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Rupee's Falling Value Hurts India's Defense Budget

Sep. 6, 2013 - 03:12PM   |  
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NEW DELHI — Indian defense spending has taken a hit as the rupee has fallen in value by more than 20 percent against the US dollar since February, when the defense budget was announced.

Nearly $7.5 billion has been shaved from the current financial year’s allocation of $37.7 billion for defense spending. In February, $1 equaled 54 rupees, and that number has risen to 68 rupees.

Since overseas weapon and equipment purchases are made in US dollars, more Indian rupees are needed to make those buys.

No official from the Indian Defence Ministry would say how much money from the current year’s allocation has been spent, nor quantify the shortfall. However, MoD sources said that since the money allocated for the year has eroded due to the depreciating rupee, the MoD will need to approach the Indian Finance Ministry for additional funds to buy fresh weapons and equipment.

Several defense projects are likely to be rolled over to the next financial year as commitments of contracted programs in the past five to seven years must be serviced first, an MoD source said.

A source in India’s Planning Commission said several projects in the “Plan Head” category could be put on hold to keep the fiscal deficit below the 4.8 percent limit.

In the current financial year, $16.06 billion was allocated under “Plan Head” for weapons and equipment purchases. The rupee’s decline means the money available for new weapons has been reduced by $3.2 billion, even lower than the money allocated in 2012-13 at $14.74 billion.

The MoD buys fresh weapons and equipment from domestic and overseas sources through the Plan Head allocated by the Finance Ministry. The Planning Commission source explained that if planned expenditure is kept under check to keep the country’s fiscal deficit under control, the MoD will be left with less money to buy fresh weapons and equipment. Therefore, several defense projects will have to be rolled over to later financial years.

MoD sources said that could affect programs such as the procurement of Lockheed Martin C-130J aircraft, Airbus Military A330 aerial refuelers, assault rifles, howitzer guns and torpedoes, and the re-engining of Jaguar aircraft with Honeywell engines.

No official would say how much additional money would be required, nor would anyone confirm whether the Finance Ministry would be approached.

“Allocations are not made in dollar terms. However, payments related to contracts with the foreign vendors are required to be made in dollars and other foreign currencies,” said defense analyst Amit Cowshish, a retired Indian MoD bureaucrat. “Because of the value of the rupee going down by about 20 percent in the last few months, more Indian rupees would be required to buy the dollars (and other currencies) for making payments, which become due this year under those contracts.”

Analysts said if the rupee does not recover against the US dollar, the government could delay clearances for other big-ticket projects.

“We would have to resort to the following options: Delay the Cabinet Committee on Security clearances of mega projects, delay planned payments if contractually feasible, defer the Contract Negotiations Committee in progress and transfer some not-so urgent deals into the next yearly or five-year plan, and wait and watch for the next three to four months to see how our economy is progressing,” said defense analyst Sharad Deshpande, a retired Indian Air Force air marshal. “The [Defence Research and Development Organisation’s] plans, too, will be hit.”

The $12 billion Medium Multi-role Combat Aircraft program is in the Contract Negotiations Committee stage, and MoD sources say there is a good chance that the contract’s signing would be delayed until the next financial year.

“I would like to believe that the acquisitions that relate to foreign exchange will be the first to be put on hold,” said K.V. Kuber, CEO of defense consulting firm Sugosha Inspirations and a retired Indian Army colonel. “Therefore, the acquisitions [under] the ‘Buy Global’ and ‘Buy and Make Global’ [import categories] are most logically the ones to be stopped until the government finds the money.”

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