The government has announced allocation of Rs 83,000 crore for defence for the next financial year commencing April 1, 2005. This implies less than 8-per cent increase over the Budget for the current year. This level of increase would not stabilise defence spending even at the current low level of 2.49 per cent of the GDP and may be expected to slide down to around 2.4 per cent!

While this is understandable from the point of view of reducing fiscal deficit, it is clear that this level would continue to sustain obsolescence and lowered combat capability in the coming years since this comes in the wake of more than a decade of poor modernisation.

The effect of low level of funding for modernisation over the past fifteen years has been to create huge gaps in our capability to credibly defend ourselves.

The Defence Budget naturally excites a lot of attention since at one end it concerns the security and stability of the country and at another is perceived in many quarters as a drag on our development. But surprisingly it does not get seriously analysed beyond the criticism that Parliament does not debate it.

Therefore, how should we look at the next Budget?

One editorial in a leading daily advises us to cut defence Budget by 25 per cent, while a report in another informs us of the ministry of defence having sought a 40 per cent hike in this year's defence Budget. The reality undoubtedly has to rest somewhere in between through a process of compromise and balancing of priorities.

But the question that must be raised is whether we are making the right compromise or not?

Last year the UPA government raised the allocations from Rs 66,000 crore approved by the NDA as an interim Budget to Rs 77,000 crore (compared with Rs 60,300 crore spent the previous year).

Bulk of this increase had gone into modernisation under the capital head expenditure which was doubled to Rs 33,483 crore. Unlike the previous five years this is expected to be fully spent. In fact going by the normal processes, we may expect something like an equivalent of 85-90 per cent of this expenditure being pre-committed to procurement orders placed earlier and paid out during successive years.

This leaves little for new procurement; and any reduction in allocations squeezes this further. The examples of the Air Force combat squadrons being 'number-plated' (the esoteric term for shutting them down!) and the growing deficiency in the Navy's submarine force and the Army's artillery shortages are obvious.

Recent wars have again proved the cardinal role that high-technology weapons and equipment play in military affairs. We are unlikely to be able to afford a US-level quality; and with manpower costs rising at 11 per cent we may soon have to rethink their numbers. Thus, while we must debate the defence-development equation, in practice we also need to look carefully at the military quality-quantity balance. What is clear is that the era of low cost weapons and equipment has been over for the past quarter century.

The Su-30 aircraft that is replacing the Rs 1 crore MiG-21 carries a price tag of Rs 158 crore and is cheap at this price. For example, the US Air Force is now struggling with the problem of the F-22 replacement (at unit cost of $135 million) to replace the older $30-million price-tag F-15s.

Theoretically, if we wish to maintain defence expenditure at the current level in relation to the GDP, the Budget would have to increase by 13 per cent.

China's (official) defence expenditure has been growing at an average of 14 per cent per year for a decade with inflation practically at zero and many major weapon imports remaining outside the budget. But to cater for the backlog, our defence spending would have to grow at a higher by at least 17-per cent for the next few years. This incidentally would still keep the defence Budget below the 3-per cent of the GDP bench mark proposed by the 11th Finance Commission (a statutory body) in 1999.

Unfortunately we had reduced our capital (read modernisation) expenditure over the years to an average of 26-per cent of the defence allocations till last year when it jumped to 43-per cent.

With an allocation of Rs 34,000 crore, it will drop to nearly 41 per cent for the next year. This may well be due to many reasons. But it is clear that on a sustained basis an average figure of around 40-45 per cent would be needed to maintain a modern military machine. This is roughly what China is spending and Pakistan wants to spend. But given the fact that we have allowed modernisation to slide down to precarious levels, an additional 5 per cent would be required for some years to compensate for the backlog.

By virtue of the technology-intensive nature of the air force and navy, the average service-wise proportional distribution of the capital expenditure would need to be around 22-per cent for the air force, and 12-per cent for the navy and 11-per cent for the army.

Can we arrest the upward push of defence expenditure without eroding future fighting capability? It is obvious that the luxury of a large manpower-intensive plus high technology-intensive military may sooner rather than later become unaffordable.

The obvious answer is to arrive at an optimal balance, not only by reviewing the quantum of manpower, but more important, its cost in the coming decades. At the same time, we have to make sure that weapons costs are managed more scientifically.

One obvious option is to seek offsets in defence industry production and sales in each and every case where the exporter would establish manufacturing capacity in India for pre-contracted export of spares, sub-systems, etc.

The latter could even be undertaken in the private sector as joint ventures and the example of automotive parts exports is relevant in this regard. We may not get the type of deal Poland recently got where its defence industry-related exports were contracted at double the cost of F-16 acquisitions from the US at the time of procurement decision making.

But there is no reason why the high costs of weapon systems are not seen as an opportunity to leverage defence procurement for faster high-technology industrial and economic growth in the country. We have the basic infrastructure and capability to take on expanded production under offset arrangements.

Our costs of offset production would be much lower than those in Western countries and this would work to the advantage of both.

The author is Director, Centre for Strategic & International Studies, New Delhi, and former Director IDSA.