Budget 2022: Expectations for the Defence Sector

Defence Sector

The Defence Budget 2022 is going to be one real test for the Indian government to improve India’s defence capabilities in general and pave the way for self-reliance through the ‘Make in India’ model. The ‘Atma Nirbhar Bharat’ dream is the real necessity of the time for India as the country is still way far behind from becoming a real defence manufacturer. 

Defence Budget of 2021

The defense budget 2022 will be compared with that of 2021. Also, the past year has witnessed heated tensions between India and its neighbouring countries. Therefore, the defence budget of 2022 is expected to meet the necessities that the country need to have in the coming years.

  • The defence expenditure of 2021 was around 4% less than the expenditure government had in the defence sector in 2020. However, there was about a 19% increase in the capital expenditure, which was lauded by many at that time.
  • The capital allocation for Army, Navy and Air Force was Rs 36,481 crores, Rs 33,253 crores, and Rs 53,214 crores respectively.
  • One of the major highlights of the 2021 defence budget was the allocation of Rs 11,375 crores for the Defence Research and Development Organisation (DRDO), an increase of 8% over the previous year. It will be very interesting to see what amount the government is going to peg this year for the same.
  • The Border Roads Organisation (BRO) received a fund of Rs 6,004 crores, a nearly 7.5% increase over the previous year.

Defence Budget 2022 Expectations

Self-reliance in Defence Manufacturing

The self-reliance dream cannot be achieved in a year and hence, a long and consistent approach is required in the direction of. There are however some immediate demands from the Defense Budget 2022, considering the growing tensions and escalations with neighbours, particularly China in the past few months. In this regard, the government is likely to consider increasing defence expenditure to strengthen the Navy. The plan may include building or purchase of submarines, warships, drones and aircraft carriers. Although the tussle with China had/has been mainly on the land, the threats in the Indian ocean cannot be neglected.

This can be made clear from the shortlisting of L&T and Mazagon dockyard as India’s strategic partners to build the required submarines, particularly the P75i submarines with an investment of up to Rs 45,000 crores.

The drones will be bought for the Indian armed forces for building anti-submarine systems. It is expected that the armed forces will purchase a number of maritime surveillance drones. 

Public-Private Strategic Partnership

The government will also consider further enhancing private investments in the defence sector and can frame the route for strategic partnership between PSUs and private companies. The major policy changes announced in the last one and a half year indicates this. The upcoming defence budget can take this forward by allocating a part of the budget for the modernization of Indian Aerospace and Defence (A&D). Besides, we can expect the government to offer subsidies or tax incentives to the A&D players. We are likely to see the following:

  • Atleast 19% increase in capital budget allocation, which was also done in the last year.
  • The defence budget may define a minimum procurement percentage of the overall capital allocation on domestic procurement.

Expected Tax Incentives for the Defence Sector

  • Introduction of a PLI scheme for the defence equipment manufacturing sector to offer incentives to the manufacturers and promote domestic production.
  • Tax holidays for an initial period to greenfield projects in the defence manufacturing sector to motivate new players for making investments and make the market more competitive.
  • Tax deductions and incentives can be provided to the research and development (R&D) in the defence sector.
  • Exemptions in GST for the easy procurement of raw materials required in the defence manufacturing sector.

Government’s Ambitions

  • India is one of the largest importers of defence equipments. However, the government has an ambitious plan to make the company self-reliant. For this, we need more and more players in the defence sector and the availability of funds for undertaking research and development work in order to make world class defence equipments.
  • We can also look forward to departure from traditional war techniques that relies heavily on manual human-based surveillance and fighting forms. The Prime Minister has already highlighted the government’s interest in drones, which the defence sector is likely to get for better surveillance of the border areas.
  • Besides the aim of making India a self-reliant defence manufacturing nation, the government has already set forward plans to achieve a total turnover of $ 24.5 billion by selling goods and services in the Aerospace and Defence field. This also includes an ambitious plan registering an export growth of $ 4.9 billion by the same year.

The defence budget 2022 has been receiving a lot of attention. The key expectations will remain to make the domestic defence manufacturing industry more self-reliant which will allow the country to reduce imports of defence equipments in the coming years.