Having signed Rs 59,000 crore Rafale deal, the government will have to increase the defence budget midway through this financial year to pay for new orders.
According to domestic brokerage ICICI Securities, the amount earmarked for new purchases is so low that it has been exhausted on just one purchase alone -- the Rafale fighter, whose 15 per cent signing advance amounts to Rs 8,700 crore.
“Additional allocations are now required for fresh acquisitions over the remaining half of FY2016-17," it said in a note, adding that the additional allocations are "inevitable".
However, the report did not quantify the increase it sees in the budget.
The revision will take the defence spending up to 2.5 per cent of the GDP, as against the originally envisaged Rs 3.41 trillion or 2.26 per cent of the GDP, it said.
The report said 90 per cent of the budgeted defence spending goes towards payments for already announced projects and added that over the past two years, the capital allocation has been unchanged at Rs 86,300 crore.
Pointing to the deal with Russia announced at the just-concluded BRICS Summit, it said this shows the country's "inability to wait for the domestic 'primes' to catch up to global technology standards".
'Primes' are domestic manufacturers like Tata Power SED, Bharat Electronics and Larsen & Toubro, which are vying for a pie of the defence spending pie.
The brokerage said at present, Rs 1.27 trillion has been committed for foreign purchases, while another Rs 90,800 crore is expected to be ordered and also raised question marks over the actual boost to domestic manufacturing.
"These orders will have limited domestic beneficiaries over the next five-six year period and will constrain the domestic defence budget significantly for any meaningful indigenous manufacturing to happen," it said, pointing to the recent orders.
The government has been trying to push domestic manufacturing through efforts like having mandatory local sourcing in new contracts.
In wake of the heightened tensions following the Uri attack, Finance Minister Arun Jaitley had affirmed the government commitment to spend for defending the country.
Defence Minister Manohar Parrikar had last week said he expected another Rs 50,000-60,000 crore worth of defence contracts to be signed by March 2017, taking the total since this government came to power in May 2014 to Rs 3 trillion.