Hindustan Aeronautics Ltd (HAL) has prepared a proposal a defence financing corporation for the acquisition of weapon systems such as aircraft and warships to bring in much-needed resources for the armed forces struggling with dipping capital budgets.
Proposed to be set up in line with the Indian Railways Finance Corporation, the new body could raise funds from the capital market and provide more stability to defence purchases that are often delayed due to the unavailability of capital.
ET has learnt that HAL prepared the proposal after reaching out to major banking institutions that gave positive feedback and further decisions on the matter would be taken by the defence ministry.
“The model already exists with the railways and could be used to make payments for major purchases like aircraft and warships. This would mean that manufacturers take receivables against government orders from the corporation, freeing up capital budget needed for modernisation,” officials told ET.
India has been trying to find ways to raise the defence budget that has been slipping in real terms over the past years as the pension and salary bill has ballooned. The Finance Commission had also been tasked with finding ways to raise funds for defence modernisation but a plan to create a non-lapsable fund out of the divisible pool of central taxes has met with objections from states. The defence ministry has also recommended levying of a special cess to the Finance Commission. The nature of the cess has not been elaborated.
If set up, the Indian Defence Finance Corporation could help tide over immediate budget constraints over the next five years and bring stability to defence purchases. Some PSUs have been forced to borrow money from banks to meet immediate requirements like salaries as the government has been unable to transfer funds for weapon orders.
In the current financial year, ₹1.15 lakh crore was allocated for weapon acquisition, an increase of ₹10,306 crores. This is not adequate for vital planned purchases to fully cater for committed liabilities — part payments to be made for weapons already ordered like the Rafale fighter jets, S-400 air defence system and artillery systems.