P 110834Z MAR 08
FM AMEMBASSY NEW DELHI
TO SECSTATE WASHDC PRIORITY 0822
INFO WHITE HOUSE WASHDC
DEPT OF TREASURY WASHDC
DEPT OF COMMERCE WASHDC
RUEKJCS/SECDEF WASHINGTON DC
ALL SOUTH AND CENTRAL ASIA COLLECTIVE
AMCONSUL KOLKATA
AMCONSUL CHENNAI
AMCONSUL MUMBAI

UNCLAS NEW DELHI 000734 
 
SIPDIS 
 
 
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E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EAGR PREL MARR IN
 
SUBJECT: INDIA'S DEFENSE BUDGET RISES MODERATELY, BUT PROCUREMENT 
REMAINS A PROBLEM 
 
¶1. (SBU) Summary: The UPA government in its 2008-09 budget presented 
on February 29 increased its defense spending by 10% to Rs 1056 
billion ($ 26.4 billion) from a budgeted Rs 960 billion ($24 
billion) for FY 2007-08 and 14% compared to the actual spending for 
FY 2007-08.  The budget seeks to establish India's defense spending 
at 14.1% of total government expenditures for 2008-2009, roughly the 
same as last year.  The defense ministry returned $1.1 billion to 
the general treasury this fiscal year due to the cancellation of 
some big ticket tenders - for helicopters and missiles - due to 
procurement delays.  The government has allocated Rs 480 billion 
($12 billion) for the acquisition of modernized military hardware, 
including a $10 billion deal to buy 126 fighter jets.  U.S. Defense 
Secretary Robert Gates was in India February 26-27 to push the 
 
SIPDIS 
American bids for the deal.  Although for the first time in the last 
ten years India's defense expenditure in the coming fiscal year will 
fall below 2% of GDP, the defense budget is seen overall as 
consistent with India's modernization trend.  End Summary. 
 
MODEST DEFENSE SPENDING INCREASES 
-------------------------------- 
 
¶2. (SBU) Finance Minister Chidambaram delivered the government's 
defense spending plans on February 29, as part of the overall 
budget.  The defense budget repeats modest increases from last year, 
targeting spending this year at Rs 1056 billion ($26.4 billion), an 
increase of about 14% from last year's revised estimates of Rs 925 
billion ($23 billion) and 10% against the budgeted Rs 960 billion 
($24 billion).  Adjusting for inflation of about 5%, the budgeted 
increase is about 5%, slightly more in percentage terms than last 
year.  India's defense spending as a percentage of total 
expenditures for the last ten years is as follows: 
 
2008-09 (Budgeted)  14.1 
2007-08 (Revised)   13.0 
2007-08 (Budgeted)  14.1 
2006-07             14.8 
2005-06             15.9 
2004-05             15.2 
2003-04             12.7 
2002-03             13.5 
2001-02             15.0 
2000-01             15.2 
1999-00             15.8 
 
PROCUREMENT PIPELINE STILL WEAK 
------------------ 
 
¶3. (SBU) The government has earmarked Rs 480 billion ($12 billion) 
in FY 2008-09 for the purchase of equipment and modernization of the 
armed forces.  This is a 27% increase over last year's actual arms 
acquisition spending of Rs 377 billion ($9.4 billion), with capital 
outlay funding now constituting roughly 45.5% of the total defense 
budget. However, the Defense Ministry in recent years has not been 
able to finalize purchases before the end of the fiscal year, and 
has had to surrender the unspent allocation to the national 
treasury. This year, the Defense Ministry failed to spend Rs 42 
billion ($1.1 billion), as two major contracts of the army for 
purchase of helicopters and 155MM artillery guns did not 
materialize. 
 
¶4. (SBU) Analysts estimate that India plans to spend at least $30 
billion through 2012 to modernize its military.  This year the 
Defense Ministry is planning one of its biggest ever weapons 
purchases, ncluding a $10 billion deal to buy 126 fighter jets for 
the Indian Air force.  U.S. Defense Secretary Robert Gates was in 
India February 26-27 and pushed the American bids for this deal. US 
companies Lockheed Martin and Boeing are competing with Russian and 
European rivals for the contract.  Media reports that the US share 
in the Indian defense market is likely to grow substantially in the 
next decade as that market grows to $50 billion - to match that of 
Russia, France, Israel and the UK. 
 
¶5.  (SBU) The US has recently been awarded one contract - a $962 
million deal to supply six-C-130J Hercules aircraft.  Negotiations 
on a $2.2 billion deal to supply eight P-8I Poseidon long range 
maritime patrol aircraft for the Indian Navy are expected to be 
concluded soon.  To date, the bulk of U.S. agreements with the GOI 
 
 
are not Government-to-Government technology sharing protocols, but 
commercial deals with business corporations.  India is also buying 
347 additional T-90S main-battle tanks from Russia valued at $1.2 
billion.  The Indian government plans to remain selective on the 
choice of target countries for export of arms and is very cautious 
about signing arms deals.  Records show that at least 38 court cases 
relating to arms agreements are still pending against military 
officers.  Defense Minister A.K. Antony has made probity in the 
procurement system a top priority during his term. 
 
MILITARY SERVICES 
-------------- 
 
¶6. (SBU) The main components of the defense budget 2008-09 are as 
follows: 
 
Expenditure    (Rs billion)     (USD billion) 
 
Army                363                   9.0 
Air Force           109                       2.7 
Navy                 71                       1.8 
Capital outlay      480                       12.0 
DRDO                 34                       0.85 
 
--India's army with its strength of 1.3 million men continues to be 
the biggest recipient of the defense budget with an allocation of Rs 
363 billion ($9 billion) - about 6 percent higher than the Rs 342 
billion ($8.5 billion) it spent in FY 2007-08.  The Army accounts 
for 34 percent of total defense spending. India for the first time 
has set aside $125 million to be spent on the "urgent needs of 
development of border areas" such as for Arunachal Pradesh state, 
which is being claimed in full by China. 
 
--The Indian Air Force (IAF) is slated to receive Rs 109 billion 
($2.71 billion), a 4.8 percent increase over the spending in FY 
2007-08. IAF will receive the highest capital outlay funds of over 
$4.8 billion for buying major equipment, including the Medium 
Multi-Role Combat Aircraft (MMRCA).  The IAF urgently needs new 
aircraft to replace its ageing Soviet-MiG series of fighters. The US 
Boeing F/A-18 Super Hornet, the Lockheed Martin F-16, the Russian 
MiG-35, the Swedish Gripen, the French Rafale, and the Eurofighter 
Typhoon manufactured by a consortium of German, British, Spanish and 
Italian companies are the six aircrafts vying for the MMRCA order. 
 
--The Navy outlay for 2008-09 has been increased to Rs 74 billion 
($1.8 billion) from the spending of Rs 70 billion ($1.8 billion) for 
FY 2007-08.  The Navy is shopping for six submarines in addition to 
the six it bought last year from Armaris and European defense firm 
MBDA for $3 billion.  Advanced negotiations are going on to buy 
eight long-range reconnaissance planes from either Boeing or the 
European consortium EADS for $2 billion, besides building a 
nuclear-powered submarine. 
 
--The capital outlay for modernization of the defense services will 
allocate Rs 480 billion ($12 billion) for FY 2008-09, almost 27% 
higher than it spent in FY 2007-08. 
 
--The Defense Research and Development Organization (DRDO) gets a 
hike of 6 percent to Rs 34 billion ($848 million) in FY 2008-09 from 
Rs 32 billion ($800 million) in FY 2007-08.  The ordinance factories 
would spend the money for deploying India's guided and ballistic 
missiles that can carry nuclear warheads. 
 
MORE FDI IN DEFENSE NEEDED 
-------------------- 
 
¶7. (SBU) Ernst & Young recently released a report on "Indian Defense 
Industry: Reaching New Frontiers," which indicates that Israel will 
overtake Russia in the immediate future as the largest arms supplier 
to India.  In recent years, Russia's sales to India have been 
averaging approximately $2 billion every year; Israel has closed the 
gap in recent years and has gone over a billion dollars worth of 
defense purchases from India annually.  Big weapon companies 
forecast that India will end up ordering almost $100 billion worth 
of defense items over the next five to 10 years. In this context, 
FDI in the defense sector needs to be raised to 49% from the current 
26% limit to facilitate the flow of investment and latest 
 
 
technological know-how which will reduce India's dependence on 
imports.  The government plans to announce a new offset policy in 
April 2008, which may include some changes in bidding by foreign 
manufacturers for Indian defense contracts, such as credit banking, 
and how they will fulfill their minimum 30% offset obligations on 
major contracts. 
 
COMMENT 
-------- 
 
¶8. (SBU) This year's defense budget mirrors last year's in its 
generally flat spending.  In both years, the modest hike was 
concentrated on procurement allocations, which continues to be 
underspent.  Much of the challenge may be a still ongoing process of 
reducing the left-over, dysfunctional defense relationship with 
Russia.  The Government of India has the money to spend more on 
capital expenditures, if the Ministry of Defense and the military 
branches improve their bidding and contract skills.  However, this 
slow bureaucratic process could delay modernization of India's 
military.  While some have noted that the Government of India has 
allowed defense spending to fall below 2% of GDP, even as China and 
Pakistan continue to spend above that on their militaries, the most 
important trend line to follow is that the GOI continues to put its 
money where its proverbial mouth is in terms of pouring money into 
military modernization. 
 
MULFORD 
 
 
NNNN 
 



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