OROP inflates the defence budget by 10% to Rs3.4 trillion, and will go up further after Seventh Pay Commission
India’s defence pensions have ballooned by 50% and the capital outlay has been slashed, with the Seventh Pay Commission’s fiscal impact looming large.
Developments over the last year have come with profound implications for India’s defence budget. However, finance minister Arun Jaitley did not bring up defence spending in his budget speech.
After a protracted crisis over One-Rank-One-Pension (OROP) for the armed forces, the government acceded to defence personnel demands, with some exceptions. Uncertainty has continued to plague India’s Rafale deal with France, and some green signals were given to the Indian army to raise an 80,000-strong mountain strike corps. The Seventh Pay Commission also imposes higher personnel costs, which affects the Indian army more than the other two services.
Overall, the defence budget estimate for 2016-17 is Rs3.4 trillion, about 10% more than the previous year’s budget estimate. This is broadly consistent with past increases.
However, what makes up this net increase is a radical departure from the past.
Thanks to OROP, the defence pensions budget has gone up by a whopping Rs27,800 crore from the previous year—a full 50% increase. This increase is just Rs2,000 crore short of the increase in the overall defence budget, making one wonder if all other expenditure increases have been frozen.
There is an accounting change this year which complicates the analysis, where it turns out the traditional defence demand for grants numbers 21 to 28 have been consolidated from eight items to four, numbered 20 to 23 in the FY16 budget.
It turns out that the armed forces’ revenue expenditure has gone up but the capital outlay has been slashed in turn. Revenue expenditure has increased by about Rs11,000 crore this year, amounting to an 8.6% increase between budget estimates. This excludes pensions but includes allocations toward the salaries and allowances of both serving personnel and civilian support staff, as well as fuel, consumables and other miscellaneous costs. The Indian army has the lion’s share of the revenue expenses, as its force strength is about nine times that of the Indian Air Force and Navy combined.