Bugdet Surprises !

Surprise, Surprise !

Finance Minister P Chidambaram

India’s Finance Minister P Chidambaram is a past master of surprises and he certainly lived up to his reputation with his Monday morning interim budget even if it was at the cost of a smart piece of statistical jugglery.

Ignoring MPs trying to shout him down as he read out his 17-page speech, a page shorter than that read out by President Pranab Mukherjee in his interim budget of 2009,   Chidambaram announced he had managed to squeeze Government’s fiscal deficit to 4.6 per cent against a target of 4.8 per cent of GDP, on the back of a successful auction of telecom airwaves and huge spending cuts. “Well below the red line I had drawn last year,” as he glibly told Parliamentarians.

Critics however, point out that what was left unsaid was that the Government would roll-over the fourth quarter oil subsidy bill of around Rs 35,000 crore to the next financial year, in a sleigh of hand described as `routine’ for the past few years, to keep the deficit for this year under a lid. The petroleum subsidy being paid out in 2013-14 is Rs 85,480 crore. If the Rs 35,000 crore bill which has been rolled over to the next financial year is added, the real fuel subsidy bill would have been  Rs 1,20,000 crore !

However, at the same time the finance minister has set a tough target for his successor, of pruning the deficit to 4.1 per cent of GDP for the next fiscal, while drastically reducing the amount of money available as fuel subsidy. In effect, the next Government if it tries to live up to his targets will have to run against popular opinion and cut fuel subsidy drastically or else live beyond its means. The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore, of which Rs 35,000 crore will be spent on paying back subsidy due this fiscal ! In reality, this will leave the Government with just over Rs 28,000 crore to pay for the fuel subsidy for the whole financial year or about a fourth of what Chidambaram spent in a year on this count.

Stimulus : His and Mine

President Pranab Mukherjee

The finance minister’s other big announcement was of slashing of excise duty or ex-factory taxes on automobiles by a fifth to a third, which could make cars, motorcycles and sports utilities, cheaper. As well as duty cuts on capital and consumer goods from 12 per cent to 10 per cent and a slashing of duty on mobile phones from 6 to 1 per cent, if tax credit for inputs are not sought or 6 per cent with tax credits, was hailed by India’s industrial barons as  a `visionary stimulus’. The duty cuts will be available for a short period till end-June this year, possibly because a new full year budget will have to be presented by a new Government in June this year.

A number of media analysts are now gleefully pointing out that Chidambaram is replicating what his predecessor Pranab Mukherjee, now India’s President, did in 2009 when he cut excise by 4 per cent across the board. Uncomfortable for the finance minister who in the past had slammed “certain decisions that we took during the period 2009 to 2011,” (when Mukherjee was at the helm of affairs in the finance ministry) which he felt pushed the fiscal deficit upwards.

Both were gifting tax-give-aways, in the hope that it would reduce prices, revive demand and in turn bail out a faltering manufacturing sector which has been consistently shrinking for the last eight months.

Populism : Tough to Live Down

Budgets are always as much political statements as they are financial. Chidambaram tried to live up to that maxim with the few sops he announced. But more than that, he also announced sops which may prove to be financial booby-traps for his successor. Chidambaram promised a Rs 2,600 crore interest relief for 9 lakh students who took loans before end-March 2009, with the Government paying interest till end-December 2013. He also promised to to let old soldiers enjoy the benefit of a scheme which calls for `one rank, one pension’.  Some 2.4 million retired defence personnel were paid pension at differing rates depending on when they left service, creating heartburn among older soldiers.  

While this will cost him chicken feed in this financial year (an estimated Rs 500 crore), in coming years this will be a big ticket item in the defence expenditure budget and a source of headaches for Mandarins trying to balance books.

Right-drive Vision

However, the minister did more than lay out fiscal booby-traps for incoming ministers, he also laid out a long term vision for economic development with which his right-wing opponents in the BJP may have few or no quarrels. (Of course India’s Communist parties as well as regional parties would find this vision absolutely unacceptable on many grounds).

Among others, he sought reduction in fiscal deficit to 3 per cent by 2016-2017 obviously through deep subsidy cuts; a policy to encourage foreign investment without too many constraints; a balance in monetary and fiscal policies between price rise-busting and economic growth, which may mean that inflation which hits the poor more should be tolerated to let India grow faster; a slew of fiscal sector reforms which could open up banking and finance to more domestic and foreign investors; a stress on manufacturing and exports with state and central taxes on all exported goods either waived or slashed and tariff walls to incentivise domestic manufactures and most controversially - more centre-state sharing of spending on flagship programmes like job guarantee schemes and literacy. Currently these schemes are almost entirely under-written by the Centre. This move would certainly not win him any brownie points with the likes of Mamata Bannerjee or Nitish Kumar or for that matter even Karunanidhi.

Whether Chidambaram gets a chance to live through with his agenda for the future is however, something which the country would decide in the coming summer. But then the pointers will remain for the next finance minister to wade through.

India’s Defence Budget: The Chinese Challenge

Ask the dragon why she’s crawling with eight legs,

And she says, donno, I’m just doing it.

…

Ask a girl why she’s dancing in the wind,
And this is what she says:

Ask an elephant why he’s raising his trunk,
And he says, donno, I’m just doing it.

…

–      from the lyrics `Ask The Dragon’  by Yoko Ono

Just days after India announced a $ 37.4 billion defence budget for the year 2013-2014, China came out with its own official defence budget figures – at $ 119 billion, some three times its southern neighbour’s.

As late as 2000, India's budget for its armed forces at $15.9 billion more or less matched China’s officially given out figures. However, in reality even then the actual Chinese spending was estimated at three times India’s.

Today, the real Chinese defence budget is believed by many, to be nearer 4-5 times India’s. India’s defence budget rose by just 5 per cent, a sign of the difficult economic times the world and India is going through. India’s $ 1.9 trillion economy grew at its decadal low of 5 per cent, its inflation rate rose worryingly and its current account deficit or the difference between the foreign exchange earned by a country and spent by it, breached self-set limits.

However, the real difference is not just in the money figures which the two Asian rivals have put out, but in the way India and China will be spending that money.

India will continue to spend most of its money on its Army with 99,708 crore or 49 per cent of the defence budget, earmarked for the 1.2 million strong land force. Air force will get the next big chunk of money at Rs 57,503 crore. Navy the smallest service will receive Rs 36,343 crore, while the Defence Research and Development Organisation will get a paltry Rs 10,610  crore and India’s Ordinance Factories complex a tiny Rs 509 crore.

Despite a scandal brewing over purchase of VIP helicopters, the Air Force has become the most favoured wing of the defence ministry – with its share of the defence budget going up from 24.9 per cent to 28.2 per cent. Not only that, its allocation for modernisation has gone up by a whopping 30 per cent from Rs 28,504 crore for 2011-2012 to Rs 37049 crore for 2012-2013.

The Air force of course will be going to town with a huge shopping list and needs that money. Among other things, it needs to sign a contract to buy 126 French Rafale fighters, sometime later this calendar year. It also plans to sign deals to buy heavy lift CH-47F Chinook heavy lift helicopters, Boeing Apache longbow attack helicopters and Airbus tanker transporters.

The favour to the air force has meant the Navy and Army’s modernisation plans have received cuts by 2.8 per cent and 3.5 per cent respectively. Last year, some 31 per cent of the Rs 79,198 crore capital budget for the defence forces had been earmarked for Indian Navy, hitherto the most neglected of India’s armed forces as part of a strategy to build up India’s outreach to partly protect sea lanes used by its merchantmen, especially energy tankers which feed India’s growing appetite for crude oil and partly to counter China’s growing naval presence.

However, the real problem with Indian defence spending is that relies heavily on foreign weapon purchases – compared to the Chinese who depend more on domestic manufacture. This means India gets a) fewer aircraft or tanks or weapons for the money both countries spend. b) Their spares have to be continuously bought and c) there is always a fear of disruption of supplies because of the vagaries of foreign relations.

While India has been busy buying the C 130J Hercules heavy lift aircraft, China has been busy producing its Y-20 heavy lift aircraft, with a maximum payload of 66 tonnes and capable of flying 4,400 km. The aircraft is based on Russia’s workhorse – the Ilyushin series and still uses old Russian engines and is certainly not as sophisticated as the US built  Hercules. However, nevertheless, its functional – does the same job and costs a fraction of Hercules’s price and is paid for in China’s own currency.

C 130 J Hercules being inducted in the IAF

Similarly, while India hankers for Chinook helicopters, the Chinese have come out with the 13.8-ton AC313 heavy lift helicopter. Unveiled last year, this aircraft is a larger and modified version of the 7-ton Zhi-8 medium transport helicopter that is a close copy of the French SA 321 Super Frelon. China had bought 13 of the French helicopters in the 1970s and at least one was reportedly disassembled for study and reverse-engineering.

 India, despite its head-start in aircraft manufacturing, having started making aircraft in the 1940s and jet engines in the 1950s, has proved itself incapable of even reverse engineering the many makes of aircraft it has bought and makes under license.

The story with tanks is no different. Despite grand announcements, the Arjun main battle tank has proven to be a flop story. Just under 50 of them have been built and no regiment equipped with these home-made tanks. India still depends on old Russian T-72s and the slightly `newer’ T-90s.

Despite having bought the 155 mm  Bofors howitzer guns in the late 1980s along with the technology, domestic politics, saw projects to build them locally shelved for decades. This year, at long last the Indian army has placed orders with Ordinance Factory Board to build 114 of them with slight modifications.

Bofors Gun in action at Kargil

Contrast this with the Chinese model. Besides, the heavy lift aircraft, Beijing has succesfully reverse engineered Russia’s Sukhoi aircraft and America’s stealth technology. Its J-20 and J-31 aircraft may be doubted by western analysts, but like most Chinese take-aways these advanced fighter jets are likely to be value for money products, though not as advanced as their western counterparts.

Just one and half decade back, China like India, was a major importer of weapons. However, in the last decade and a half, it very consciously worked to `catch up’. It reverse engineered British missiles, worked on Soviet era fighter jet platforms to work in improvements. It used students and scientists sent abroad on exchange programmes to spy on rival systems, a few of which were openly available, some commercially buyable.  It hired out-of-work Soviet weapons scientists and specialists and restructured its own defence research and production labyrinths. 
The Middle Kingdom has also strategised by coming up with innovative ideas to take on its arch rival – the US – whose military size, strength and spending - dwarfs everyone else. Beijing is believed experimenting with `bugs’ in telecom and power equipment which could cause power and communication systems in client countries to collapse. It has again reportedly trained armies of hackers who can play havoc with computer based command and control systems in a wide range of areas and is perfecting satellite warfare capabilities to take out the communication lines of the enemy. It has also reportedly strategised on using low cost, small yet very fast strike craft to disable enemy fleets including aircraft carrier groups.

China's J-31 stealth fighter

Despite this defence-industrial complex model next door, India’s focus on indigenisation is more than missing in its annual budget. It has yet to fully realise the potential for indigenous manufacture of high tech weapons or for innovating new attack systems which could be cheap or involve less high tech inputs.  Unlike the west, the private sector is hardly involved in manufacturing weapon systems in India. India had allotted just under Rs 90 crore in 2012-2013 for projects under which Indian companies can design and make advanced defence equipment. In the year 2013-14, that amount has been cut down to a measarable Rs 1 crore, possibly because the amount set aside for 2013 has been returned unused!

The private sector too has proved itself as yet, incapable of meeting the challenges required to make quality platforms needed by the armed forces. The Mahindra& Mahindra manufactured `Axe’ jeep touted as India’s answer for a Future Infantry Combat Vehicle failed its test and army officers still swear the best vehicle they have used is the old, fuel-guzzling 1960s Jonga. 

However, this could well change. Indian private industry as lethargic as India’s public sector in doing meaningful research or development, has started using its new found cash reserves to buy up foreign firms in technology areas where India needs to catch up. India’s Tata group whose cars such as Indica and Nano weren’t perceived to be among the best technologically, has in the last decade bought Jaguar-LandRover, giving it access to world class technology. Mahindras have similarly bought Korean car-maker Ssangyong. Its cars are not considered great in terms of design but are grudgingly accepted as value for money, robust vehicles. 

A joint venture Memorandum of understanding inked earlier this year, between France’s Dassault Aviation and Reliance Industries Ltd will build components and eventually assemble Falcon business jets in India. These are signs of what may come about. If India can use this new found confidence in its private sector and builds up on the momentum by getting universities to work in tandem with ordinance factories and the private sector, its defence budget can literally earn more bang for the rupee in the years ahead.

Will Chidambaram Manage to Clean up the Economy?

When P. Chidambaram took over as finance minister of India for the third time on July 31, last year, he inherited a slowing economy, high inflation rates and an acute state of policy paralysis.
Though the Harvard educated, right-wing minister has kicked in a few reforms – liberalising foreign investment rules in a retail and aviation, bringing out new bank licensing norms, cut oil subsidies, and generally tried to stem the rot by getting cabinet to clear long delayed projects, the story remains the same – India’s economy is still in a mess and perhaps in some respects in a worse mess.
India grew at 6.5 per cent in 2011-12, the last year that Pranab Mukherjee ran North Block. In the current fiscal, under Chidambaram’s watch, the economy is expected to grow at 5 per cent, a straight growth slowdown of 1.5 per cent.
The fiscal deficit, or the gap between what the government spends and earns,  which Chidambaram has bravely tried to rein in by pruning not only wasteful subsidies but also defence spending, is still going to be 5.3 per cent of GDP. When that figure is coupled with state government deficit, the actual deficit of the government sector would amount to a high of 8-9 per cent of India’s economy. To put it in perspective, India’s fiscal deficit is three fourth’s the size of Pakistan’s entire economy.
This obviously means, that despite pressures from party colleagues, Chidambaram will have to be cautious about spending splurges and better at garnering revenues – which stand at a tad below 18 per cent of GDP (with taxes contributing to just half of the earnings) compared to 35 per cent for Brazil, 38 per cent for Russia, 39 per cent for the UK and 28 per cent for the US, not to speak of the 40 per cent of GDP which the Germans manage to collect. Of course, part of India’s dismal tax collection ability comes from the fact that a mere 2.5 per cent of its population pays taxes. The rest simply say they don’t earn enough to cough up any money. But then this is a year which runs up to a General elections, next year, and most of Chidambaram’s colleagues still suffer from a hangover of Socialism inherited from Indira Gandhi’s rule. Checking populist spending will be one tough task – especially when India showcases it’s `Right to Food’ bill which could sap up more money in subsidies from the budget than any other. 
Chidambaram will certainly have to work harder to earn more. One way would be to fast track the Goods and Services Tax. Another to  cut out various exemptions which corporates’ enjoy, roll back some of the excise and service tax cuts given to industry in the post-global meltdown period. A surcharge on the incomes of the `super rich’ is considered highly likely as is a commodities transaction tax on the lines of the securities transaction tax, to partly generate taxes and partly regulate a wildly oscillating commodities market.
This year, sales of shares in state run lumbering giants like  NTPC and Oil India, could not earn the government its targeted Rs 30,000 crore. But Chidambaram will probably bank on an improving stock market to try earn more from aggressive sales of PSU stocks. Similarly, poor appetite for a badly managed auction of radio-waves fetched India less than Rs 10,000, a fourth of its targets. North Block in conjunction with Sanchar Bhawan, home to the telecom department, will certainly try again.

NTPC Power Plant

Last year, the country’s current account deficit or the difference between the dollars, Euros and Yens we earn or which flows in by way of investment or debt and dollars, Euros or Yens we spend on importing oil, gold, jet aircraft and power plants, bloated to 4.2 per cent of GDP. The Reserve bank of India, tasked with managing our foreign exchange reserves, considers this to be alarmingly higher than what is prudent, which pundits at the central bank say should be 2.5 per cent of GDP.
This year that current account deficit figure is likely to be 5.2 per cent, far bigger than what Mukherjee had left the country saddled with. To put it in perspective, in 1991, when India ran into its worst foreign exchange crisis forcing the country to pledge gold to pay off impending debt closures, India’s CAD was 3 per cent of GDP. India’s rising import bill and weak exports has seen the rupee value falling from about Rs 44 to the dollar in April 2011 to over Rs 53 to the dollar as of today.
No wonder that earlier this week, Moody’s rating service warned that India’s widening current account deficit and the spurt in its external debt meant the country risked a downgrading of its credit rating  outlook.
Last year, under Mukherjee’s watch, India had received a similar threat from Standard & Poor’s  which had announced there was a one-in-three chance of a sovereign rating downgrade to junk status, leading to much consternation at North Block. Given that India’s total debt to GDP runs at a high ratio of 70 per cent, similar to the United Kingdom’s whose rating was cut today by Moody’s, India needs to perk up and try attract more dollar and Euro inflows.
This should mean more sops for foreign investors, more easing of rules for debt inflows, perhaps Sovereign status for rupee denominated bonds to be issued by public sector companies (but paid for in dollar or Euros) and certainly more concentrated attempts at encouraging value-added exports.
Not to speak of steps to stall the import of more gold, the single biggest item of import after oil and to check import of cheap telecom and power gear by posing higher taxes on them or by encouraging local manufacture of substitutes. India had last month raised import duty on gold and platinum to 6 per cent from a previous 4 per cent in a bid to break the country’s huge appetite for imports of gold. However, what the Reserve Bank and finance ministry would like to see would be a scheme to monetise India’s estimated 20,000 tonnes of gold reserves worth around $ 1.16 trillion, stashed away in household hoards.
One way out, could be gold banks, suggested by the RBI, to collect household gold against bonds, whose value went up or down with the value of bullion.  The gold so gathered could be on lent to jewellers, reducing imports.

India's Gold Obsession

Chidambaram will also have to be mindful of the savings rate which has been falling like never before, putting at doubt India’s ability to reach the professed goal of 9 per cent GDP growth. The RBI estimates household savings have plummeted to 7.8 per cent this year from 12.2 per cent in 2009-10. North Block, many aver, will certainly be looking at ways of encouraging middle class Indians to save more by giving larger tax breaks for pension and insurance products and to buy houses. Some say total exemptions for the `aam admi’ could well go up to a princely sum of Rs 3 lakh.
But then, how much the scion of the Rajah's of Chidambaram will risk and how much he will bow to popular sentiments will be something which will be revealed in just a couple of days.

India's Monsoon Strategy

Reproduced below is an atricle by me, which appeared in the Planning Commission's Yojana :

Indian Naval flotilla excercising in the Indian Ocean

Last August, an unidentified Chinese warship confronted an Indian naval ship near the coast of Vietnam and demanded it explain its presence in Chinese waters.

Many in India and elsewhere saw this as an unintended sampler of what the future may hold. As India and China grow, thriving on foreign trade and buying up energy supplies where they can, the two powers quite naturally look towards the sea-lanes which support their outward reach to the rest of the world.
While China earns a hefty 39.5 per cent of its GDP from exports alone, India earns a not insignificant 22 per cent from its sales to the rest of the world. 
Similarly, India depends on imported oil for about 80 percent of its crude oil requirement, needed to drive its $ 1.8 trillion economy. The giant Chinese economy which accounts for roughly 13.5 per cent of the global economy, also depends on foreign crude imports for at least 50 per cent of its needs and this figure is expected to move upwards as China has a mere 1.2 per cent of global proven reserves of oil and gas.
In ancient times, with the Monsoon winds, Indian fleets used to travel westwards to the Arabian peninsula and eastwards to the spice islands of Indo-China. Chola, Pala and much later Mughal fleets used to protect these shippers.  
In much the same way, as vast Indian and Chinese fleets scour the seas for trade and resources, naval fleets of these two nations need to follow to provide security in far flung seas. China is believed to be laying the groundwork for a naval presence along maritime chokepoints in the South China Sea, the Malacca Straits, the Indian Ocean and the Strait of Hormuz in the Persian Gulf through acquisition of naval bases. While India, similarly, gears up to protect routes through which its oil supplies must traverse from the Middle East, Australia, Africa and Russian Siberia’s Sakhalin.
China’s interest in the port of Gwadar in Balochistan and in Arakanese ports in Myanmar along with oil pipelines and roads from these ports to mainland China is but natural. A casual look at the map of the Indian Ocean will show that the Straits of Hormuz, patrolled by the US and the Straits of Malacca, straddled by India’s Andaman Island which boasts of a new integrated command, are the natural choke points for China’s oil supplies. China wants to reduce risks and costs run up by its oil tankers, by offloading Middle Eastern crude at Gwadar and piping it to Sinkiang. Similarly, crude from South East Asia could be piped out from Arakan instead of being brought through the Straits of Malacca and then through the contested South China Seas.
It would be but natural, to expect India to respond to China’s strategy, termed by one writer as `String of Pearls’ (in reference to the far off Ocean ports the giant nation wishes to control) by seeking friendly access to the Vietnamese, Taiwanese and Japanese ports for deploying its Naval assets to protect India’s shipping and trade routes to the Far East and to access its equity oil at Sakhalin.
India’s race to reach out and defend its sea-lanes is supported by its neighbours in South East and East Asia. Asean and Far East powers found themselves increasingly worried about China's maritime claims, which cover about 3 million square km. Most of this is in two areas — the South China Sea, where Beijing's claims overlap mainly with those of Vietnam, the Philippines and Malaysia, and the East China Sea, where its claims are contested by Japan.
Beijing has described its territorial disputes with Japan and Southeast Asian countries as ones involving its "indisputable" or "inalienable" sovereignty. Though it has not ruled out compromise, it has at the same time increased it naval presence in these areas and flexed its muscle from time to time.
No wonder then that some 31 percent of the Rs 79,198 crore capital budget for the defence forces have been earmarked for Indian Navy, hitherto the most neglected of India’s armed forces. The Air Force which wants to buy new French made fighter aircraft to replace ageing jets is slated to spend slightly more with an allocation of over 38 per cent of the capital budget. India’s vast land army with more than 1.2 million soldiers will, by contrast, be getting a relatively lower capital outlay.
Some 89 percent or Rs 66,459.43 crore of the total capital spend has been kept aside for capital acquisition or modernisation. In the case of the navy this represents a huge build up – it has managed to garner a 72 per cent increase in its budget on this count at Rs 24,151 crore. The Air Force’s modernisation budget is pegged at Rs 28,503 crore and Army’s at just Rs 13,804 crore. Navy’s demands for building new ships have been given more priority to the Army’s demand that new guns be bought to replace the more than two decades old Bofor’s 155 mm howitzers.
According to Maritime Research firm AMI, India will spend almost $45 billion over the next 20 years on 103 new warships, including destroyers and nuclear submarines.
China in contrast, will be spending around $25 billion for 135 vessels.
However, unlike Indian Air Force’s buy of Rafael or Army’s purchases of night vision equipment from Israel or search for an artillery gun abroad, the Navy has been depending largely on Indian dockyards to build its fleet.
This obviously gives it more bang for the rupee. Foreign equipment is costly. China realised this long ago and adopted the path of reverse engineering to build its missile forces, jet fighter crafts and assault rifles. Just one and half decade back, China, like India was a major importer of weapons. However, in the last decade and a half, it very consciously worked to `catch up’. It reverse engineered British missiles, worked on Soviet era fighter jet platforms to work in improvements. It used students and scientists sent abroad on exchange programmes to spy on rival systems, a few of which were openly available, some commercially buyable.  It hired out-of-work Soviet weapons scientists and specialists and restructured its own defence research and production labyrinths.
The Middle Kingdom has also strategised by coming up with innovative ideas to take on its arch rival – the US – whose military size, strength and spending - dwarfs everyone else. Beijing is believed experimenting with `bugs’ in telecom and power equipment which could cause power and communication systems in client countries to collapse. It has again reportedly trained armies of hackers who can play havoc with computer based command and control systems in a wide range of areas and is perfecting satellite warfare capabilities to take out the communication lines of the enemy. It has also reportedly strategised on using low cost, small yet very fast strike craft to disable enemy fleets including aircraft carrier groups.
India has yet to fully realise the potentials for indigenous manufacture of high tech weapons or for innovating new attack systems which could be cheap or involve less high tech inputs. Its creaking research and development organisation has been struggling to build a good main battle tank, a fighter jet and even a good assault rifle, even as its best brains have managed to break tech barriers to produce world class missile systems and rockets. Even today, India depends on Bulgarian and other former Soviet Union states to procure assault rifles for its crack commando forces, while successfully building nuclear shields and 3,500 km-range nuclear capable missiles.
This inability to build `nuts and bolts’ while making far more sophisticated weaponry, has meant a huge drain on the treasury and far less `bang’ for the rupee for the Indian armed forces. Attempts are being made to remedy it, partly by introducing the private sector to defence production, partly by letting them rope in foreign partners to build systems and sub-systems for aircraft, armoured carriers and other weapon systems. However, an overhaul of India’s basic defence R&D set-up and more extensive and leveraged use of India’s ordinance factory network are still awaited.
However, in terms of overall defence spending, despite the Chinese depending on low cost indigenous manufacture as opposed to India’s starategy of purchase of equipment from abroad, India’s spending on its armed forces will still be drawfed by China. India’s defence budget this year (2012-2013) will be just $ 40 billion compared to China’s gigantic spend of $ 106 billion for the current year. While India’s spend in rupee terms is 17 per cent more than last year’s, China’s is 11 per cent more in Yuan terms than last year’s.
The natural question which follows any discussion on India’s defence budget and its comparision with China’s is : Will this rise in spending on both sides of the border necessarily fuel an arms race or worse, a conflict between two rising powers? Not necessarily. Both are mature nations and both are aware of their vulnerabilities. It would be wise on the part of both to be ready, and wiser to be even more ready to negotiate points of conflict.