The most eye-catching aspects of the recently released Indian defense budget are top-line growth and diminished spending for procurement. Top-line defense spending grew by 12 percent in fiscal year 2017 compared to the previous budget, making India one of the fastest-growing major defense markets in the world. However, the vast majority of that growth was generated by an increase in personnel costs, and an even bigger increase in pensions. Procurement spending actually declined. This trend of rising personnel costs and shrinking capital funds will decelerate India's military modernization efforts.
India's defense budget in fiscal year 2017 topped $50.9 billion, which means the country now has the fourth-largest defense budget in the world behind the United States, China, and the United Kingdom. The long-term growth in Indian military spending has been remarkable. India had the 13th-largest defense budget in 1995, with spending on par with Spain and the Netherlands. Now India could eclipse British defense spending in a few years, joining the United States and China as the world's biggest military spenders for the foreseeable future.
Despite an impressive top-line, this year's jump in Indian defense spending is less impressive than it seems. While personnel costs soared, the procurement budget shrunk. Capital outlays in fiscal 2017 were $10.5 billion, a five-percent decrease from the previous year. Key budget accounts within the procurement budget were also cut. Capital outlays for shipbuilding shrunk by 30 percent, while the aircraft-modernization budget was cut by nearly six percent. The Army was the only military service spared and actually saw its procurement budget grow by 10 percent, possibly due to the long-awaited purchase of artillery from the United States.
Shrinking procurement budgets could not have come at a worse time for the Indian military, especially the Air Force (IAF). Ashley Tellis, a leading expert on India, has argued that the IAF is in a full-blown crisis and is in desperate need of new aircraft to replace its aging fleet of French and Russian fighters. India's quest for an indigenously built fighter has been quixotic, and it is still ironing out the details of a deal with Rafale for 36 aircraft. These considerations are not academic. India faces conventional air challenges from Pakistan's F-16s, and a rapidly modernizing Chinese air force (PLAAF). China not only enjoys a slight numerical advantage over the IAF, but can now field indigenously built fighters like the J-10. India is years, if not decades, away from being able to do the same.
The decline in capital outlays is linked to rising personnel costs. Military pensions grew 36 percent in 2017 due to the implementation of a new and costly program of pension reforms—One Rank One Pension (OROP). The incorporation of OROP in 2016 means that New Delhi pays the same pension to service members of the same rank, regardless of when they retire. The largely emotive issue became a deeply political one in recent years. Although the BJP may have solved a political problem, it now faces a national security problem. The pension account exceeds $12 billion—up from $8 billion in fiscal year 2016—and will continue to grow in the years ahead. Unlike China, which has made a concerted effort to downsize the number of personnel to free up budget space for military modernization, India is going in the opposite direction. India has committed to establish a mountain strike corps of 90,000 troops to defend its border with China, and is already finding this difficult to pay for.
India's defense budget is too big to ignore, but needs to be viewed with a critical eye. The size of the defense budget will continue to grow along with India's economy, which remains the fastest-growing large economy in the world. However, trends suggest that capital spending will plateau while personnel costs rise. India will be able to maintain its conventional advantage over Pakistan in this budget environment, but will do so with less room to spare. The military balance with China could prove to be especially precarious, although the odds of another Sino-Indian war are slight. From a strategic perspective, India's mismanagement of the defense budget will prevent India from realizing its full military potential.
Shane Mason is a Research Associate at the nonpartisan Stimson Center and author of the report Military Budgets in India and Pakistan: Trajectories, Priorities, and Risks .