Defence Budget – How Much India Must Afford

Military budgets often reflect how strongly a country perceives the likelihood of threats against it, or the amount of aggression it wishes to conjure because of its global ambitions. A military budget (or military expenditure), also known as a defence budget, is the amount of financial resources dedicated by a state to raising and maintaining an armed forces or other means essential for defence purposes.

Financing Militaries

It also gives an idea of how much financing should be provided for the upcoming fiscal year. The size of a budget also reflects the country’s ability to fund military activities. Factors include the size of that country’s economy, other financial demands on that entity, and the willingness of that entity’s government or people to fund such military activity. Generally excluded from military expenditures is spending on internal law enforcement and disabled veteran rehabilitation. While often military expenditure is a boost to local economies, still military expenditure is a drag on over development. In 1983, during the Reagan administration, Employment Research Associates, a non-profit economic consulting firm based in Lansing, Michigan, found that military spending not only produces far fewer jobs per dollar invested, it siphons off intellectual and scientific expertise needed to advance society.

Historic Event Based Defence Expenditure

The Saturday Review magazine in February 1898 outlined the levels of military expenditure as a percentage of tax revenue spent by the then great powers for the year 1897. United States spent 17%, the Russian Empire 21%, French Third Republic 27%, British Empire 39%, German Empire 43%, and the Empire of Japan, 55%.

Ever since, the United States has fluctuated for decades, depending on the conflict of the time. The first spike in defence spending, and in turn taxes. During World War I, the United States spent 22% of Gross Domestic Product (GDP), while during peacetime, the government came down to 1% GDP. During WWII it exceeded 41%. Following the World War II, to counter expansion of Communism, Americans supported defence expenditure of 3.6% GDP. During the Cold war at one stage it was as high as 10%, the period included the Vietnam War. In the 1970s came down 5.5%. After 2001, though, and the September 11 terrorist attacks, defence spending spiked again, peaking at 5.7% in 2010.

Absolute Military Expenditure

          A pie chart showing global military expenditures by country for 2018, in US$ billions, according to Stockholm International Peace Research Institute (SIPRI).

Major Defence Spenders as Percentage of GDP (2018)

Among the countries maintaining some of the world’s largest military budgets, China, India, France, Germany, Japan, Russia, the United Kingdom and the United States are frequently recognized to be great powers. According to the SIPRI, in 2018, total world military expenditure amounted to 1822 billion US$. In 2018, the United States spent 3.2% of its GDP on its military, while China 1.9%, Russia 3.9%, France 2.3%, India 2.4%, Germany 1.2%, United Kingdom 1.8%, Israel 4.3%, and South Korea spent 2.6% of its GDP on defence.

SIPRI Fact Sheet 2020 (For 2019)

The SIPRI fact sheet which includes a list of the world’s top 15 military spenders in 2019, based on current market exchange rates.

Rank	Country	Spending US$ Bn	%age of GDP
	World Total	1,917	2.2
1	United States	732	3.4
2	China	261	1.9
3	India	71.1	2.4
4	Russian Federation	65.1	3.9
5	Saudi Arabia	61.9	8.0
6	France	50.1	1.9
7	Germany	49.3	1.3
8	United Kingdom	48.7	1.7
9	Japan	47.6	0.9
10	South Korea	43.9	2.7
11	Brazil	26.9	1.5
12	Italy	26.8	1.4
13	Australia	25.9	1.9
14	Canada	22.2	1.3
15	Israel	20.5	5.3

Military Balance by the IISS

The International Institute for Strategic Studies (IISS) list is based on the 2020 edition of “The Military Balance” published by the IISS using average market exchange rates. The figures change a little because of the exchange rate. As per this list, USA spends US$ 684.6, China 181.1, Saudi Arabia 78.4, Russia 61.6, India 60.5, United Kingdom 54.8, France 52.3, Japan 48.6, Germany 48.5, South Korea 39.8, Brazil 27.5, Italy 27.1, Australia 25.5, Israel 22.6, and Iraq 20.5.

Top Spenders as per GDP

As per SIPRIdatabase (2018) for the year 2017, the top military expenditure as percentage of GDP among all the nations were Saudi Arabia 8.8, Oman 8.2, Algeria 5.3, Kuwait 5.1, Lebanon 5.1, Armenia 4.8, Jordan 4.7, Israel 4.4, Pakistan 4.0, Russia 3.9, Ukraine 3.8, Azerbaijan 3.8, Bahrain 3.6, Uzbekistan 3.6, Namibia 3.3, Colombia 3.2. None of the following analyze such potential record-breakers like North Korea, Syria, Yemen, and Libya.

Defence Expenditure as Share of Government Spending (2018)

          Belarus defence expenditure at 31.9 percent of its annual spending is among the highest. Others big spenders were Saudi Arabia at 24.6, Armenia 20.9, Oman 19.0, Pakistan 18.5, Singapore 17.1, Iran 15.8, Lebanon 15.6, Myanmar 15.2, Jordan 15.0, Chad 14.6, Mali 14.3, Algeria 13.8, South Korea 12.4, and Columbia 11.6.

Defence Expenditure as Share of Goods Exports (2018)

          Yet another way of looking at defence expenditure is as percentage of nation’s total exports. Both USA, Pakistan and India feature in this list. In the lead is Timor-Leste at 158.8 percent. Lebanon is 73.9%, Nepal 47.5%, Pakistan 45.8%, USA 38.7%, Burundi 37.8%, Sudan 30.1%, Algeria 27.7%, Israel 26.8%, Afghanistan 25.3%, Jordan 25.2%, Colombia 23.9%, Armenia 23.2%, Saudi Arabia 22.9%, and India 20.0%.

Threat Perception and Defence Budgets

          The defence budgets are linked to threat perception and global or regional ambitions. USA and China have no immediate threats but have global ambitions. There are others like India, Israel, and Iran, who have serious threats because of regional disputes. India has serious boundary disputes with its two main neighbours China and Pakistan, both of who have large standing militaries and are nuclear powers. There are many other smaller countries who have local threats from dominant neighbours in different parts of the world. India is a large country, and will soon have the world’s highest population. It continues to have relatively low per capita income. Also India has still to catch up with the rest of the world on many social indicators. Therefore the annual budget of the country has competing demands from various sectors. Balancing social and economic development and security needs is thus a complex matrix.

Parameter Comparison to Evolve Reasonable Budget

I have chosen a few major countries to compare indicators to help evolve a reasonable defence budget.  The data is based on the IMF’s World Economic Outlook Database, October 2019.

Parameter	USA	China	Russia	Japan	Pakistan	Israel	India
GDP Nominal	$21.44 trillion	$14.14 trillion	$1.64 trillion	$5.15 trillion	$284 billion	$395.10 billion	$2.94 trillion
GDP PPP	$21.44 trillion	$27.31 trillion	$4.21 trillion	$5.75 trillion	$1.2 trillion	$334.675 billion	$10.51 trillion
GDP Per Capita PPP	$65,281	$16,785	$29,181	$43,236	$5,872	$39,121	$9,027
Public Debt By GDP	107%	50.5%	12.2%	237%	87%	59.9%	69.6%
Threat Index Scale of 10	3.5	5.6	8.3	1.6	8.5	6.3	7.2
Defence  budget	$732 billion	$261 billion	$65.1 billion	$47.6 billion	$11.4 billion	$20.5 billion	$71.1 billion
Defence Budget Share of government expenditure	9.4%	7.9% ($3.4 trillion government expenditure in 2019)	11.4%	2.5%	18.5%	13.2%	15.5%
Defence Budget/GDP	3.4%	1.9%	3.9%	0.9%	4.0%	4.4%	2.4%

Reasonable Defence Budget for India

          India’s GDP in PPP terms is fairly high. That means that India can afford better quality of life for its people for lesser Dollars. Albeit, to buy arms from abroad, India needs hard cash, so absolute GDP matters. India’s efforts for arms import substitution have still to pay off substantially and it may take at least two decades before India can start making most of the weapons and military platforms for its own needs. But this would be an area requiring a centralized push at highest levels. For India to be able to allot greater resources in absolute terms to defence acquisitions, the economy has to keep growing at a faster rate. Covid 19 and some other factors have slowed the economic growth and the target of a 5 trillion economy by 2024 will require greater effort to reach. India’s per capita GDP even in PPP terms has a lot of catching up to do. However India’s public debt remains relatively under control. One reason for this is the relatively low spend on social security.

          India remains fairly high on threat Index. The close strategic and defence cooperation between China and Pakistan, both of which want to settle scores with India, actually increases the possibility of two-front war and the overall threat. This figure would go up for 2020 after the face-off in Ladakh and continuing hot-border on LoC. This would surely call for increased defence spending. India has the third largest defence budget and defence budget as a share of annual government expenditure too remains high. This puts constraints on how much can the defence budget be increased. Of the Rs. 4,71,378 crore (US$ 66.9 billion) earmarked ad Defence budget for 2020-21, Rs. 3,23,053 crore ($45.8 billion, 69%) has been provided under the Defence Services Estimates (DSE), which goes directly into the defence preparedness. Of this Rs. 209319 ($27 billion, 44%) goes for revenue expenditure for day-to-day running of the armed forces and includes cost of personnel and their salaries. It is important to note that the defence budget includes pensions ($19.0 billion, 28%) of veterans. Only around Rs 113734 ($15 billion, 24%) is for Capital purchases. These ratios need to change and at least 55 percent of defence allocation must be used for Capital acquisitions and modernization. The exercise to change this skewed ratio may take nearly two decades, but effort must begin now.

          India’s GDP has been growing at around 6.8 percent in the last decade. Defence budget growth rate has invariably been higher than or matching the GDP growth rate. In all fairness the nation has been contributing a fair share of its GDP. However the threat has increased, and the defence expenditure in the neighborhood has been going up in absolute terms. Also the new weapon systems are becoming disproportionately costly. To get the value for money India has to not only reduce defence exports, but should actually become a significant exporter of defence equipment so as to reduce costs for itself through economy of scale.

          For the entire 1980s, China’s defence budget to GDP ratio was as high as 6.0 percent. Only when their economy boomed this ratio became below 2.0 percent. It is a well-known fact that China spends a lot on defence which is outside the official defence budget. Some analysts put this figure close to 35 percent. For 2018, IISS estimated Chinese defense spending to be $225 billion, while SIPRI put the number at nearly $254 billion. The official budget that year was just $167 billion. Comparing the defence budget by GDP ratios, other than China and Japan all the other major countries analyzed above spend more than India despite having lesser threat. India clearly has a margin to go up to 3.0 percent for another decade. This will allow India to catch up with defence modernization and also promote indigenization.

Header Image Source: Economic Times

References:

1. The World bank, Data Bank, World Development Indicators. https://databank.worldbank.org/reports.aspx?source=2&series=MS.MIL.XPND.GD.ZS&country=
2. The World Bank, Military expenditure (% of general government expenditure) https://data.worldbank.org/indicator/MS.MIL.XPND.ZS
3. Investopedia, The Top 20 Economies in the World https://www.investopedia.com/insights/worlds-top-economies/
4. IMF, Real Growth – Annual percent change https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD
5. The Global Economy, Security threats index – Country rankings https://www.theglobaleconomy.com/rankings/security_threats_index/
6. SIPRI Military Expenditure Database. https://www.sipri.org/databases/milex
7. Breaking Down China’s 2020 Defense Budget, https://www.csis.org/analysis/breaking-down-chinas-2020-defense-budget#:~:text=Chinese%20officials%20revealed%20on%20Friday,7.2%20percent%20and%208.1%20percent.