NEW DELHI

07 July 2019 22:17 IST

Navy and Air Force have no money left for new deals, and may default on earlier payments as well

There is disappointment in the military and industry over the defence allocation in the Union Budget. There are also questions on the overall military modernisation and the big-ticket deals lined up for conclusion this year as there are no resources left for new procurements.

“The capital expenditure allocated for the Navy and the Indian Air Force (IAF) does not meet their committed liabilities this year. Services had taken up the matter with the Defence Ministry after the interim Budget,” a defence source said on condition of anonymity.

Finance Minister Nirmala Sitharaman, as Defence Minister previously, had promised to take up the matter with the Finance Ministry and get it addressed in the full budget. “But nothing has been done,” the source said.

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Committed liabilities are payments for deals already signed and typically spread over several years. The remaining part of the capital head goes for new procurements.

Industry downcast

The industry too has given the thumbs down to the defence budget. There was no major expectation on defence but this is actually disappointing, a senior industry official said.

“One expected easing of Foreign Direct Investment (FDI) but the decision was excluded,” said another official of a major Indian company.

The IAF which has signed major deals in the last few years including the 36 Rafale jets, S-400 air defence systems and is beginning to induct platforms like CH-47F Chinook heavy lift and AH-64 Apache attack helicopters has committed liabilities of ₹47,400 crore. In contrast, its capital allocation is ₹39,300 crore. Similarly, the Navy’s committed liabilities stand at ₹25,461 crore while the capital allocation is ₹22,227 crore.

The Navy has major deals lined up and they are in advanced stages. A deal for 24 MH-60R Multi-Role Helicopters from the U.S. valued at $2.6 billion is expected to be concluded by year-end. A proposal for 10 more P-8I long range maritime patrol aircraft estimated to cost over $3 billion is waiting for clearance from the Defence Acquisition Council (DAC).

This means the Navy and Air Force have no money left for new deals, and may default on earlier payments as well. The Army with its large size has a huge revenue burden and a significant part of it goes for salaries. For the coming year, the Army has a total shortfall of ₹12,000 crore of which ₹6,300 crore is in the capital head and around ₹5500 crore in non-salary expenditure.

The only relief the services were given was waiver of basic customs duty for import of equipment not manufactured in the country. The MoD says the savings from this will be ₹25,000 crore over five years. That would ease the situation only a bit given the requirements of the three services.

The IAF may be forced to delay payments to Hindustan Aeronautics Limited (HAL) as happened recently so as to not default on payments for imports as it can attract penalties. In January this year, HAL Chairman R Madhavan had stated that IAF dues to HAL stood at ₹15,700 crore as of December 31, 2018 for platforms and services rendered and would rise to ₹20,000 crore by March 31, 2019.

In addition, there have been a series of emergency procurements of ammunition and spares to make for deficiencies and more are under way post-Balakot, for which a separate allocation hasn’t been made. These will be paid through the regular budget.