Scholar’s Voice: A New Way of Thinking Centre for Defence Sciences

Vol. 2, No. 1, January-June 2011, 67-74 Research & Development

Global Economic Crisis and Military Spending in

Indian Subcontinent
Dr. K. K. S. Parihaar*

Abstract
The first decade of twenty-first century met with a turmoil which
affected the entire international system. The global economic melt-
down caused a serious concern to all the nation-states in the
international community irrespective of their status and category. The
financial crisis of 2007-2010 has been called by leading economists as
the worst financial crisis since the ‘great-depression’ of the 1930s. It
contributed to the failure of the key businesses, declines in consumer
wealth and a significant decline in economic activity.

The present article attempts to investigate the hypothesis that there is no

relationship between global economic crisis and military spending, since security
requirements are not conditioned by economic upheaval.
The first decade of twenty-first century met with a turmoil which affected the
entire international system. The global economic melt-down caused a serious
concern to all the nation-states in the international community irrespective of their
status and category. The financial crisis of 2007-2010 has been called by leading
economists as the worst financial crisis since the ‘great-depression’ of the 1930s. It
contributed to the failure of the key businesses, declines in consumer wealth and a
significant decline in economic activity.
Many causes have been proposed, with varying weights assigned by the
experts. Both market based and regularity solutions have been implemented or
the under consideration while significant risks remain for the world economy over
the 2010-2011 periods.
Although this economic period has at times been referred to as ‘The Great
Depression’, but surprisingly the same phrase has been used regularity solutions
have been implemented or the under consideration while significant risks remain
for the world economy over the 2010-2011 periods.
Although this economic period has at times been referred to as ‘The Great
Depression’, but surprisingly the same phrase has been used to refer to every
recession of the several preceding decades.

* Asso. Professor & Head, Dept. of Defence & Strategic Studies, Allhabad Degree College, Allahbad.

ISSN 0974-6501
© 2011 Centre for Defence Sciences Research & Development
 68 Scholar’s Voice: A New Way of Thinking Dr. K. K. S. Parihaar

The pages of history reveal that the process of globalisation is historical with
ebbs and flows. During the pre-World War I period (1870-1914), there was rapid
integration of economics in terms of trade-flows, movement of capital and the
migration of people.
The period between 1914 -1939, saw erection of various barriers to restrict
free movement of goods and services. A drive to revive ‘increase in integration’
was again made after World War I, but its momentum was slow because of cold
war rivalries. The collapse of communism brought tremendous changes in the
ideological and political context of the World order. The economics gained
primacy and the strategic security concern became relatively less-pressing. Then
came ‘information-revolution’. All these combined together gave momentum to
the process of globalisation with enormous impact on security in its traditional and
non-traditional dimensions.
Thus in this phase of globalisation, the concept of the security of state has
become much broader with qualitative and quantitative changes.
As the interaction among states and their societies becomes intensive and
extensive, the diverse issues of international significance in different areas came to
fore. Drug trafficking, money laundering, terrorism, ethnic nationalism, secessionist
and religions movements, pollution, ecological disbalances, migration (refugees)
and disarmament are some such issues. All these are threats to economic
dimensions of national security. Sri Lanka, Ethiopia, Somalia, Rawanda, Iraq, Iran,
North Korea, Burundi, Pakistan and India are few countries for example, which are
facing such threats.
Globalisation has become an expression of common usage amongst
academicians, but unfortunately it implies two different things to two different
groups of people. For academicians of developed world it represents new means
to prosperity with no barriers, but on the contrary for the academicians of
developing world it means a new way of exploitation.
At its most basic level globalisation is an economic process with political
consequences. In other words, it means integration of economic and societies
through cross-country flow of ideas, information, people, goods, services, capital
finances and technologies.
Now, we come to military spending, which is generally used in different terms
such as defence expenditure, security expenditure, military expenditure and arms
trade. All these terms denote military spending. This implies the lack of common
perception which blurs transparency in this field.
The basic problem in defining the military expenditure is the lack of
demarcation line between military and civil expenditure. The distinction between
civilian and military industries is blurred due to the dual use of the equipment. The
systems developed for civil purpose are often integrated into the weapon
system than the other way round. Hence, the defence expenditure remains
unidentified.
Global Economic Crisis and Military Spending Vol. 2, No. 1, Jan-June 2011 69

The problem of accurate definition of military spending has special

significance to the South-Asian region, because.
a. In most of the countries of this region major part of the defence
expenditure is on operation costs-particularly salaries and emoluments for
the troops, rather than on acquisition of weapon systems and
technologies.
b. Expenditure on Para-military forces in not included in the defence budget,
which affects a true assessment of a nation’s military strength. This aspect
is particularly relevant because of predominance of internal security
threats to the most of the countries of South-Asian region. A case in point
is India, where the strength of Para-military forces has doubled between
2000 and 2010, but the strength of the regular military forces has stayed
constant.
This is the main reason why defence spending analysis of these countries
leads to incorrect inference of their military capability and erodes the effectiveness
of transparency.
Further, there are certain variables which may influence security environment
1
of coming years. These variables could be summarised as follows:
1. The twin revolutions of rising expectations and information-
communications will continue.
2. The fundamental ideological conflict between India and Pakistan is likely
to continue, which could be resolved only after a major socio-political
transformation in Pakistan.
3. Territorial disputes with China would continue in the future, since there is
very dim possibility of permanent resolution.
4. Religious extremism and radical politics will continue to have adverse
impact on Indian core values.
5. Rising dependence on energy-import will make
The military may
India vulnerable both economically and engage in research
diplomatically. and development,
6. Public opinion and media would continue to provide technical
play an important role in international strategic skills, educational
affairs. training, and
7. The international order is likely to evolve into a create an
polycentric configuration with its centre of infrastructure
gravity shifting to Asia. necessary for
8. The increasing economic and military strength of economic
China may pose a serious challenge to India’s
development. This
security interests.
will have a positive
In the view of the above considerations the recent indirect effect on
expansion in defence spending in developing countries
growth.
has stirred debate over the relationship and direction of
casualty between defence spending and economic growth. Arguments and
empirical evidences have been produced to either support or reject the existence
 70 Scholar’s Voice: A New Way of Thinking Dr. K. K. S. Parihaar

of positive net effect of defence spending on economic growth. In one such

2
study by Chowdhury , a Granger causality test was used to analyse the
presence and direction of causality between defence spending and economic
growth for 55 developed countries (DC) Chowdhury’s test-result showed a lack of
consistency across different countries. The absence of any causal relationship
between defence spending and economic growth was evident in 30 countries,
whereas a causal relationship was evident in the remaining 25 countries, in no
case did his results support the hypothesis that defence spending promotes
economic growth.
There are several versions of the defence spending-economic growth
3
proposition. First, Benoit has shown that defence spending may stimulate growth
by increasing aggregate demand. The additional demand generated by higher
defence spending leads to increased utilization of capital stock, lower resource
costs, and higher labour employment. The DC’s usually suffer from idle capacity,
high unemployment and under consumption due to a lock of aggregate demand.
Hence increased utilization of capital stock may lead to an increase in the profit
rate. Increased profits may then lead to higher investment which, in turn, will
generate both short run multiplier effects as well as higher long term rates of
economic growth. In this case defence spending appears to be casually prior to
economic growth.
It has also been suggested that defence spending may help economic growth
4
through a spin-off-effect. In the DCs, the military is undoubtedly one of the most
modern institutions and thus may help in creating socio-economic structure
conducive to growth. The military may engage in research and development,
provide technical skills, educational training, and create an infrastructure
necessary for economic development. This will have a positive indirect effect on
growth.
On the other hand, defence spending can be detrimental to economic growth
in several ways. First, defence expenditure can diverse available resources from
domestic capital formations, thus reducing potential savings available for
investment. This will increase the savings-investment gap and can eventually
reduce economic growth. Second as Deger suggests, ’Additional savings........will
mean not only more capital stock, but also better capital stock. If an increased
defence burden reduces the amount of new capital formation from the level it
could have attained, then the economy suffers from a lowering of both, the
5
quantity and quality of its capital stock.
6
Third, Rothschild pointed out the possibility of round about effect of defence
spending via reduced availabilities of growth products for exports with
consequent growth-damping effects. Fourth, the absorption of public expenditure
in defence may lead to a shortage of available funds in other fields. Finally, military
burdens may also depress growth through inflationary process they generate.
All these mechanisms through which defence spending may influence
economic growth are based on the assumption that defence spending is causally
Global Economic Crisis and Military Spending Vol. 2, No. 1, Jan-June 2011 71

prior to economic growth. Most of the studies, in this area make this
assumption to estimate their regression of economic growth on defence
7
spending. However, Joerding showed that no attempt has been made to test the
assumption that economic growth is casually prior to defence spending.
There is another assumption too that the defence spending may lead to
changes in the economic growth, but it is also plausible that economic growth
may cause defence spending. For instance, a country with high economic growth
rate may be willing to strengthen its armed forces through increased defence
expenditures. On the other hand it is theoretically plausible for a country with
high rate of economic growth to divert resources from defence spending to more
productive domestic capital formation.
In view of the above theoretical framework, if brief survey of regional
economy is made with respect to military expenditure, it could be easily concluded
that economic crises has not affected India’s military spending.
The revenue expenditure has grown from Rs. 10194 crores in 1989-90 to Rs.
87,344 crores in 2010-11, i.e., an increase of almost nine times during the last two
decades. The graph given below indicates the rising trend of India’s defence
expenditure.
The revenue Fig. : Rupee goes to (2010-2011)
expenditure trend
for the last three
years shows that Transfer to
about 46 percent of Interest States & UT,
Payment, 22% 13%
expenditure is
incurred on pay and Central Plan,
allowances, 35 per Defence, 13% 25%
cent on store and
equipment, 10 Subsidy, 11%
Other Non
percent on revenue Plan Exp.,
16%
works and 5 percent
on miscellaneous
changes. More than Source: www.globalissues.org
half of the
expenditure is, thus, spent on salary and allowances. But there is need to develop
force structures that are capability based and not threat based. Defence
8
transformation through technical improvements is the need of the hour.
In 2008-09 Rs. 1,05,600 crores were allocated for India’s defence. For the fiscal
year 2008-09, India’s defence allocation has increased by 10 percent previous
years allocation of Rs. 96,000 crores and by little over 14 percent of the last year’s
revised allocation of Rs. 92,500 crores. During the last five years the defence
spending has increased by about 37 percent from Rs. 77,000 crores in 2004-05,
which shows a growth of 8 percent per annum, (Figure-2).
 72 Scholar’s Voice: A New Way of Thinking Dr. K. K. S. Parihaar

This trend in
military spending
growth over the
years puts up the
question, whether
this trend is
compatible with
nation’s security
needs.
As per the
budget estimates
for the year 2010-
Source: Union budget 2004-05 to 2008-09
11, defence has
been allocated Rs. 1,47,344 crores, which shows a marginal increase of 3.98
percent over the budget estimate of 2009-10. The outlay for defence comprises of
Rs. 87,344 for Revenue expenditure and Rs. 60,000 crores for capital expenditure.
Keeping in view the requirement for modernisation defence forces, the capital
budget has been given an increase of 9.44 percent over the budget estimate of
9
2008-09.
The revenue allocation has increased only by 0.5 percent. However, there is
no reduction in allocation of Rs. 1096 crore in revenue budget in comparison to
revised estimates of 2009-10. Last year, the revenue budget was increased by
50.85 percent over the budget estimate of 2008-09 due to implementation of the
sixth Pay Commissions recommendations. Since part of that a onetime
expenditure, thus no additional funds were required under the pay and
allowances head this year. However, considering the fact that a substantial part of
revenue expenditure is incurred on stores and equipment, transportation, revenue
works, maintenance of blurring’s, installation etc. and there is a danger of double
digit inflation, thus the proposed allocation under these heads of expenditure will
require extra effort on the part of defence functionaries to priorities expenditure
without compromising the operational readiness of the forces.
The figure-3 shows that the Central Government controls about 45 percent
of total expenditure
under the heads of
Central Plan, other
non-plan and
Defence.
Due to rising
social and political
tensions in the
different parts of the
country, there is far
greater need of
Source: www.globalissues.org
inclusive growth. To
Global Economic Crisis and Military Spending Vol. 2, No. 1, Jan-June 2011 73

achieve this goal the government has to allocate more resources for infrastructure
development, health and education etc. Thus plan expenditure is bound to rise in
the coming years and consequently the government will have to take steps to
reduce non-plan expenditures to achieve the fiscal deficit as mentioned above.
Considering the security environment in and around India under the capital
budget for modernisation of forces, thus defence authorities will have to work-
out how to function with a minimal whereas in the Revenue budget.
In view of the regional security environment India’s military spending seems to
be insufficient. China’s relentless military modernisation, backed modernisation in
IT Sector, arms capability has extended its military reach from the traditional
battlefield to the cyber-space domains. Given the India-China border-dispute,
China’s war preparations for winning ‘low conditions of informationalization’ to
gather with its massive infrastructure along the border, have certainly given it a
10
definite military advantage.
At the sametime, ever increasing defence budget, the sharpening of Pakistan’s
armoury, especially with the military aid, is no less worrying. Since the terrorist
attack on United States on 11 September, 2001, Pakistan has been getting US
military aid worth billions of dollars, which includes F-16 Fighters, Air-to-Air
Missiles, Cluster bombs, air-defence and surveillance technologies, has direct
security implications for India and no doubt, it undermines India’s present military
capability despite the fact that superiority in conventional warfare has already
been in our favour for over the last decades.
11
According to a report of Daily Times, the Pakistan Government gas allocated
Rs. 3,71,776 billions for the year 2009-10. This military expenditure has been
12
bifurcated in the following major heads:
Army ` 1, 28,699 bns.
Air Force ` 71,006 bns.
Navy ` 29,133 bns.
Defence Product Estt. ` 66,467 bns.
Operating Expenses ` 40,129 bns.
General Expenses ` 36,342 bns

Overall analysis brings to light certain facts that—

1. The military spending is a cause, not an effect of economic growth. The
growing concept of military-industrial complexes in the developing
countries since the early 1980s substantiates this fact.
2. The economic depression which started around 2007 had negligible
effect on defence expenditure of the world in general and of South-Asia in
particular.
3. The two major players of South-Asia share unequal ratio in their security
requirements and military spending. Pakistan’s defence-allocation for
2009-10 is Rs. 3,71,776 billion, whereas India’s defence budget for 2009-
 74 Scholar’s Voice: A New Way of Thinking Dr. K. K. S. Parihaar

10 is Rs. 1,41,703 crores despite 35 per cent increase from the previous
13
year.
4. There is requirement of clear cut differentiation between defence
spending and military spending because amalgamation of these two
concepts presents a hazy picture in defence and development debate.
5. In view of the unresolved Kashmir issue, cross-border terrorist activities
and the concentrated effort of Pakistan to enhance her military might,
India has an uncomfortable strategic environment in the subcontinent,
which needs an all out rennovation of defence structure of the country.
6. The fifty-five years old border dispute and the trans-border irritating
activities of China reflect an image of future confrontation which requires
a bilateral approach for an amicable settlement backed by a strong
military power with an updated high tech capability.
7. The strategic scenario around India and internal security problems
indicate towards insufficiency of nation’s defence-budget. The present
budget estimate needs a minimum fifty percent increase with main thrust
on research and development for an integrated weapon technology.

Reference
1. Peace and Security in 2020 (A Draft Paper prepared by Govt. of India).
2. Chowdhury, A.R. 1991. A causal analysis of defence spending and economic growth. Journal
of Conflict Resolution 35 : 80-97.
3. Benoit, E. 1973. Defence and Economic Growth in developing countries. Boston : D.C. Health
& Co. 1978. Growth and defence in developing countries Economic Development and
Cultural Change 29, 271-80.
4. Deger, S. 1986. Economic Development and Defence Expenditure Economic Development
and Cultural Change 34, 179-96.
5. Ibid.
6. Rothschild, K.W. 1977, Military expenditure, exports and growth Kyklos 26, 804-13.
7. Jeording, W. 1986 Economic growth and defence spending : Granger Causality. Journal of
Development Economics 21, 35-40.
8. www.globalissues.org.
9. India’s Military Spending vs. the World : Report of Center for Arms Control and Non-
Proliferation, Feb. 22, 2008
10. mhtml:file://G:/new Folder/bb.mht, p. 2-3
11. A report in the Daily Times mentioned in Col. R.K. Bhonsle’s article ‘Pakistan Defence Budget :
Misplaced Priorities’, p. 2.
12. Ibid.
13. India’s Military Budget, mhtml : file : //G. :/New Folder/aa.mht, p.7.
____________________

"It is war that shapes peace, and armament that shapes war."
-Fuller