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  • Union Budget 2018: Highlights in the Defense Sector

    Union Budget 2018: Defence sector witnesses marginal growth

    As expected by various analysts, defence budget of the country was increased only marginally owing to higher spending in other sectors. Most industry expects predicted already that the government may not be able to allocate higher resources for the military. Since the allocation is not adequate, modernisation of the armed forces have to wait a little longer.

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    Defence allocation

    Defence allocation was increased to Rs.2.95 lakh crore in the Union Budget 2018. This is about 7.8% higher than the Rs.2.74 lakh crore allocated in the previous budget. The allocated amount represents about 1.58% of the country’s GDP. In the previous budget (2017-18), defence allocation represented only 1.56% of the country’s GDP. With the government spending focused on other growth sectors and infrastructure development, the budget allocation for the defence sector only witnessed a marginal growth.

    Delay in modernisation

    The armed forces in India are mainly using AK-47’s and INSAS (Indian Small Arms System) rifles, which are outdated compared to the modern day assault rifles. Moreover, the Indian military gear which comes with bullet-proof jackets are heavier than what is used in many countries around the world. Defence analysts across the country have been pushing for budget allocation around 3% of the GDP to ensure modernisation on par with the global standard. Considering the budgetary constraints of the government, a significant delay in modernisation is inevitable.

    The Union Budget 2018 has raised many expectations with regard to the changes that might be witnessed in various sectors. In addition to industrial sectors, taxpayers in the country have their own expectations regarding the potential reliefs they might be getting from this budget. While the priorities of the government lie mainly on economic growth, defense is one major sector that cannot be ignored at any cost. With the rising threat of terrorism looming over the country, there is an imminent need to upgrade the force and modernise the defense sector. However, the revenue expenditure for the current year may not allow a large contribution to the defense sector.

    Defense allocation in previous budgets

    The ‘Make in India’ initiative was announced by Prime Minister Narendra Modi in September 2014. While the previous budgets including Union Budget 2016 pushed for this initiative in the defense sector, last year’s budget did not highlight any specific initiatives for this. In Union Budget 2017, finance minister Arun Jaitley allocated more than Rs.3.59 lakh crore (including defense pensions) for defense spending. Excluding pensions, defense budget for this period stood at Rs.2.62 lakh crore. This represented a 5.34% growth from the defense budget for the year 2016. In terms of GDP share, this allocated amount stood at 1.56%.

    Expectations from defense analysts

    Defense analysts across the country have been arguing for the modernization drive for a long time. Every year they push for a considerable increase in the defense budget. While India’s defense budget has been around the 1.5% GDP mark over the last few years, analysts have been pushing for an increase in defense budget to 3% of GDP. There is a significant rise in security threats all over the country, and this has prompted defense analysts to push for modernisation of the armed forces and boost their combat capabilities.

    Spending and contractual obligations

    The defense sector has various contractual obligations with regard to the procurement of military equipment. With the current level of spending, there is a major stress in the sector when it comes to honouring contractual obligations and allocating resources for modernisation of the forces. Another major spending criteria in the defense budget is the salary hike and pension funds provided to military personnel. Following the 7th pay commission, there is a significant increase in salary and pension related spending for the armed forces. Considering these spending requirements, any moderate hike (5% to 10%) in military budget will not fulfill all the expectations of the analysts.

    What to expect in Union Budget 2018?

    While there is no denying that upgrading the armed forces is the need of the hour, it is safe to assume that there will not be a substantial increase in military budget this year. Even in the previous budgets, revenue expenditure of the government has prevented the government from implementing major changes in the defense budget. The government has to keep the revenue expenditure within the GST collection limit. If the defense budget must be increased, the government must look for revenue sources in other places including direct taxes. Another disadvantage is the weak economic growth of the country in the current fiscal year. It is worth noting that our country’s economy is still recovering from the impact of GST and demonetisation. Considering these factors, only a meagre increase can be expected in the upcoming defense budget of the country.

    In terms of standing military personnel, India has the third largest military in the world right next to China and the United States. Catering to the demands of this large army is not easy, especially at a time when the country is facing constraints with regard to revenue expenditure. However, with proper utilisation of existing resources, the armed forces can be fully prepared to tackle any inbound threats. Though the defense budget may not be significantly high in Union Budget 2018, there is a great chance of growth in the upcoming years when the country witnesses higher economic growth.

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