Union Budget 2021: Developments around LAC, LOC warrant hike in allocation in defence outlay

File image of LCA Tejas. Image credits: HAL website/ANI

Year 2020 saw a remarkable beginning with the 11th edition of Defence Expo at Lucknow from 5-8 February 2020. Over 200 partnerships involving the signing of memorandum of understandings (MoUs), transfer of technology and product launches took place on the third day of DefExpo-2020 at a ceremony called Bandhan.

Among those MoUs signed, 23 of them were by Uttar Pradesh government. The Bandhan ceremony witnessed more than 13 product launches, 124 MoUs between DPSUs, private and global defence manufacturing companies.

Given India’s geopolitical situation, the expectations from the Defence Budget for FY 2020-21 were quite high. However, it was a routine allocation of Rs 3,37,553 crore (excluding Defence Pension). Out of Rs 3,37,553 crore, Rs 2,18,998 crore is for the Revenue (Net) expenditure and Rs 1,18,555 crore is for capital expenditure for the Defence Services and the organisations/departments under the Ministry of Defence.

With the outbreak of the pandemic, several countries went under national lockdown. India, too, was under a nationwide lockdown from 24 March till 14 April 2020. Though lockdown restrictions continued to ease with each phase, it impacted the economy adversely. As a result, the Ministry of Finance on 8 April 2020 released an order listing spending and cash flow management of each ministry.

For the Ministry of Defence (MoD), the order put a cap of 20 percent to defence capital, defence services and defence pensions. Such measures further solidified the understanding that in a post-COVID world, self-reliance will be a necessity. Hence, on 12 May 2020, the Government of India (GoI) gave a clarion call of Atmanirbhar Bharat or self-reliant India.

As part of the Atmanirbhar Bharat Rozgar Yojna, the GoI announced several reforms in eight sectors as part of the stimulus package. These sectors are defence production, space, civil aviation, power, atomic energy, coal, minerals and social infrastructure. Reforms announced under defence production are as follows:

Increase of FDI cap to up to 74 percent under automatic route: The formal revision of FDI
cap as per press note 4 (2020 series) was issued by the DPIIT on 17 September 2020.

Setting up of Project Management Unit (PMU): The DAP 2020 mandates setting up of a PMU to support contract management so as to usher in faster decision making and time-bound defence acquisition process.

Corporatisation of Ordnance Factory Board (OFB): The GoI has begun the process of the corporatisation of OFB.

Creation of a Capital Budget for domestic procurement: In August 2020, it was announced that the MoD has bifurcated the capital procurement budget for 2020-21 between domestic and foreign capital procurement routes. A separate budget head has been created with an outlay of nearly Rs 52,000 crore for domestic capital procurement in the current financial year.

Creation of a negative list of import: A list of 101 items has been notified on which there
would be an embargo on the import beyond the timeline indicated against them.

Due to the major developments in the situation around LAC and LOC in the past year, the defence budget for 2021 is expected to go up. Since the release of import embargo list, more funds are expected to the focused towards indigenous procurements to make India ‘self-reliant’ in defence sector. Today, self-reliance has become a strategic requirement of the nation. It is crucial to develop an industrial ecosystem for long term indigenous support to Indian armed forces.

With major programmes in the pipeline, such as 114 fighters for the air force, P 75I class submarines for Indian Navy, carrier-based fighters, armed UAVs, artillery modernisation for the army, the defence budget is expected to cater to such crucial requirements of the armed forces. The Centre increased the defence budget by approximately 6 percent and the total defence budget stood at Rs 4.7 lakh crore last year and the same or more is expected to be the hike this year.

The writer is Director-Aerospace and Defence, EY India; and Indian Army veteran