Tag Archives | revenue expenditure

Budget 2016-What about naval acquisitions?

Navy’s role as an instrument of Indian foreign policy gets a lukewarm treatment with the latest budget

By Guru Aiyar (@guruaiyar)

The budget presented by the Finance Minister Mr Arun Jaitley surprisingly sidestepped one of the most important components—national security. Not a word was mentioned about defence. The Budget estimate for 2016-17 is Rs 2,95,623 Crores excluding defence pensions. An amount of Rs. 82,332 Crores has been set aside for defence pensions. The total allocation is thus an increase of about 10 percent which compares to the previous year on year (YOY) increases. What is of interest is the allocation for capital acquisitions which is Rs. 90,660 crores.

Capital expenditure indicates the money that is spent on acquiring new assets to enhance combat capability. The defence ministry returned 13.5% allocated to capital expenditure in the last fiscal. This is attributable to the procurement procedures as well as delay by the arms suppliers. The ratio of individual service expenditure approximately is as below.

Service             Capital Expenditure (in %)          Revenue Expenditure (in %)

Army                           10                                                                          90

Navy                            40                                                                          60

Air Force                     35                                                                          65

The armed forces’ capital acquisition is based on a Long Term Integrated Perspective Plan (LTIPP) which envisages acquisition over a period of fifteen years from 2012-2027 (from 12th to 14th five year plans). The individual services then have their own Service Capital Acquisition Plan (SCAP) that are based on the five year plans. The yearly plan that is reflected in the budget is the Roll-on Plan (ROP).

Of the three services, navy is the one which is the most visible as an instrument of foreign policy. It derives this ability from being the most mobile and deployable in any part of the globe when national interests require it to do so. To maintain combat capability, the desirable equipment profile of the armed forces as per defence secretary’s testimony to parliamentary standing committee is 30:40:30 (30 per cent state of the art, 40 per cent current, and 30 per cent nearing obsolescence), the present profile is 15:45:40. As a result, the combat edge is consistently getting weakened.The main reasons for emasculated acquisition budget is the ballooning salaries and pension bill.

The most significantly affected on the acquisition matrix of the navy are the Project 15B destroyers, Project 17A frigates and the two indigenous aircraft carriers which are the fulcrum of the navy’s capability. Another cause for worry is the delay in Light Combat Aircraft (LCA) and the Medium Range Reconnaissance Aircraft. According to the latest Defence Procurement Procedure 2016 unveiled by the defence minister, one of the main initiatives to overcome the foreign dependence is the Indigenous Design Development and Manufacturing (IDDM). This would ensure a viable military-industrial complex with spin offs for the civilian sector. At present, is better to be circumspect than sanguine about our acquisition policy.

Guru Aiyar is a Research Scholar with the Takshashila Institution.

Featured Image: Aircraft Carrier by Steven Weng, licensed from creativecommons.org

 

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Primer on deficits

Today’s budgetary deficits are tomorrow’s taxes. Therefore, it is important to understand what deficit means, and how India has performed on this metric over the past few years. This post provides a primer on this topic.

Budgetary deficit occurs when the expenditures[1] are more than receipts (This is true for homes and nations).There are three types of deficits

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

deficit

Revenue deficit is defined as the difference between total revenue expenditure and total revenue receipts. The revenue deficit signals how much the government is spending when compared to its earnings to perform its day-to-day activities(like paying salaries etc.)

Revenue receipts are those government receipts which neither reduce assets nor create future liabilities. These are proceeds from taxes, interest and dividend from government investment, cess, and other receipts for services rendered by the government. Revenue expenditure includes those expenditures that neither creates assets nor reduces liabilities. These are expenditures on salaries of government employees, subsidies, grants (to state government and other entities), interest payments and pensions. These expenditures are short term and recurring in nature and mostly meant to ensure the daily functioning of the government.

Given this, revenue deficit shows how much the government is borrowing to finance its daily functioning. In the past few years, eliminating the revenue deficit has been the priority for both the Union and State governments. The Fiscal Responsibility and Budget Management Act, 2003 recommended elimination of revenue deficit by 2009.

Revenue deficit = Total revenue expenditure – Total revenue receipts

Fiscal Deficit is defined as the difference between total expenditure and total receipts (excluding borrowings) ie., any loans received as money are not counted as receipts.. Therefore fiscal deficit actually represents the amount of borrowing that the government must make to meet its expenses(this is the reason why the fiscal deficit is the most discussed number and a keenly observed number during the budget and by commentators.

Fiscal Deficit = Total expenditure – Total receipts(excluding borrowings)

Primary deficit is defined as the difference between fiscal deficit and interest payments ie., if the primary deficit is zero then, the governments borrowings will be used just to meet its previous borrowings. If the primary deficit is positive and significant, it feeds back into the interest payments in the following years, as fresh debt is created, for which interest has to be paid.

Primary deficit = Fiscal deficit – interest payments

 

deficit gdp

[1] There are two types of expenditures: Revenue expenditure and Capital Expenditure. Revenue expenditure is a cost that is charged to expense as soon as the cost is incurred.

Varun Ramachandra and Anupam Manur are Policy Analysts at Takshashila Institution. Varun tweets at @_quale and Anupam tweets at @anupammanur

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