs 3,40,921 crore. It’s for the first time that pensions have been clubbed with the budget.

The budget includes a capital outlay of Rs 90,208 crore, including a sum of Rs 78,586 for new equipment, weapons, aircraft, naval warships, Army vehicles.

Notably, the spending on salaries for the three services – the Army, Navy and the IAF, along their civilian staff — has been budgeted at Rs 95,849 crore — that is Rs 5,641 crore more than the capital expense. The biggest increase is in terms of pensions, which itself will cost Rs 82,332 crore. It’s up from Rs 60,238 crore in the ongoing fiscal, ending March 31.

Though the expense of the MoD will account for 10 per cent of all government spending, it leaves India ‘gasping for breath’ to catch up with its neighbour China, which is spending $144 billion. India’s budget of 2,58,589 crore is $38.2 billion – which is just about 26 per cent of China. Meanwhile, the US Department of Defence has submitted a budget of $582.7 billion to the Congress.

Already India’s expenses on operations and maintenance are dropping while expenses on salaries have risen. The finding of a study conducted for the pay commission by Institute for Defence Studies and Analysis, a New Delhi-based think tank, says India’s expenditure on personnel as a percentage of total defence spending witnessed a sharp increase from 27.55 per cent in 2007 to 41.12 per cent in 2012, reflecting the impact of the implementation of the 6th Pay Commission.
Defence Ministry Gets Rs. 86,000 Crore For Modernisation
New Delhi: The Defence Ministry will have about Rs. 86,000 crore for the financial year 2016-17 to fund the purchase of the French made Rafale fighters, Medium Range Surface to Air Missiles (MRSAM) and Submarines for the Indian Navy.

If the Rafale deal goes through, at an estimated cost about Rs. 60,000 crore, India will have to pay about one-sixth of the total cost in the financial year to France.

The total budget allocation for this financial year of Rs. 2,49,099 crore is an increase of nearly one per cent over last year's allocation.

This is apart from the funds for pension and allocation for payment for One Rank One Pension which stands at Rs. 82,332 crore.

The Defence Ministry returned back about Rs. 20,000 crore worth of unspent funds to the exchequer this time. "This is excess is largely because of low international fuel prices," a senior MoD official told NDTV.

Out of nearly Rs. 2,50,000 Crore allocated to the ministry, Rs. 1,62,759 crore is allocated for Revenue expenditure. It includes expenditure for Defence Ordnance factories, Research and Development, Rashtriya Rifles, Military Farms and the National Cadet Corps.
Government Aims to Cut Defence Imports, Hold Spending Steady
NEW DELHI: India plans to focus defence spending more on the domestic market instead of importing combat planes, ships and submarines, after saying on Monday it will leave military spending for 2016/17 largely unchanged following years of increases.
Major global defence companies have been circling over the Indian market, buoyed by the military's modernisation plans worth more than $100 billion.

But the government of Prime Minister Narendra Modi has vowed to end the military's dependence on imports that have made it the world's largest buyer, according to the Stockholm International Peace Research Institute.

"For the first time this government is having a look at our procurement policies and they are telling the military we are not interested in your outright purchases anymore," said Deba R. Mohanty, chairman of Indicia Research and Advisory, a consulting firm on defence affairs.

India's military is deployed on the border with China as well as Pakistan and says it has to plan for a "collusive threat" from them both. For decades it relied on the former Soviet Union to supply planes, ships and artillery.

Then it turned to Western manufacturers including France, United Kingdom and in recent years Israel and the United States for expensive combat planes, missiles and surveillance planes.

In his federal budget presented to parliament on Monday Finance Minister Arun Jaitley allocated 2.49 trillion Indian rupees ($36.5 billion) for defence, a 0.96 percent increase over the 2015/16 allocation of 2.46 trillion rupees.

Amit Cowshish, who handled defence accounting in the ministry, said more than funds, the bigger problem was lack of clarity on the defence procurement policy.

"It's not that the money is not there, it's that there's no still no clear-cut policy on indigenous manufacture, the procedures etc. That is why even the money that has been allocated ends up not being spent."

The budget papers showed that the military didn't spend the full amount given to it last year. The revised estimate for spending for the fiscal year ending in March was 2.24 trillion rupees.

Defence wages and pensions have also risen this year, making even less money available for modernisation, Cowshish said.

China is expected to announce a large rise in defence spending next month, as the ruling Communist Party seeks to assuage the military's unhappiness at sweeping reforms and as worries over the South China Sea and Taiwan weigh on Beijing.

At 886.9 billion yuan ($136.4 billion), China's budgeted defence spending last year was more than three times that of India's expenditure announced on Monday.
Defence budget: What Arun Jaitley didn’t tell you in his speech

OROP inflates the defence budget by 10% to Rs3.4 trillion, and will go up further after Seventh Pay Commission
India’s defence pensions have ballooned by 50% and the capital outlay has been slashed, with the Seventh Pay Commission’s fiscal impact looming large.

Developments over the last year have come with profound implications for India’s defence budget. However, finance minister Arun Jaitley did not bring up defence spending in his budget speech.

After a protracted crisis over One-Rank-One-Pension (OROP) for the armed forces, the government acceded to defence personnel demands, with some exceptions. Uncertainty has continued to plague India’s Rafale deal with France, and some green signals were given to the Indian army to raise an 80,000-strong mountain strike corps. The Seventh Pay Commission also imposes higher personnel costs, which affects the Indian army more than the other two services.

Overall, the defence budget estimate for 2016-17 is Rs3.4 trillion, about 10% more than the previous year’s budget estimate. This is broadly consistent with past increases.

However, what makes up this net increase is a radical departure from the past.

Thanks to OROP, the defence pensions budget has gone up by a whopping Rs27,800 crore from the previous year—a full 50% increase. This increase is just Rs2,000 crore short of the increase in the overall defence budget, making one wonder if all other expenditure increases have been frozen.

There is an accounting change this year which complicates the analysis, where it turns out the traditional defence demand for grants numbers 21 to 28 have been consolidated from eight items to four, numbered 20 to 23 in the FY16 budget.

It turns out that the armed forces’ revenue expenditure has gone up but the capital outlay has been slashed in turn. Revenue expenditure has increased by about Rs11,000 crore this year, amounting to an 8.6% increase between budget estimates. This excludes pensions but includes allocations toward the salaries and allowances of both serving personnel and civilian support staff, as well as fuel, consumables and other miscellaneous costs. The Indian army has the lion’s share of the revenue expenses, as its force strength is about nine times that of the Indian Air Force and Navy combined.

However, the budget does not take the Seventh Pay Commission recommendations into account—which will likely be accepted some time in the year.

Revenue expenses have increased by similar percentages in the past even when not accompanied by new pay commissions. Thus, one can expect significant new expenditures on salaries and on pensions that have not yet been allocated for.

Last year, the government had allocated close to Rs86,000 crore as capital outlay, and we learn now that this was revised down to Rs74,300 crore. The latest budget estimate is Rs78,586 crore on capital expenditure. While this is an increase over the previous revised estimate, the ministry of defence has consistently underspent the capital budget for the last several years, with the Indian army’s modernization efforts usually being the most hampered. It is a concern that the final expenditure on defence modernization and capital goods may be much lower than the latest estimate.

Defence modernization involves buying large equipment like tanks, ships and aircraft which are usually paid for in eight-year cycles or thereabout. This means that a large part of the defence modernization budget goes toward committed liabilities, with some budgetary space left for new acquisitions.

In each of the last three years, the defence ministry has been able to allocate less than 8% of the defence modernization budget for new defence acquisitions, with the rest of the budget being used for committed liabilities. Thanks to an increasing budget and high growth in the late-2000s, India was able to spend between 30% and 40% of its modernization budget on new acquisitions. This started falling from 2011, and in the last four years, the defence ministry has not allocated more than 9% of its modernization budget on new acquisitions. This may be insufficient for the Indian armed forces to maintain their technological edge.

It is unclear whether this pattern changes in 2016, but the prospects look unlikely. The only way by which the budget for new acquisitions rises significantly is if any large contractual payment cycles got completed last year. Until the parliamentary standing committee on defence publishes its reports this year, the Indian public will remain in the dark.

It is a seldom asked question whether the Indian Army could do with fewer soldiers while providing the same level of security and defence. Even the Chinese People’s Liberation Army has begun rationalizing force strengths in recent years. The cost of implementing OROP and the Seventh Pay Commission recommendations must trigger a fundamental rethink on how India’s armed forces are organized and paid for.

Pavan Srinath is a fellow and faculty member at the Takshashila Institution, an independent think tank and school of public policy. He tweets at @zeusisdead.
Seeker to revolutionise Indian Defence
 India and Israel are expected to ink a significant Defence deal worth over Rs50,000 crore for Seeker technology ahead of Prime Minister Narendra Modi’s visit to Tel Aviv later this year. The cutting-edge technology will help India take a giant leap forward in manufacturing smart weapons within the country and rapidly modernise missile and rocket system used by the IAF, Army and Navy.

The talks for wrapping up the deal are in advanced stage between the two countries and Israel has agreed to transfer the expertise to develop and manufacture Seeker technology. It will enable the Defence forces to identify, acquire and then destroy an enemy missile or aircraft at long range or beyond visual range.

In simple terms, it means a warship can fire a missile at a hostile target at more than 200 km distance without visually sighting it as compared to the present 50 to 60 km. Seeker technology will also revolutionise the armoured corps as tanks will hit a target at a greater distance and same will be the case for fighter jets. In fact, this technology will cover the entire gamut of missiles ranging from Akash to Long Range Surface to Air Missiles (LRSAM) used by the three Services.

Elaborating upon the importance of this proposed deal, officials said here on Saturday the countries including the US and some European countries are reluctant to transfer Seeker technology to India resulting in the country’s missile system lagging behind by at least two generations.

Against this backdrop, Israel has given a clear signal that it will provide the critical ‘know why’ instead of ‘know how’. Starved of  the state-of-the-art technology, the Indian industry depends on know how or technology transfer but has not been able to master entire process of manufacturing a smart weapon from scratch. In turn, it hampers the faster modernisation of the armed forces as they are using weapons which are at least 15 to 20 years behind in terms of technological advancement as compared to the US, China and NATO countries.

Defence Research and Development Organisation (DRDO) will be the lead agency in developing this technology. The Prime Minister’s Office (PMO) had given an “in-principle” approval for setting up of an Rs6,000-crore facility by the DRDO for air missile defence systems last year.

Besides the Seeker technology deal, the two countries are likely to ink a Rs10,000-crore deal for joint development of a medium-range surface-to-air missile system for the Indian Army.

The other pacts include procurement of 164 laser-designation pods or ‘Litening-4’ for IAF fighters like SU-30s and Jaguars as well as 250 advanced ‘Spice’ precision stand-off bombs capable of destroying  fortified enemy underground command centres. The Cabinet Committee on Security (CCS) chaired by the Prime Minister may clear it next month, sources said.

Talks are also underway to finalise a Rs3,200-crore contract for 321 ‘Spike’ anti tank guided (ATGM) systems and 8,356 missiles. The Army is in urgent need for third-generation ATGMs, with a strike range of over 2.5-km and fire-and-forget capabilities, to equip all its 382 infantry battalions and 44 mechanised infantry units.

The NDA Government in 2014 had selected the Israeli Spike ATGM over the US Javelin missile system, but the actual contract could not be inked due to some issues. The project involves an initial off-the-shelf induction, followed by large-scale indigenous manufacture by Bharat Dynamics Ltd (BDL).

The proposed medium range surface to air missile (MRSAM) project between DRDO and Israeli Aerospace Industries (IAI), too, is a big ticket item, officials said. The initial order is for one MRSAM regiment, with 16 firing units along with their multifunction surveillance and weapon control systems. BDL will manufacture these missiles. DRDO and IAI are already engaged in a project worth over Rs13,000 crore for Navy and IAF for developing similar missiles.

Incidentally, the Israel Defence industry is closely involved with the DRDO in more than 30 projects, including development of radars, electronic warfare systems and satellite based command and control systems for the three Services.

Moreover, Israeli made Greenpine radars are successfully integrated into the Agni missiles systems capable of carrying nuclear warheads. Israel is now the third largest weapon supplier after the US and Russia to India since diplomatic ties between the two nations were established in 1990.

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