Higher defence spending won't stretch India's finances

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Higher-than-expected dividends from the Reserve Bank of India, lower oil prices, will provide fiscal flexibility; the past also shows that the deficit has been contained during heightened tension he Central Govern T ment has enough fiscal space to ab sorb a jump in defence ex penditure without deviat-ing from fiscal deficit target of 4.4% for this financial year, say economists. This is largely in keeping with India's past perfor mance where the fiscal def icit has been under control during periods of height-ened tensions with Pakis-tan unless it escalated into a full-blown war, or if glo-bal crises had taken place. The Ministry of Defence will be reportedly seeking an increase in its Budget to the tune of 150,000 стоге this year in the Supple mentary Demand for Grants in December. This extra spending, however, is manageable for the go-vernment as it is expecting higher revenue and has the flexibility to cut some oth-er expenditure. "While additional de fence outlays may initially appear to pressure the def icit target, the actual im-pact of -0.14% of the Gross Domestic Product (GDP) may be offset by multiple factors throughout the year," Rishi Shah, partner, Grant Thornton Bharat, old The Hindu. "The cur ent macroeconomic tail inds notably softening obal oil prices and stable revenue growth pro de a favourable buffer for o reprioritisation" No cause for concern . The Centre's fiscal deficit remained reasonably in control during heightened tensions with Pakistan except during outright wars or global crises . The fiscal deficit rose from 3% in 1970-71 to 3.45% in 1971-72 - coinciding with the 1971 war with Pakistan Source Ministry of Statistics & Programme Implementation Note: Data for 2025-26 is a target, not the actual . Dr. Radhika Pandey, As-sociate Professor at the Na-tional Institute of Public Fi-nance and Policy, agrees with this assessment.

"Even if the government does expedite defence deals to ramp up defence infrastructure and logis tics, 4.4% fiscal deficit tar-get will likely not be deviat-ed from," she explained.

"If there are to be cuts in expenditure on higher de fence spending, then those would more likely be from the revenue expenditure side," Dr. Pandey added. "Even here, it won't be concentrated in any one item or sector, but would be spread across various schemes and outlays."

 A major factor that could work in the government's favour is a higher-than-ex-pected dividend transfer from the Reserve Bank of India. The Hindu had re-ported on Saturday that

The RBI transferred a re-cord 2.1 lakh crore divi dend last year for financial year 2023-24, a whopping 141% higher than the pre-vious year's transfer.

"The government has enough fiscal space to do it and is expecting higher transfers of RBI dividends," said Madan Sabnavis, chief economist, Bank of Baro-da. "There is likely addi tional revenue coming for the government. If nothing else changes and only de fence spending goes up, that can be absorbed."

An analysis by The Hin-du shows the Centre's fis cal deficit remained rea sonably in control during heightened tensions with Pakistan except in out right war or global crises.

the Ministry of Finance was in parallel to the RBI examining how it could increase dividend transfers from the Central bank and further to 3.9% in 1972-73 before dropping again. Similarly, it rose from 5.3% in 2000-01 to 6.1% in 2001-02 following the Kargil War. However, the fiscal deficit fell follow-ing the 2001 Parliament at-tack and the subsequent heightened tensions with Pakistan, as it did following the 2016 Uri attack.

The 26/11 Mumbai terror attack in 2008 was during the Global Financial Crisis, when India, along with sev-eral other countries, had significantly loosened its purse strings to stabilise economy thereby raising deficit levels significantly.

Similarly, fiscal deficit ballooned in 2019-20 and 2020-21-after 2019 Pulwa-ma attack - due to the go-vernment's COVID-19