India’s defence pensions have ballooned by 50% and the capital outlay has been slashed, with the Seventh Pay Commission’s fiscal impact looming large. Developments over the last year have come with profound implications for India’s defence budget. However, finance minister Arun Jaitley did not bring up defence spending in his budget speech. After a protracted crisis over One-Rank-One-Pension (OROP) for the armed forces, the government acceded to defence personnel demands, with some exceptions. Uncertainty has continued to plague India’s Rafale deal with France, and some green signals were given to the Indian army to raise an 80,000-strong mountain strike corps. The Seventh Pay Commission also imposes higher personnel costs, which affects the Indian army more than the other two services. Overall, the defence budget estimate for 2016-17 is Rs3.4 trillion, about 10% more than the previous year’s budget estimate. This is broadly consistent with past increases. However, what makes up this net increase is a radical departure from the past. Thanks to OROP, the defence pensions budget has gone up by a whopping Rs27,800 crore from the previous year—a full 50% increase. This increase is just Rs2,000 crore short of the increase in the overall defence budget, making one wonder if all other expenditure increases have been frozen. There is an accounting change this year which complicates the analysis, where it turns out the traditional defence demand for grants numbers 21 to 28 have been consolidated from eight items to four, numbered 20 to 23 in the FY16 budget. It turns out that the armed forces’ revenue expenditure has gone up but the capital outlay has been slashed in turn. Revenue expenditure has increased by about Rs11,000 crore this year, amounting to an 8.6% increase between budget estimates. This excludes pensions but includes allocations toward the salaries and allowances of both serving personnel and civilian support staff, as well as fuel, consumables and other miscellaneous costs. The Indian army has the lion’s share of the revenue expenses, as its force strength is about nine times that of the Indian Air Force and Navy combined. However, the budget does not take the Seventh Pay Commission recommendations into account—which will likely be accepted some time in the year. Revenue expenses have increased by similar percentages in the past even when not accompanied by new pay commissions. Thus, one can expect significant new expenditures on salaries and on pensions that have not yet been allocated for. Last year, the government had allocated close to Rs86,000 crore as capital outlay, and we learn now that this was revised down to Rs74,300 crore. The latest budget estimate is Rs78,586 crore on capital expenditure. While this is an increase over the previous revised estimate, the ministry of defence has consistently underspent the capital budget for the last several years, with the Indian army’s modernization efforts usually being the most hampered. It is a concern that the final expenditure on defence modernization and capital goods may be much lower than the latest estimate. Defence modernization involves buying large equipment like tanks, ships and aircraft which are usually paid for in eight-year cycles or thereabout. This means that a large part of the defence modernization budget goes toward committed liabilities, with some budgetary space left for new acquisitions. In each of the last three years, the defence ministry has been able to allocate less than 8% of the defence modernization budget for new defence acquisitions, with the rest of the budget being used for committed liabilities. Thanks to an increasing budget and high growth in the late-2000s, India was able to spend between 30% and 40% of its modernization budget on new acquisitions. This started falling from 2011, and in the last four years, the defence ministry has not allocated more than 9% of its modernization budget on new acquisitions. This may be insufficient for the Indian armed forces to maintain their technological edge. It is unclear whether this pattern changes in 2016, but the prospects look unlikely. The only way by which the budget for new acquisitions rises significantly is if any large contractual payment cycles got completed last year. Until the parliamentary standing committee on defence publishes its reports this year, the Indian public will remain in the dark. It is a seldom asked question whether the Indian Army could do with fewer soldiers while providing the same level of security and defence. Even the Chinese People’s Liberation Army has begun rationalizing force strengths in recent years. The cost of implementing OROP and the Seventh Pay Commission recommendations must trigger a fundamental rethink on how India’s armed forces are organized and paid for.