NEW DELHI: For the defence sector, good news in terms of higher allocation for the past five years shows no signs of abating. This year too promises to be no different. However, spillover benefits to industry, barring the public sector, from the annually increasing military equipment purchases had been scarce. With the Defence Ministry having erected the necessary policy superstructure in the form of a Defence Procurement Policy (DPP) and, more important, inserting an offset clause, the stage is set for the Union Finance Minister to give the intentions a push towards implementation.

Though Budget figures are classified, a hint about a higher outlay comes from two indicators. The first is the defence XI plan, which indicates the broad outlay from fiscal 2007 to 2012. The Government has approved an outlay of Rs. 6.5 lakh crores for the XI Plan, which translates into Rs. 1,30,000 crore a year. Given that some of the money might not materialise and the increase over the years will be incremental, the budget promises a higher outlay than last year's Rs. 89,000 crore. Although the Plan outlay translates into 2.33-2.34 per cent of the gross domestic product (GDP), it falls short of the services' demand for 3 per cent of the GDP.

The second indicator is the Government's desire to improve the ratio between equipment purchase and revenue expenditure (mainly salaries). From 70 per cent on the revenue account and 30 per cent on equipment purchases in 2001-02, the ratio improved to 60:40 in 2003-04. The aim is to further change the ratio to 50:50 and finally to the world ideal of 40:60.

With the Government showing no indication of beginning an exercise to downsize the armed forces, the one available way to improve the ratio is to give a higher amount for equipment purchases while keeping revenue expenditure as static as possible. The only alternative to achieve this goal is by driving up the total budget allocation for the defence sector till the Government feels that the security situation is comfortable enough to begin reducing the number of men in uniform. The trend of modernising the armed forces is not expected to slow down in the near future and this holds true for all the armed forces — the Army, Air Force and the Navy. Even the Navy, which traditionally received the lowest amount for capital expenditure, the allocation for capital purchases stands at Rs. 16,000 crore annually and is poised to go up to Rs. 20,000 crore a year in the next couple of years.

In this talk about figures that run into several digits, industry has had to make do with few opportunities despite the Government's avowed accent on indigenisation. It was only during Pranab Mukherjee's tenure that things started moving. The biggest hope for the industry comes in the form of the offset clause of DPP. It states that for all military equipment imports of over Rs. 300 crore, at least 30 per cent of the value of the product must be sourced from India. Since foreign direct investment in defence is limited to 26 per cent, companies sense a major opportunity to get involved in higher end manufacturing of defence products. This would be a major shift from producing mainly low-end items though in recent years, a section of industry has made significant contribution to some high end products, such as avionics and radars.

Apart from catering to the offset requirements of foreign vendors, industry has been allowed to enter defence research and development with the promise to be finally permitted to produce equipment. Although the Government would back some of the R&D with funds, the expectation is that industry would also contribute. It is being hoped that the budget could see the Government disclosing its intentions on that count, especially on tax relief.

The process though is some distance from taking a concrete shape as the Government is yet to announce the list of companies — Raksha Udyog Ratnas (Stars of defence industry) — that have made the cut. The fleshing out of policy objectives by the Finance Ministry would mark a major departure from the current milieu where the public sector has cornered most of the opportunities.

Jawans' expectations

Another area where there are expectations from the Finance Minister is improving the lot of the soldiers and officers. The implementation of part one of the Aditya Vikram Singh Committee accelerated promotions for junior and middle level officers. The second part, which is more difficult to implement due to inter-ministerial implications, would take care of the senior officers' cadre. The ordinary jawans too are looking at the budget with expectations. Defence Minister A. K. Antony has recognised their problems during his visit to far-flung cantonments and taken up the issue with the Finance Ministry. The budget will tell whether their expectations would be met.

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