The defence budget of a nation is linked to threat perception and is limited by competing demands on the scarce resources. Allocation under revenue expenditure required to sustain existing force levels, is affected by inflation and unfavourable changes in exchange rates. Enhancement of allocation from year to year under this head is therefore inescapable. If there is no significant increase in the total budget, the allocation under capital outlay remains near constant, adversely affecting modernisation plans of the armed forces. The Service Headquarters have repeatedly apprised the government of this problem.

The centralised decision-making in China has not only accelerated economic growth to unprecedented levels, it has also helped them cross the bottom of the indigenous defence production curve. Total funds available for the armed forces in China are significant. The actual figures though, are generally believed to be higher. China is today producing its own stealth, ‘near fifth-generation’ fighters, heavy transport aircraft and helicopters. China will soon have two aircraft carriers, one produced indigenously. The People’s Liberation Army is undoubtedly undergoing major modernisation. To provide the requisite infrastructure and forces on the northern borders, India needs to spend far more on defence. Only then can the nation negotiate on territorial issues from a position of strength. Also India has to cater for a two-front war. India should increase defence outlay to three per cent of GDP at the very least and to 3.5 per cent for ten years if the procurement backlog is to be cleared. In the recent past, some of the defence procurements were cancelled or were delayed due to procedural issues. While the Defence Procurement Procedure (DPP) has been fine-tuned over the years, there are loopholes that still get exploited. Apprehensions of allegations of procedural or financial impropriety retards the decision-making process.As per a report by the Institute of Defence Studies and Analyses, in 2011-12, Rs. 3,055 crore (4.41 per cent of the defence budget) were surrendered from the capital budget at the RE stage. It is well known that 75 per cent budgeted money is spent between January and March. The Ministry of Finance also initiates cuts closer to the end of the financial year to address the more important problem of reducing the fiscal deficit. In 2004, a non-lapsable defence modernisation fund was mooted for which Rs. 25,000 crore was to be earmarked and procurement could be completed within three years. This proposal is yet to see the light of the day.

Essentially, the eight major defence public sector undertakings (DPSUs) along with 39 ordnance factories in the country constitute an elaborate defence industrial base. During 2010-11, the value of production by DPSUs totalled nearly $3.9 billion ( Rs. 21,450 crore). The eight DPSUs are the Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Earth Movers Ltd (BEML), Mazagon Dock Limited (MDL), Garden Reach Shipbuilders and Engineers Ltd (GRSE), Goa Shipyard Ltd (GSL), Bharat Dynamics Limited (BDL) and Mishra Dhatu Nigam Limited (MIDHANI). Ordnance factories are one of the oldest industrial organisations of the Government of India with a total workforce of 1,50,000. The organisation is often criticised for obsolete and substandard products at much higher cost. Their main products are small arms, ammunition and explosives, military and armoured vehicles, parachutes, troop clothing and general stores. Ranked at 46 in the world in the list released by disarmament watchdog Stockholm International Peace Research Institute (SIPRI) for 2010, its total sales were at $2.4 billion ( Rs. 13,200 crore) Turnover figures are not truly indicative of indigenisation as many components are imported.

HAL’s flagship future projects cover the entire gamut from fifth-generation fighter aircraft (FGFA) to transport, rotary-wing and trainer aircraft. Such ambitious projects notwithstanding, HAL continues to struggle with its basic trainer aircraft (BTA) and intermediate jet trainer (IJT) projects. The DPSU continues to suffer problems all government-controlled corporations face the world over. There has been a talk of privatisation of HAL for decades. The time to act is now. Excellent models from emerging economies such as Embraer of Brazil are available to emulate.

The Defence Research and Development Organisation’s (DRDO) share in the defence budget at six per cent is $2.2 billion ( Rs. 12,100 crore). With the 17 per cent hike in its budget this year, the state-run DRDO intends to focus on development of missiles, unmanned aerial vehicles (UAV) and the Kaveri-II engine for the Tejas aircraft. DRDO Chief V.K. Saraswat indicated that about 40 per cent of the budget is devoted to development of strategic systems while the remaining 60 per cent is utilised for the science and technology-based programmes. DRDO is often accused of not being able to convert R&D into an end product.

In May 2001, the government opened up the defence industry to the private sector for participation up to 100 per cent and FDI up to 26 per cent, both subject to licensing. Major private players in the defence sector today are Tata Advanced Systems Limited, Larsen and Toubro, Kirloskar Brothers, Mahindra Defence Systems and Ashok Leyland. However, there is a degree of diffidence as investments required are huge but returns uncertain. The recent policy regarding “offsets” has brought in additional players. However, uncertainty continues to rule.

China is concerned about terrorism on its Western border. The US, Japan and India have serious differences with China and possess the military, economic and diplomatic means to compete. China’s population has started ageing on account of their extended one-child policy. China strives to gain influence in South Asia while India tries to do the same in East Asia. While securing oil sources around the southern Russian republics and Africa, China has outmanoeuvred India. China spends $12,259 ( Rs. 6,70,000) per square kilometre on defence, while the US spends $75,915 ( Rs. 41,75,000). Also China spends $91 ( Rs. 5,005) per capita on defence vis-à-vis the US which spends $2,447 ( Rs. 1,44,500).

Pakistan not only suffers from internal contradictions but also continues to be unstable and insecure. Pakistan looks for support from the US and China. Survival continues to be the central pillar for all actions by Pakistan. As per Foreign Minister Hina Rabbani Khar, in the last ten years, this biggest exporter of terrorism, Pakistan, has itself lost 40,000 lives to terror.

Many a committee, including the recent Naresh Chandra Committee Report, has suggested institutional changes that need early implementation. These include budgetary and decision-making approach. There is also this doubt in willingness to use force, making the nation appear indecisive. For the first decade after independence, India’s defence expenditure was at 1.2 per cent of GDP. After the 1962 war, it went up to 3.5 per cent for the next 25 years. It then gradually came down to around 2.5 per cent and now rests below two per cent. Minimum three per cent is required. The need of the hour is that India not only spends more, but spends more efficiently.