India recently published the Budget for FY 2023 – 2024. An exercise that has an effect on every Indian citizen not only for the current year but for many years in the future. A carefully crafted budget coupled with a strong policy framework can make a country a superpower. An integral part of any budget is the Defense budget. Every budget cycle leads to a whirlwind of discussions on topline numbers but rarely discusses the details and the larger impact. Let’s see how we can move from the topline numbers and read between the lines.
The total budget for defense is a staggering ₹ 593,538 Cr an increase of 13.02 % from last year (₹ 525,166 Cr). The question is, how do we know if this budget is good?
2. Taking on more debt –
A popular number that is floated in newsrooms is that the defense budget should be 3-4% of the GDP. Translating to an additional defense budget of ₹ 200,000 – 400,000 Cr. That is additional debt that the country must take in addition to the ₹ 17,016,512 Cr that it already has.
The yearly interest payment of this staggering debt is around 2 times the defense budget and accounts for the largest expenditure in the budget. An increase in debt would lead to a higher interest rate on debt leading to ever-increasing interest payments leading to a downward spiral of economic collapse. Any country that has not been financially prudent has led to economic hardship take for example India’s neighbors, Pakistan, Sri Lanka, Nepal, and Bangladesh. Where shortages of fuel, food, and medicine are a daily occurrence.
Taking an example to explain the concept of spending as a percentage of GDP, a person has a house that has a value of ₹ 10,000,000 and has a yearly income of ₹ 5,00,000. He would spend based on income and not as any percentage of the value of the house. Both are mostly independent of each other. The value of the house can increase or decrease each year by ₹ 1,000,000 based on the real estate market but that person will have the same money to spend if the income remains the same. Similarly, the budget and expenditure are not a function of the GDP but the receipts that the government receives in form of taxes. The GDP and taxes are related as the GDP (GDP = Consumption + Investment + Govt. Expenditures + Net Exports) grow, and the total goods and services produced in a country increase, which in turn results in an increase in taxes as businesses and companies pay more tax. The taxes will not increase by the same percentage as the GDP as the factors contributing to each are different. Therefore, expenditure as a percentage of GDP is not a financially sound strategy.
In conclusion, the Defense budget is a great budget. It is financially well-balanced and takes into account the larger strategic goals of the country. It is part of the larger aspirations of the country which is to make India prosperous and a global power of the 21st century.
