India has raised its defense budget for the next fiscal year, contrary to expectations that there would be a reduction in its military spending due to economic strains.

The defense allocation for the India’s fiscal year beginning April 1 is being increased by around 5% to 2.03 trillion rupees ($38 billion), from the originally allocated 1.93 trillion rupees for the year ending March 31.

In the last quarter of the current fiscal year, the Indian government trimmed defense spending by about 5% from the 1.93 trillion rupees, mainly due to the ongoing economic downturn. The revised budget stood at 1.78 trillion rupees. Defense Minister A.K. Antony last month anticipated that since the government has been passing through a recession, there could be a cut in the capital and revenue budget in the following financial year as well.

But Finance Minister P. Chidambaram noted in Parliament on Feb. 28: “The minister of defense has been most understanding and I assure him and the house [Parliament] that constraints will not come in the way of providing any additional requirement for the security of the nation.”

Of the total outlay of 2.03 trillion rupees for the next year, 867.41 billion rupees will be spent on new defense equipment, the finance minister says, up from this year’s level of about 695.79 billion rupees. That figure had been 100 billion rupees higher before the budget was trimmed. In the current budget, 1.13 trillion rupees was earmarked for revenue expenditures including salaries and pensions.

The decision to prune capital acquisitions by 100 billion rupees has pushed plans for several key purchases to the next fiscal year.

One defense analyst sees the defense budget increase as “largely symbolic, but reflects anxiety at what India sees as an increasingly hostile region in which Pakistan and China appear happy to throw their weight about.”

India has a number of large defense acquisitions in the works, including the more than $20 billion effort to acquire 126 Rafale fighters from France’s Dassault, as well as a program to buy Apache and Chinook helicopters from Boeing.

“Some acquisitions due this fiscal year will be put off to next fiscal as we have to tighten our belt to the extent possible for a better future,” Antony says. However, he had said earlier that India’s planned defense modernization will maintain its pace, “mainly because of the situation around us and the emerging volatile security scene.” 

The government has been negotiating the details of its Rafale purchase with Dassault Aviation, “and this process cannot be cut short,” a defense ministry official says.

Prime Minister Manmohan Singh’s government is aiming to increase local production of weapons and reduce imports. The government seeks to raise the proportion of defense equipment produced at home to 75% from about 30% over the next 10 years.  

“We are very serious about indigenization,” Antony says. “I don’t believe that there can be zero imports in defense, but we want to substantially reduce imports.” The government is reviewing defense procurement and defense production policy so as to speed up the indigenization process.

In 2011, the government revised its policy on military procurement, to boost local defense production. The new procedures added a “buy and make Indian” provision. For contracts that require certain expertise, only local companies, including joint ventures with overseas companies, can enter bids.

India can enter the top tier of defense exporters, but to attain that position the country has to build adequate capacity and skill, says Tom Captain,  U.S. aerospace and defense practice leader for Deloitte LLP.

“Information technology applications in defense, including in cyberwarfare, could be a great area where India could be a pioneer,” Captain says. “The world needs this and India can take leadership in the next 10 years. India could be a giant in the defense world.”

Rafale photo: Dassault