India Policy Watch #1: What Do Successive Defence Budgets Reveal? Insights on burning policy issues in India — Pranay Kotasthane (An edited version of this article was published in Hindustan Times on 13th Feb) Another defence budget zoomed past us on Feb 1. Since then, analyses have focused on how the defence spending for the coming year departs from the last year. Some have waved a red flag as defence spending has fallen below 2 per cent of GDP for the first time in many years. On the other hand, the defence ministry’s post-budget press release emphasised a 44 per cent increase in operational spending, which is expected to “close critical gaps in the combat capabilities and equip the Forces in terms of ammunition, sustenance of weapons & assets, military reserves etc.” The ministry also highlighted that the capital outlay for modernisation and infrastructure development has risen by a seemingly handsome 57 per cent over the last five years. How, then, do we make sense of these conflicting narratives? Comparing allocations with those in the previous year gives us a confusing picture. Every interest group can pull up a number from the budget to suit their pre-formed narrative. Taking a step back from these narratives, this article will show that this was another run-of-the-mill defence budget, just like the previous one was. Nothing in it indicates any significant change in the defence posture. Unlike Japan, which has announced a doubling of its military spending in the next five years, India’s approach is about gradually improving the operational efficiency of the armed forces. Looking under the hood This article looks at the defence expenditure over the last six budgets to make sense of the numbers. To put numbers into context, let’s use an earlier year (FY16). FY16 is a useful reference point as it predates two major developments: China’s visibly aggressive posture on the border and the budgetary commitments arising from the One Rank One Pension (OROP) scheme. Three observations follow from such an analysis. One, not only has defence spending fallen as a proportion of GDP, but it has also fallen as a percentage of government expenditure. In other words, defence has slipped in priority relative to non-defence functions (Figure 1).  Two, the China challenge hasn’t led to any spectacular change in the composition of defence expenditure. Defence spending can be divided into four major components: salaries, pensions, capital outlay, and others. As Figure 2 shows, capital outlay was being squeezed by rising pension expenditure over the last few years. For two consecutive years (FY19 and FY20), more money was spent on pensions than on capital acquisition and modernisation. The balance has now been marginally restored since FY21, after the Galwan crisis flared up. Crucially, the rises in pension and capital expenditures have come at the cost of operational and maintenance expenditures, including ammunition stores (under the Others category). It is hence not surprising that the latest budget is trying to arrest this decline in combat capabilities. Three, this period has been relatively better for the Indian Navy in terms of capital expenditure. Since the procurement of new platforms happens over multiple years, a temporal view is useful in analysing how capital outlay is split between the three armed forces. Figure 3 suggests that the big change in the last four years is in the capital outlay for the Indian Navy, with the FY24 figure having doubled in absolute terms since FY20. The Big Picture By connecting these dots over the last five years, the picture that emerges is this: the government seems confident that China can be handled without a substantial rise in defence expenditure. The latest budget serves as a bellwether indicator for this claim. It was the first budget of the post-pandemic period, at a time when the economic prospects for India had improved considerably. The government achieved better-than-e