The Indian Finance Ministry appears to have put a stop to the headlong dash by the country's military to enlarge its defense forces to meet the China challenge, slashing the military budget by US$2 billion this year.

The cuts are necessary, officials say, because of economic distress and a ballooning fiscal deficit of 5.8 percent, up from 4.1 percent in 2011. But the fiscal adjustment, which has raised eyebrows, might not only have an impact on the country's defense preparedness but also throw off kilter vital acquisition projects of aircraft, choppers, howitzers and missiles.

The cut, for instance, appears likely to affect the already much-delayed $20-billion MMRCA (medium multi-role combat aircraft) project to acquire 126 French Rafale fighter jets, ministry sources sway.

India began a massive military buildup in 2010 after a November, 2008 attack by Pakistani militants on luxury hotels and other facilities in Mumbai that took 166 lives, and after an admission by military officials that they were unable to retaliate with a full-scale attack against Pakistan because they didn't have the military readiness to do so.

"New Delhi is in the throes of finalizing important contract negotiations to bolster segments like the artillery, aviation, air defense, night-fighting, anti-tank guided missiles and specialized tank and rifle ammunition. All these will now be pushed to the back burner," a source told Asia Sentinel.

The Army too, had sought a 30 per cent budget hike allocation for the 12th Plan (2012-17) including upgrading its rapid reaction ground force capability against China by building two specialized divisions in high-altitude areas at a cost estimated at more than US$11 billion. This plan too, will now have to wait.

What has most surprised policy watchers is that the current squeeze comes in the wake of Defense Minister AK Antony's campaign for an additional outlay of US$8.18 billion for 2013 due to "new ground realities" and the "changing security scenario" against the backdrop of a disquieting China-Pakistan collusion.

However, Antony has hinted that given the grim economic situation, his Ministry would be hard pressed to get the allocated money. "I am struggling to get the budgetary amount," he acknowledged on being probed about additional funds for the modernization of the three services.

Unfortunately, the defense's belt tightening coincides with a corresponding rise in India's security challenges. Already, the country's defense outlay of $35.09 billion seems paltry against China's official outlay of $106.41 billion. (Beijing's actual military spending is suspected to be twice as much). It is also an open secret that the Chinese are topping up their war supplies with strategic missiles, space-based assets, aircraft carriers, fighter jets, warships and more.

With India's GDP growth plummeting to between 5 to 6 percent (from 9 percent in 2009), there may be more forced thrift in the offing, reveal sources. With elections for the lower house (Lok Sabha) in 2014, and no less than 10 states going to polls this year, the ruling UPA (United Progressive Alliance) will also be under pressure to invest funds in populist measures rather than defense procurement.

"The defense squeeze at this juncture will also disappoint the global defense industry which has been salivating at the thought of snapping up lucrative defense contracts from the Indian government," said Abhijeet Deodhar, a foreign policy analyst. Delhi last year, he said, earmarked an estimated US $80 billion for military modernization over the next three years. The cut, he adds, will hit the global players hard as they are already facing shrinking business prospects from western economies caught in an economic slowdown.

The squeeze notwithstanding, India's defense establishment could surely do with some fund infusion. In a letter from army Chief V.K. Singh to Prime Minister Manmohan Singh last year that was leaked to the Indian press, Singh described in detail the sorry state of affairs in the Indian army. "The state of the major (fighting) arms i.e. mechanized forces, artillery, air defense, infantry and special forces, as well as the engineers and signals, is indeed alarming," the army chief wrote in the letter.

The army's entire tank fleet is "devoid of critical ammunition to defeat enemy tanks", while the air defense system is "97 percent obsolete and it doesn't give the deemed confidence to protect… from the air," he wrote. The infantry is crippled with "deficiencies" and lacks night fighting equipment, while the elite Special Forces are "woefully short" of "essential weapons".

At current levels of around 2 percent of GDP, India's defense spending is miniscule as compared to its neighbors, an analyst said. "The sensitive security situation arising out of the critical geopolitical theater that Asia has become necessitates that we gird up our own capabilities," says a former senior Army official. "We have China flexing its muscles ready to synergize operations with our traditional bete noire Pakistan. There are territorial disputes with countries, there is instability in Pakistan and Afghanistan and internal issues like the Maoists to grapple with. We just can't afford to be complacent." Interestingly, a 2010 Deloitte study projected India's arms procurement to balloon from US$41 billion in 2011 to US$120 billion by 2017. The study triggered an intense debate in the country on whether India ought to be spending billions on defense procurement when it was hosting almost half the world's poor. India's skew in spending 2 percent of its GDP on the military, pointed out the anti lobby, was in stark contrast with its spending on health and family welfare (0.34 percent) and education (0.73 percent).

Be that as it may, many strongly feel that defense spending is hardly an either-or situation. "We can't choose social development over national security," said developmental economist Shubranghshu Roy in an interview. "It's not a toss-up. Economic development and defense needs are both vital and not mutually exclusive."

However, insiders say the current budget trim is largely due to the existing inefficiencies in defense expenditure and continued profligacy. "With finance minister Palaniappan Chidambaram on a strict expense-control trip to bolster the economy," adds Roy, "the military ought to look for fiscal and procedural efficiency to ensure that modernization is on track."

In view of the cost-cutting measures, defense forces have also been asked by the ministry to concentrate on prioritizing their procurements. However, while the Navy and Air Force IAF are relatively better placed, say sources, India's 1.13-million Army needs rejuvenation. It has not bought a single new artillery gun since the Bofors scandal exploded on the international scene in the late 1980s nor has its US$4-billion artillery modernization plan appeared

India's defense expenditure, add ministry sources, may be further challenged by the UPA government's attempts to ride back to power a third time on the back of recently unleashed economic reforms and controlled spending to rein in the fiscal deficit. It seems the defense forces might just have to brace themselves for more squeezes down the line.

(Neeta Lal is a New Delhi-based senior journalist; neetalal@hotmail.com)