Defence capex for 'Make in India' fails to enthuse

Union Finance Minister Nirmala Sitharaman's last budget before elections, which mainly focussed on green and grassroot level growth, has not enthused the defence & aerospace industry for its 'Make in India' ambitions.

Though there is an increase of 13% (₹5.93 lakh crore) in the overall defence budget for FY24 as compared to the outlay in FY23 (₹5.25 lakh crore), capital expenditure outlay increased only by 7% to ₹1.62 lakh crore, from ₹1.52 lakh crore in the previous year. Of the total budget outlay of ₹45 lakh crore, Ministry of Defence gets 13.18% of the total budget. Defence Revenue expenditure got a 16% higher allocation of ₹2.7 lakh crore and Defence Pension got a 15% higher allocation of ₹1.38 lakh crore. Ministry of Defence (Civil) allocation was also higher by 13% to ₹22,613 crore.

In the backdrop of a policy decision to earmark 68% procurement from domestic industry, local companies were anticipating a big and higher allocation in defence capex. The budget also ignored certain key demands of the industry such as introduction of production linked-incentive scheme, extension of the deadline of concessional tax rate for commencement of manufacturing activities, etc.

"As the budget comes in the backdrop of the geo-political upheaval, rising inflation and slowing global growth, it can be said that the capital allocation to the defence sector is not in accordance with the expectations of the industry at large. While the defence capex allocation has risen in absolute terms on a yearly basis, the incremental percentage in the past three years has seen a downward trend,” says a KPMG budget analysis led by Gaurav Mehndiratta, Partner and Head Aerospace and Defence.  

The budget has a nominal capital outlay increase of 7% as compared to last year’s increase of 13% and an increase of approximately 19% in FY22 budget. On top of it, the government has budgeted an increase of 33% in overall capital expenditure commitment in this year’s budget, but the defence sector only gets an increase of 7% for defence capex, say KPMG analysts.

A Defence Ministry press release says non-salary revenue outlay has been enhanced from ₹62,431 crore to ₹90,000 crore in BE 2023-24, representing a 44% jump, and this expenditure is expected cater to sustenance of weapon systems, platforms including ships/aircrafts & their logistics; boost fleet serviceability; emergency procurement of critical ammunition and spares; procuring/hiring of niche capabilities to mitigate capability gaps wherever required; progress stocking of military reserves, strengthening forward defences, amongst others.

"As a precursor to this increase in the Non-Salary Revenue segment, the government during the Mid-term review had also enhanced the operational allotments of the current financial year by ₹26,000 crore, which works out as 42% of the present allocation. This unprecedented increase in the Revised Estimates 2022-23 has ensured liquidation of the entire carry over liabilities during the current year thereby ensuring that there is no dent in the next year’s operational outlay of the Services. The enhanced allocations in the Budget will also cater to Training Aids & Simulators for Agniveers and ensure that they achieve the set standards of training for induction in the Defence Forces", reasons Defence Ministry.

In the total defence capital expenditure, army got a share of 23% with ₹37,242 crore, Navy (₹52,805 crore) with a share of 32% and Airforce got a share of 35% (₹57,137 crore). Others (research & development, inspection, technology development, etc got 10% allocation in defence capex, ₹15,417 crore. The Ministry of Defence says the increase in the capital budget since 2019-20 has been ₹59,200 crore (57%) and this is a reflection of the government’s commitment towards sustainable augmentation in the area of modernisation & infrastructure development of the defence services.

For the Army, increase in capital outlay under the head ‘Aircraft and aero engines – Army’ to the tune of ₹1,935 crore is expected towards the announced induction of the AH 64 Apache helicopters. For the Indian Air Force, there is an increase of about ₹9,599 crore in capital outlay and is likely because of the committed payments towards the induction S-400 Triumf missile systems. Further, the allocation of the budget towards Aircrafts and Aero engines - Air Force' has reduced by about ₹7,991 crore as compared to the revised estimates of FY23.  For the Indian Navy, the land budget has increased from ₹30 crore to ₹1,551 crore, indicating acquisition of new land for new bases/ berthing of ships/submarines, say a KPMG analysis.

The capital budget of Border Roads Organisation (BRO) has been increased by 43% to ₹5,000 crore in FY24 as against ₹3,500 crore in FY23, which has been doubled in two years since FY22. "This will boost the border infrastructure, thereby creating strategically important assets like Sela Tunnel, Nechipu Tunnel & Sela-Chhabrela Tunnel and will also enhance border connectivity", says the Defence Ministry.

The Department of Space (DoS) is allocated ₹12,544 crore, out of which ₹6,357 crore is towards the capital expenditure.The allocation to Defence Research & Development Organisation (DRDO) has been enhanced by 9%, with a total allocation of ₹23,264 crore.

To foster innovation, encourage technology development and strengthen the Defence Industrial ecosystem in the country, iDEX and DTIS have been allocated ₹116 crore and ₹45 crore respectively representing an enhancement of 93% for iDEX and 95% for DTIS over 2022-23.